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Title: The Portuguese Slump and Crash and the Euro Crisis

Author(s): Ricardo Reis

Publication Date: August 2013

Keyword(s): Eurozone, Financial imperfections and Sudden stop

Programme Area(s): Development Economics and International Macroeconomics

Abstract: Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression and less than Japan during its lost decade. This paper asks why this happened, with a particular focus on the slump between 2000 and 2007. It describes the main facts of Portugal's recent economic history, evaluates some possible explanations for its dismal performance, and proposes a new hypothesis based on the misallocation of abundant capital flows from abroad. I put forward a model of credit frictions to show that if financial integration exceeds financial deepening, productivity will fall, generating a slump as relatively unproductive firms in the nontradables sector expand at the expense of more productive tradables firms. This explanation can also potentially account for the similarities and the differences between Portugal on the one hand, and Ireland and Spain on the other, during this period, and for some features of the crash in Portugal after 2010.

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Bibliographic Reference

Reis, R. 2013. 'The Portuguese Slump and Crash and the Euro Crisis'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=9591