The 2008 Global Financial Crisis in Portugal, Research Paper Example

The 2008 Great Recession marked a time of considerable economic and financial turmoil all over the world. Most economies were affected by the recession, especially European economies. A number of European banks experienced failures leading to the eventual drop in international trade as credit continued to be tightened. The fallout of the failure of a number of European banks led to economic and financial turmoil, riddled with high rates of unemployment and the eventual strain in the fundamental ties between the member states of the European Union (EU). One of the most affected European nations was Portugal.

The credit crunch that begun to be felt in the final two quarters of 2007 considerably affected Portuguese banks by virtue of holding excessive external debt. During the period of unprecedented economic growth during the credit bubble of 2001 to 2007, the economy had considerably relied on external financing to fund its operations as opposed to the use of domestic savings (Kontiad?s, 2013, p. 13). These banks experienced the aftermath of the burst of US housing bubble that formed a huge portion of the toxic assets that financial institutions had invested in. This created a situation of scarce credit and escalating cost of acquiring credit. Portuguese banks were forced to tightened credit policies, virtually stagnating the economy in 2008.

GDP

Between 2008 and 2009, Portugal experienced a considerable decline in domestic demand. As credit was not accessible, an economy that was largely dependent on foreign investment and debt financing led to a decline in domestic demand. This caused a 2.7% decline in GDP (WorldBank.com, 2015).

In 2010, with the help of the stimulus package, GDP started an upward trend. In this case, the government employed the stimulus package so as to stimulate aggregate demand through the increase in government expenditure. This is further enhanced by improving the net exports position of the economy.

Aggregate Demand

Portugal suffered largely from a fall in aggregate demand. This created contractionary gaps characteristic of a recession. As the economy found it more difficult to access external debt to finance its huge government expenditure, certain sectors of the economy failed, including the ability to import. Businesses were crippled and increasing unemployment significantly reduced aggregate demand.

Since government could not access external debt employment falls and aggregate demand also falls. The prices of things go down as there is willing supply but little demand. Government receives financing from the bailout and boost aggregate demand through increased public expenditure. This raises the prices of commodities as demand increases.

Unemployment

Between 2002 and 2007, Portugal experienced a considerable increase in the rate of unemployment. Unemployment rose by 65%, where 270,500 citizens were unemployed in 2002 compared to the 448,600 citizens unemployed in 2007 (TradingEconomics.com, 2015). This created precarious economic conditions before the onset of the 2008 recession. The economy would be ill prepared to withstand the shocks of the 2008 global recession where credit became scarce.

As the economy was largely dependent on foreign investments and credit financing, most business, companies, factories and especially banks had heavily been supported by either foreign investments or foreign debt. The collapse of some of the major banks in the United States caused a sudden scarcity of credit to finance these operations. Operations came to a standstill leading to massive unemployment, shocking the economic system.

Between 2008 and 2009, the economy realized an increase in the unemployment rate to 9.47%. Employment decreased faster than the GDP of the economy. By the middle of 2008, 66.7% of women were employed compared to 79.7% of men. Those who were most employed were aged 25 to 49 years old, realizing 83.2% of employment. While more than half of those aged 20 to 24 years and 50 to 64 years were employed.  By 2013, the employment rate had reached an all-time high as employment for women has declined to 62.2% and for men 68.5% (Lourtie, 2011, p. 35). Those aged between 25 to 49 years of age experienced 74.7% employment. Those age between 20 and 24 years of age had employment decline to 36.3%.

The most notable trend is the decline in employment for the youth within the economy. This was the most affected age group, experiencing employment decline of more than one third. During the second quarter of 2008, unemployment for the youth was at 13.3%. However, during the same quarter in 2013, the unemployment rate had risen to 34.3%.

The problem of unemployment is compounded by another underlying factor that may yet threaten the economic future of Portugal. Currently, Portugal has arguably the best qualified generation in its history. As such, it is vital to the growth of the country’s economy that this qualified manpower be fully employed.  However, evidence suggests that there has been a considerable exodus of highly trained units of labor to other European countries currently experiencing a shortage of labor.

Wages

Prior to the 2008 global economic crisis, Portugal’s wages were increasing at a much faster rate than productivity realized within the economy. This made the Portuguese economy highly uncompetitive, further compounded with problems of inflation. The high wages in Portugal became a problem to the point where the MoU for the bailout categorically expressed the need to mitigate the costs of labor within the Portuguese economy (European Communities, 2009).

After the application of austerity measures, the unit labor cost was significantly reduced relative to productivity realizes within the economy. As the economy received the stimulus package, lower paying jobs were created to replace those that had been destroyed in the recession. This resulted in the general decrease in real wages.

This is depicted in the disposable income for each household within the economy. Prior to the economic crisis, disposable income was growing rapidly (between 2006 and 2007). As unemployment increased in 2007, household disposable income reduced.  Finances from the bailout led to the temporary increase in disposable incomes for households. However, after the application of austerity measures in 2010 has led to the significant decline in household disposable income, recording negative growth up until 2012.

Export

Prior to the 2008 global economic recession, Portugal had generally an external deficit with negative balance of payments. Portugal is an economy that mainly imported as opposed to exporting. This is even before the economy had consented to the euro. Despite the increase in export and an improvement in its eternal deficit position, the economy still recorded a deficit in its current account, which was 10.1% of GDP in 2007 (Hubbard & O’Brien, 2013). During the final quarter of 2008, international trade was heavily affected by the scarcity of credit, directly affecting Portugal in the process. All economies experienced a sharp decline in their import and export businesses. However, Portugal continued to experience this decline in 2009 up until the stimulus package from the bailout arrived.

In conclusion, Portugal’s fiscal and monetary strategy before the 2008 global financial crisis ill prepared the economy for the event. Portugal had amassed considerable debt before 2008, compounded by an increasing unemployment rate, and a growing government deficit. The negative impacts of the 2008 global financial crisis left Portugal unable to access international debt to finance government expenditure. Portugal employed the Austerity Measures under a MoU with Troika, to streamline its economy and gain control of the financial markets.

References

European Communities. (2009). Sustainability Report 2009. Luxembourg: European Communities. Retrieved January 10, 2015, from http://ec.europa.eu/economy_finance/publications/publication15998_en.pdf

Hubbard, G. R., & O’Brien, A. P. (2013). Economics. Boston: Pearson.

Kontiad?s, X. I. (2013). Constitutions in the global financial crisis : a comparative analysis. Farnham: Ashgate.

Lourtie, P. (2011). Understanding Portugal in the Context of the Euro Crisis. The European Debt Crisis. Chantilly: Peterson Institute for International Economics.

OECD.org. (2015, January 4). General government spending. Retrieved January 10, 2015, from OECD: http://data.oecd.org/gga/general-government-spending.htm#indicator-chart

TradingEconomics.com. (2015, January 03). Portugal Unemployment Rate. Retrieved January 10, 2015, from Trading Economics: http://www.tradingeconomics.com/portugal/unemployment-rate

WorldBank.com. (2015, January 4). Portugal World Development Indicators. Retrieved January 10, 2015, from World Bank: http://databank.worldbank.org/data/views/reports/tableview.aspx