Portugal and Euro Crisis

Portugal and the Euro Zone Crisis

Europe’s sovereign Debt Crisis of 2009

Sustainability of Public Finance across European Nations

Since May 2010, a sovereign debt crisis has arisen in many European states. A sovereign debt crisis arises when the government of a sovereign state fails to pay back its debt in full. The fear that a government will fail to honor its debts result in a dramatic rise in the interest rate. In 2010, concern about rising deficits and debt levels across the world, along with a wave of downgrading of European government debt created alarm in financial markets.

Concerns intensified early 2010 and thereafter making it difficult or impossible for Greece, Ireland and Portugal to re-finance their debts. On 9 May 2010, Europe's Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF). In October 2011 Euro zone leaders agreed on another package of measures designed to prevent the collapse of member economies. This included an agreement with banks to accept a 50% write-off of Greek debt owed to private creditors

Background

In 1986, Portugal joined the European Economic Community (EEC), one of the predecessors of the European Union.

Together with Spain, it brought EU membership to 12 states. In 1995 Portugal joined the border-free Schengen zone, and it was a founding member of the euro area, introducing the euro on January 1, 1999. Euro notes and coins entered general use three years later, replacing the Portuguese escudo. Portugal’s membership in the EU contributed to stable economic growth, largely through increased trade fostered by Portugal’s low labor costs and an inflow of EU funds for infrastructure projects. The country’s subsequent entry into EMU brought exchange rate stability, lower inflation, and lower interest rates. The service sector is now Portugal’s largest employer, having overtaken the traditionally...