Pandemic reawakens Portugal’s debt crisis trauma

Pandemic reawakens Portugal’s debt crisis trauma


Boarded-up shops and cafés, food banks under pressure, unemployment rising sharply: the economic impact of the coronavirus pandemic in Portugal has reawakened painful memories of the European debt crisis just as they were beginning to fade.

Three months before the virus struck in March, the country recorded its 25th quarter of uninterrupted growth. As the scars left by a punishing EU-IMF bailout programme gradually healed, unemployment was at its lowest since 2004. The budget was in surplus for the first time in 45 years.

Less than a decade later Covid-19 has reopened the wounds of that distressing crisis, plunging the economy back into a deep recession.

“Unemployment is already skyrocketing and poverty is on the rise,” said Ricardo Baptista Leite, health spokesman for the centre-right Social Democrats, the main opposition party. “The idea that we are constantly in crisis is at the back of everyone’s mind.”

Portugal won international praise for its rapid response to the first wave of the pandemic. But it has been one of the European countries hardest hit by the second wave and among the slowest to lower the growth rate of new infections.

In a country of 10.2m people, coronavirus had claimed more than 6,600 lives by December 27 after the number of cases and fatalities began rising significantly faster in mid-November. “We need to crush the curve more quickly,” said Mr Baptista Leite, who is also a medical doctor and head of public health at Lisbon’s Catholic University. “A third wave would have devastating economic and social consequences.”

The immediate shock to the economy has been far greater than in any of the crisis years between 2009 and 2014. The Bank of Portugal forecasts that the economy will have contracted 8.1 per cent this year. Unemployment is set to reach almost 9 per cent in 2021. Some economists fear more than two-thirds of the 360,00 jobs created in Portugal over the past four years could be wiped out in 2020 and 2021.

As Portugal advances with its Covid-19 vaccination programme, people are hopeful this recession will be relatively shortlived in comparison with the previous downturn. The central bank, however, has cut its forecast for a rebound in 2021 to growth of 3.9 per cent, warning that the economy will not regain its pre-pandemic level until 2023.

A doctor is given the BioNTech/Pfizer Covid-19 vaccine on December 27 in Lisbon © Patricia de Melo/AFP/Getty

Portugal’s dependence on tourism, the sector that helped drive the country’s recent recovery, has made it especially vulnerable to the economic impact of coronavirus. Accounting for about 15 per cent of national output and 9 per cent of employment, the industry expects to lose about 60,000 jobs this year. About 45 per cent of the country’s hotels have temporarily closed. TAP Air Portugal, the struggling national airline, is to be bailed out at the cost of 3,500 jobs.

Public health spending was cut during the debt crisis but, according to the OECD, has increased roughly in line with economic growth in recent years. “One of the outstanding outcomes of 2020 was that our NHS showed it was capable of meeting the challenge of coronavirus,” said Augusto Santos Silva, foreign minister.

The virus, however, has placed Portugal’s intensive care bed capacity, one of the lowest in Europe, under intense pressure. Since late November, coronavirus patients have occupied close to 500 out of a total of about 1,125 ICU beds. Non-coronavirus patients would normally occupy 60 per cent to 70 per cent of them, meaning many surgeries have had to be postponed.

In a country where the number of nurses per 100,000 inhabitants is also below the EU average, a record number, more than 4,000, applied to their professional body for emigration papers last year. 

After the trauma of the debt crisis, many Portuguese worry about how the pandemic will affect public finances. “Public debt was already very high and will now be higher,” said Pedro Simas, a senior scientist at Lisbon’s Institute of Molecular Medicine. “I worry about the weight of the state in our economy. Portugal needs to reinvent itself with private initiative.”

The European Commission expects public debt to reach 135 per cent of gross domestic product this year, up from 117 per cent in 2019. The budget is projected to return to a deficit of 4.3 per cent of GDP in 2020. 

“We don’t have the ‘wriggle room’ we need [in terms of public debt] and that creates a sense of anxiety that affects the collective conscious,” said Mr Baptisa Leite.

Emergency bond-buying by the European Central Bank has kept down the cost of government borrowing, as it did during the debt crisis. In contrast to the bailout years, however, many voters now see the EU as a source of succour rather than austerity. Portugal, for example, is set to receive €13bn in grants by 2026 from the EU’s recovery fund — equivalent to 6 per cent of GDP — but will not add to public debt by tapping its loan component.

“There’s a feeling that we’re all in this together now,” said Eugénia Monteiro, a retired civil servant. “In the last crisis, we felt Europe was leaving us behind.”



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