Sardine Capitalism in Portugal Is a World Model

Lisbon’s macroeconomic model could show other small countries the path to recovery.

In Portugal, defying conventional thinking has a long tradition. After all, in an era when maps showed the Earth abruptly ending somewhere around Bermuda and the seas teeming with sea monsters, Portuguese explorers downplayed the dangers, putting Vasco da Gama (the first European to reach India by sea), Bartolomeu Dias (the first to round the Cape of Good Hope), and Ferdinand Magellan (who led the first circumnavigation of the Earth) at the forefront of global imperialism.

Portugal's colonies are long gone, but the country's amazing ability to sustain what is perhaps the European Union's most successful mixed economy reflects its proclivity for carving its own path. Despite the global financial crisis a decade ago and the recent economic downturn brought on by the pandemic, Portugal has emerged as a growth model for Europe's smaller economies, which have struggled to balance cultural traditions and political values with the demands of much larger economies with which they share the euro, such as Germany, France, and Italy.

Despite the fiscal constraints that such cohabitation imposes on smaller eurozone members, Portugal has figured out a way to keep Western Europe's most affordable cost of living, relatively low unemployment, consistent economic development, and overall public happiness in an age of division.

The "P" in the derisively called "PIIGS" group of deeply indebted eurozone nations (Portugal, Ireland, Italy, Greece, and Spain) has recovered strongly this year from the worldwide depression caused by the COVID-19 epidemic. Despite continuous on-again, off-again COVID-19 limitations that affected the country's crucial tourist industry, the economy grew at a 4.6 percent annual pace in the fiscal quarter ended June 30, according to the European Commission.

The International Monetary Fund (IMF) and Portugal's central bank both predict that the country will expand at around 4% in 2021, a remarkable achievement for a country highly reliant on tourism, which essentially dried up in 2020.

Unemployment is lower than that of Germany, a traditional European Union powerhouse, at 5.5 percent, and even the United States, at 6.7 percent (5.4 percent in July). In comparison, Spain's unemployment rate is hovering around 15%, Italy has just dipped below 10%, and Greece remains Europe's sick man with a 15.9% unemployment rate. Even Ireland, which was held up as an example by the financial engineers who devised the draconian terms of the eurozone bailout plan, has a higher unemployment rate (7.6 percent).

All this is heady stuff for a country of 10 million citizens whose primary influence on global affairs these days is the fact that its language is still spoken by about 240 million people in the far-flung lands it once ruled, including Brazil, Angola, Mozambique, and East Timor. With the world’s 34th largest economy—known mostly for sardines, soccer, and Port wine until recently—Portugal has managed to defy stereotypes about southern European nations (supposedly lazy and imprudent) and countries run by socialists (inefficient and uncompetitive) to combine growth, social cohesion, and quality of life.

U.S. News & World Report joined together with the University of Pennsylvania's Wharton School and BrandAsset Valuator Group to name Portugal as one of the world's top "quality of life" countries. The methodology is a little hazy, but the top 20 include a predictable mix of city states, Scandinavians, and northern Europeans. Portugal, however, is ranked 21st, just below the United States.

Portugal is ranked 17th in the world in the 2021 World Index of Healthcare Innovation, according to the Foundation for Research on Equal Opportunity. Portugal is ranked third internationally in the index for quality of care, such as choice and patient outcomes, only behind more wealthy Switzerland and Israel.

It wasn’t always this way. The 2008-2009 financial crisis exposed the weaknesses and contradictions of the eurozone project. Lumping economies like France and Germany into a single currency with the likes of Latvia, Cyprus, and Greece led to trouble. Unable to devalue a national currency—the classic economic answer to a sovereign debt crisis—weaker eurozone economies nearly lost access to international markets. The solution imposed by the continent’s apex economies, led by the Germans, was an austerity so deep it crippled smaller economies for more than a decade.

Portugal, on the other hand, has been an outlier. Portugal accepted a $92 billion bailout from the so-called "troika"—the European Commission, European Central Bank, and International Monetary Fund—in 2011 after it was nearly bankrupted by the global financial crisis due to its inability to meet its quarterly debt payments or devalue its way out of trouble. Lisbon kept up with its obligations and, unlike other countries where bailouts were arranged, its political scene remained relatively stable. Unemployment flirted with 18 percent early in 2013 before starting to drop, but Lisbon kept up with its obligations and, unlike other countries where bailouts were arranged, kept up with its obligations. In 2015, communist administrations handed way to social democrats, who were re-elected in 2021. Portugal withstood troika pressure to accept a second bailout tranche and broke free from foreign-imposed austerity along the road.

How does it differ from the other PIIGS: Italy, which has the highest debt-to-GDP ratio among the world's leading economies (158 percent), has never fully recovered from the 2008 financial crisis. Italy's GDP was worth $2.39 trillion in that year. It has shrunk to a $1.9 trillion economy by the end of 2020, losing 20% of its economic weight since 2010. Although not as indebted as the United States, Spain has had an unemployment rate in the high teens since the crisis began, and it is still at 15.3% today.

Of all, Greece is the continent's economic basket case, and it has had to deal with the additional strain of dealing with the refugee crisis triggered by Syria's civil war. Of the original PIIGS, only Ireland has fared nearly as well as Portugal, though its less generous welfare state and high youth unemployment could see a resumption of the age-old Irish curse of youth emigration once COVID-19 travel restrictions loosen.

Portugal, on the other hand, stands apart, owing to the fact that it was formerly the poorest country in Western Europe. Once out of the troika in 2015, Portugal employed a mix of tax breaks, fiscal stimulus, and creative marketing to attract foreign investors, including a "Golden Visa" program that offered residency papers and a road to EU citizenship to anybody who spent 500,000 euros ($591,000) on a home. This aided growth, which averaged about 2.6 percent per year from 2015 until the epidemic struck. The momentum gained during this phase of recovery allowed Lisbon to increase spending when the crisis struck.

The result, economists said, is Portugal is now an economy able to weather crises—“a poster child for what could be done differently in the context of the European recovery,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics in Lisbon, in 2018.

The lecturer was absolutely correct: According to the European Commission, after taking a blow in 2020 and decreasing by just over 7.5 percent, a 4 percent rebound in 2021 is likely to be followed by GDP growth of more than 5 percent in 2022, more than making up ground lost during COVID-19. That's significantly higher than the commission's 2022 estimates for the ultra-prudent Dutch (3.3 percent), who led the "PIIGS" tut-tutting during the eurozone crisis; the French (4.2 percent); or even Germany (4.4 percent) (4.6 percent).

That Portugal is beautiful and relatively affordable has been an open secret in the world of “global citizens” for more than a decade now. Spurred in part by unusually generous tax and immigration policies aimed at luring wealthy northern Europeans and North Americans to resettle, the country’s expat population has exploded from about 100,000 people at the turn of the century to nearly a half million people in 2020, when the rate of increase slowed for the first time since the financial crisis due to COVID-19, according to a report by Portugal’s Foreigners and Border Service. Even so, the overall number grew by 12.2 percent in 2020, and that has increased as restrictions were loosened this year.

One reason beyond beautiful beaches, low prices, and great seafood for this influx is the “Golden Visa” rule whereby Portugal allowed foreigners who purchase sufficiently expensive real estate to obtain a residency visa for renewable for five years, at which point they can begin the process of obtaining citizenship. Already a popular retirement destination for the British, Germans, and other EU sun-seekers, a new wave of Chinese, Russian, Arab, and North American money began to flow when the rule was enacted in 2012. Not surprisingly, Portugal, in the words of global law firm DLA Piper, “is currently considered by many to be the most attractive country in Europe for foreign investment.”

This all sounds great for wealthy expats. But what about the Portuguese? Surveys show the Portuguese genuinely appreciate the money and attention tourism and expat relocations bring to their country. “In business, you sell what you do best if you want to make a good living,” said Alfonso Camara, a shop keeper in Braga in the country’s north. “And what we do well is hospitality, and natural beauty, and sardines.”

Not everyone, of course, is thrilled. The price of real estate, especially in popular tourist destinations like Lisbon, Porto, and the sandy shores of the Algarve, has skyrocketed. This trend is not consistent with a country that prides itself on holding down the cost of living. Angry at seeing the prospect of homeownership—or even a reasonable tenancy—pushed over the horizon, groups like Stop Despejos (“Stop Evictions”) and Morar em Lisboa (“Live in Lisbon”) have held protests and disrupted new developments.

Concerned about backlash, the socialist administration pushed through a change to the Golden Visa statute that prevents property purchases in Lisbon, Porto, and the Algarve from receiving tax and immigration incentives. It's unclear whether this will help stop the spread of "social terrorism," as Stop Despejos calls it. It might simply reroute traffic to the country's numerous hidden beauties, which are often missed by international retirees and visa-seekers. However, affluent Chinese, Arabs, Russians, and others who see the safety benefit of an EU passport as a big "return-on-investment" are unlikely to be deterred. In any case, the administration hopes to respond to public outcry without slaughtering the foreign geese that are laying all these golden eggs.

What's more surprising than the expat inflow is the extent to which Portugal has become a magnet for macroeconomists. "Portugal is now frequently highlighted as an example of economic comeback, commended by international organizations," commented ngel Sánchez, a macroeconomics professor at Spain's Elcano Royal Institute.

The concept that Portugal is developing as a model for smaller European nations, in addition to being an appealing location to retire, has spurred national pride, especially considering the residual hostility produced by the troika's austerity demands a decade ago.

According to the Organization for Economic Cooperation and Development, Portugal's government debt will be at 155 percent of GDP by the end of 2020. That's a lot of debt, but it's the result of an economic downturn that necessitated expenditure. And, once again, Greece is not burdened by 236 percent of GDP, nor is the United States burdened by 160 percent of GDP.

Fitch Ratings, a worldwide economic rating agency, has reasons to be optimistic. "General government debt will continue a downward trend, driven by stronger economic expectations, favorable financing circumstances, and the government's commitment to fiscal restraint," the firm stated in May, reaffirming Portugal's "BBB" credit rating.

Portugal's sovereign bonds—the instrument through which the government borrows on international markets—do not face severe competition from US or German treasuries because of the BBB. However, despite having far less purchasing power on global markets and remaining a sardine among salmon in the eurozone's claustrophobic monetary environment, the Portuguese are demonstrating to smaller European countries that, with a clever mix of policy and fiscal measures and a little luck, you can live well and grow your economy.

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