Somehow, it again rose by 0.1% in the first quarter and appeared to have pulled the economy out of recession. But Portugal retained big trouble. In the last quarter of 2002, its GDP plummeted.8% from the third quarter and in the last quarter, it contracted by 1.3% from the previous year until the.3% in the third quarter of 2002. The economy continued to sag until the Bank of Portugal itself observed the fall of business confidence to its lowest recorded level since the 1993 recession. Official unemployment rate increased to a high 49.6%, rising by 26.3% from 2001 (O'Flynn).
Unemployment was 6.7% in 2003, compared with 4.3% in 2002 (O'Flynn 2003). Labor unions in Portugal claimed it was more than 7.6% as against the 5% ceiling set by the EU, despite the fact that the unemployment rate was more than 7% for most members of the EU. Portuguese men aged 25 to 34 were the most affected sector, which increased to 81%. The situation was made worse by an increase in workforce by 700,000 in 2002 and a further projected increase at the same volume when more graduates poured in. Employment centers noted that the best qualified graduates were the hardest hit. Jobless university graduates increased from 24,000 in 2001 to more than 30,000 by the end of 2003. When Portugal announce its intention of joining the euro zone, interest rates were even beyond the levels of Germany and France. Perceiving that there was money to be realized from the interest rate gap, it began to borrow huge amounts in deutschmarks and francs at lower rates than it could domestically do. The loans were then converted into domestic currency to finance a lending boom. With large sums flooding the country, interest rates swiftly began to converge with those in Germany even before the launching of the euro. In reaction to this credit boom and the inflation in Portugal, the European Central Bank cut the euro interest rate from 2.5 to 2% to put an end to it (O'Flynn).
The credit boom stopped and the economy slowed down, but the problem went uncontrolled (O'Flynn 2003). Portugal was berated for violating fiscal policies and the Stability and Growth Pact budget deficit rules for continuing to borrow in an attempt at saving its collapsing economy. It confronted a huge deficit of 4.1% by the end of 2002, which was higher than the 3% GD limit set by the Mastricht Treaty. Portuguese banks used foreign currency to finance its lending and it appeared that it did not have enough money to pay is debts. Anti-euro critics saw this as the result of Portugal's adoption of the single currency, but other critics believed that the true and ultimate cause was the modified global position of Portugal. In the 1990s, Portugal assumed the cheap labor platform of Europe from Spain and was ahead of other EU countries at an average economy growth of 3.5%. Reduced unemployment and improved public services won the majority of seats for the Socialist Party, led by Antonio Gutierrez, in Portugal's 1999 elections. But within the succeeding two years, Gutierrez's party lost in the municipal elections of December 2001 to its opponent of seven years, the Social Democrats or PSD.
The present Portuguese government under Jose Manuel Durao undertook severe austerity measures, such as a two-percent increase in value added tax or VAT at 19%, reduced subsidies for the youth, a public-private finance initiative for 10 new hospitals, opened up social security pensions to insurance corporations, and radical anti-immigration laws (O'Flynn 2003). Durao attributed the rise in Portugal's exports by 6%, not to a problem over the euro but to the stimuli inherent to its economy, which compelled its government to undertake measures within their reach and capability, regardless of the strength or weakness of the euro. Durao's government reform plan included managing budget deficit by further throwing the burden on to the working class and reducing corporate tax from 30 to 25% in 2004 and to 20% in 2006. In maintaining its status as a cheap labor platform for Europe, Portugal must take in the poorest workers in Western Europe and reduce their living standards to less than those of workers in the east. Approximately two companies fold up and leave Portugal each month for the Eastern countries with cheaper labor cost and taxes. The average salary paid to workers in Portugal is 750 euros, compared to only 350 euros in the Czech Republic and only 100 euros in Bulgaria. The enlargement of the EU was viewed as deepening the crisis confronting Portuguese capitalism, when EU would provide more substantial subsidies to...
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