Sunday, November 28, 2010

Portuguese Economy Struggling


With the slow growth that has plagued the Portuguese economy over the past decade, both Portuguese officials and EU Commission President Jose Manuel Barroso have had to fend off rumors that Portugal is next in line for a financial rescue package from the European Union. The Financial Times Deutschland recently reported that several Euro Zone countries and the European Central Bank were encouraging Portugal to seek financial aid from the EU and the IMF. However, Barroso claimed that that report is "absolutely false," and that a rescue package for Portugal has been neither requested nor suggested by the EU.

Nevertheless, economists still anticipate that Portugal will eventually receive EU bailout funds. One economist stated that the market is already assuming a bailout for both Portugal and Spain, even though officials from both countries have vehemently denied this possibility. Portuguese Prime Minister Jose Socrates emphasized the 2011 budget that the Portuguese parliament recently passed, which aims to cut the deficit from 7.3% of GDP to 4.6% in 2011 by imposing public spending cuts. The budget measure also includes a value-added tax (VAT) increase to a maximum rate of 23%.

Portugal's economic problems are primarily a result of the country's inability to adapt to globalization over the past decade. Portugal has struggled to compete with nations like China, who are able to produce the same goods as Portugal but at a much lower price. At one time, one of Portugal's largest exporters was its shoe-making industry. But since 2001, its shoe production has decreased by 40%.

Some of the stronger economic EU countries may be putting pressure on Portugal to accept aid to help stabilize its economy. The euro has sharply fallen due to fears of instability in several European nations, including Portugal. The euro fell to $1.32 this week, down 3% in this week alone.

Discussion Question: Are EU and Portuguese leaders just trying to instill confidence by denying that Portugal is set to receive EU bailout funds?

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