Economist Paul Krugman says “Portugal is an economic miracle”

The US economist Paul Krugman called Portugal “a kind of economic miracle” yesterday in an interview with the Portuguese business daily Negócios. Krugman was the keynote speaker at an event to mark the publication’s 20th anniversary.

Krugman said Portugal would be a “case study” today when looking back at the country’s sovereign debt and banking crises between 2011 and 2014 when at the time “we tended to put Portugal and Spain in the same basket”.
“Both had seen huge amounts of capital coming in, they were seriously overvalued in terms of labour costs, had high levels of debt, and went through a long period of austerity,” he said.
Spain had managed to overcome it, but went through years of high unemployment, internal devaluing, and falls in costs. Portugal, on the other hand, had recovered without these.
“I had conversations with Oliver Blanchard, the former IMF economist and head, and he told me: “I don’t understand how they got out of it so well.” How did they do it?”
There are some things we can point to; some of them obviously have to do with Portugal’s attractiveness, and tourism is no mean thing, but exports too tell part of the story,” he said, but added that it was a “bit of a mystery how things went so well”.
As to whether Portugal could keep it up, he said that Portugal was integrated into the European economy, and if Europe was going to have problems with a recession, then Portugal, because of its small size and close (economic) links, particularly to Germany and Spain, could suffer because the Euro Zone “dominates your economy”.
“Your economy is fairly focused on exports and to provide our example, if the US fell into a depression, don’t think that Canada and Mexico would escape it, and Portugal is much more reliant on Europe. I think the external risks are great because although Portugal has been doing well, Europe has not been”, he continued.
Krugman said that when he worked in Portugal in 1976 the transformation seen today in terms of infrastructure is huge.
“When I was here for the first time, In many ways Portugal seemed like an emerging market than a European nation, and this is not at all true now,” he said.
And the economist did think that it was a good idea for Portugal to create a fund using the country’s budget surpluses (€6Bn). “It’s good for companies and countries to have a kind of capital budget, making a distinction between current expanses and capital. I think that European countries don’t do it, but individual States in the US do so in many cases, which is a sensible thing to have,” said the winner of the Nobel Prize for Economics in 2008 for his work in economic geography and international trade patterns.

Photo: LSE