Portugal

Membership in the European Union (EU) contributed to stable economic growth, largely through increased trade ties and an inflow of funds to improve the country's infrastructure. After a recession in 1993, the economy grew at an average annual rate of 3.3%, well above EU averages. In order to qualify for the European Monetary Union (EMU), Portugal agreed to cut its fiscal deficit and undertake structural reforms. The EMU brought to Portugal exchange rate stability, falling inflation, and falling interest rates. Falling interest rates, in turn, lowered the cost of public debt and helped the country achieve its fiscal targets.

Household debt has expanded rapidly. The European Commission, OECD, and others have advised the Portuguese Government to exercise more fiscal restraint. Portugal's public debt exceeded 3 % of GNP in 2001, the EU's self-imposed limit, and left the country open to either EU sanctions or tighter financial supervision. The overall rate of growth slowed in late 2001 and into 2002, making fiscal austerity that much more painful to implement. Portugal will be forced into greater self-sufficiency when EU funds are likely to be discontinued in 2006. In addition, EU expansion into eastern Europe also will erase Portugal's key competitive advantage, low labor costs.

Portugal's economy is based on traditional industries such as textiles, clothing, footwear, cork and wood products, beverages (wine), porcelain and earthenware, and glass and glassware. In addition, the country has increased its role in Europe's automotive sector. Services, particularly tourism, are playing an increasingly important role in the economy.

Portugal has made significant progress in raising its standard of living to that of its EU partners. GDP per capita on a purchasing power parity basis rose from 51% of the EU average in 1985 to 78% in early 2002. Unemployment stood at 4.1% at the end of 2001, which is low compared to the EU average. Real wages are flexible, but high social costs and severance packages raise fixed labor costs and make new job creation difficult.