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By HaleStewart May 6, 2014 2:05 pm
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The Failure of Austerity: Portugal

    Last week, Portugal announced that it was emerging from its bailout without a safety net.  This was greeted as a somewhat vindication of the austerity policies the Portuguese government utilized in order to qualify for the bail-out package.   But a deeper look at the relevant statistics shows the policies implemented as a result of austerity did more harm than good.

     Let's begin with a working definition of austerity.  This concept entered the popular lexicon largely after Reinhart and Rogoff published a paper that stated countries which have a debt to GDP ratio over 90% experience weaker than expected growth.  As many countries in the EU periphery had or were approaching this number, the troika of lenders (the EU, ECB and IMF) required most bailout recipients to cut government spending in order to get their fiscal balances in line.  The working theory was doing so would lead to increased investor confidence in these countries, lowering interest rates and increasing economic activity.  It would also lead to economic growth thereby lowering the debt/gdp ration.  The fact the R&R paper was later found to have major problems (a spreadsheet error that completely invalidated their hypothesis) has not detered those espousing this theory.

     So -- has the Portuguese austerity miracle really worked?  They did decrease government spending:

But the debt/gdp ratio has increased:

The reason is GDP growth has been weak. 

In fact, total GDP is still 15% below its peak (in nominal terms) from 2008:

And unemployment is still high:

As is the long-term unemployment rate:

So, to sum up, GDP growth is weak, total GDP is still below its peak of 5 years ago, the debt to GDP ratio has increased and unemployment is skyhigh.  By any economic measure, this is a failure, plain and simple.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer 

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