Shutterstock / Santiago Cornejo - Edited by GED
Shutterstock / Santiago Cornejo – Edited by GED


This blogpost examines both the paths that let Greece and Portugal into the crisis, as well as the potential ways out and what challenges lay still ahead for the two countries.


We come to the main conclusions that the two crisis-struck countries need to:


  1. Generate a turnaround in the export sector and
  2. Modernize their production sectors to further boost competitiveness


These results, along with many others as well as an in depth analysis of the causes that led these two small open economics to ask for financial assistance programmes and the implementation of reforms through time can be found in our new GED Focus Paper “Two Economic Paths out the Crisis?


How could it come so far?


The reasons that led both Portugal and Greece to a forthcoming default are, at the core, similar:

  • Weak competitiveness due to low productivity and high unit labour costs;
  • Rigid labour as well as goods markets; and
  • Persistent large trade and budget deficits

The adjustment programs included, therefore

  1. fiscal measures aimed at reducing public debts and deficits;
  2. financial measures to restore the health of the financial sector; and
  3. structural reforms to enhance competitiveness.


The programmes themselves had design problems


The financial assistance programmes were based on far too optimistic assumptions, mainly regarding GDP growth and unemployment.

Although the worse than expected macroeconomic environment played a part on this, the talks about a possible Grexit, the lack of political stability also contributed for a worse scenario.


The implementation of reforms faced less political support in Greece


The implementation of the reforms agreed with the creditors diverged. In Greece there was less political support than in Portugal.

Political support of reforms affected markets’ perception towards the countries. Thus, markets had a better positive perception towards Portugal due to its domestic consensus in favour of the Troika programme and a close cooperation between the Portuguese authorities and the Troika”.


Exports as a pathway to economic growth


Over-relying on the domestic demand seemed to be one of Greece’s and Portugal’s structural problems. A turnaround in the export sector could, have helped to offset the negative consequences of austerity policies which require governments to cut spending.

In Portugal the recession was less acute than in Greece since the fall in domestic demand was offset by an increase in net exports.

The worse than expected recession in Greece can be attributed, to some extent, to the lack of export recovery (although a fall in imports helped to balance the external account).




The concentration in low and medium-low-technology industries in exports, don’t allow these countries to produce high value-added to products. Furthermore, integration in GVCs remains limited. The positioning in the GVCs shows the need to change to – upstream and downstream, where the majority of value added is created.


Unit labour costs had been increasing substantially more than the EU average


Belonging to a currency union means losing the control over monetary policy. Thus, currency depreciation in order to increase external competitiveness is not possible. Internal wages and prices depreciation is, therefore the way to increase competitiveness and hence exports.

In both Portugal and Greece the developments of their unit labour costs damaged their price competitiveness position until the beginning of the sovereign debt crisis. From 1995 to 2013, Greece ranked first as the country regarding nominal unit labour costs increases (2.8%), and Portugal ranked third (2.3%).




A decrease in unit labour costs would help both countries to regain international competitiveness. However, since they could never win a wage race against Eastern European countries and other Asian countries, they need to focus on modernizing their production structures in order to specialise in high value added, capital intensive sectors.


Future Challenges:


  • External climate: Quantitative Easing; deflationary trends in the Eurozone might hinder debt payments; an increase in oil prices
  • The ongoing deleveraging process in the corporate sector will holding back investment
  • Thus, corporate investment in GFCF must be incentivised in order to prevent further long lasting damaging effects in the economies’ dynamism
  • Complete the Banking Union, in order to end banking fragmentation and promote investment
  • The public pension system needs urgent reforms. In the long run, economic growth can be constrained due to a reduction in total population (due to migration flows), together with population’s ageing due to the lowest fertility rate in the EU.
  • Challenges ahead for Portugal: political instability


See how Germany’s export surplus can affect other EU countries!