Portugal the Next Nation to Show that Contractionary Policy Results in Contraction

Why is Anyone Surprised Anymore – and Why Does the Policy Continue?

When European countries receive fiscal support from the European community because their budget deficits are too great for them to finance, the European community demands economic austerity programs in return.  The result of economic austerity programs is the contraction of the economy, usually leading to countries missing the required deadlines on getting their fiscal deficits down, and usually leading to severe economic conditions.



Small country needs $100 billion bailout



Portugal is the latest example of this.  The country received about $100 billion in bailout money (This is not a big country, look at the map) and the new government is now releasing the information on how its new economic policy will affect the economy in the near term.

The Prime Minister, Passos Coelho

said a slowdown in the global economy would hit Portugal's gross domestic product in 2012, prompting a revised forecast of a 2.3% contraction, worse than the previous outlook of a 1.8% contraction.

However, this year Portugal's economy will contract slightly less than previously expected because of a relatively strong first half, he said. The economy is now expected to shrink by 1.8% in 2011 compared with a prior estimate of 2.2%, he said.

The country's unemployment, now at 12.2%, will peak in 2013 at 13.3%, Mr. Passos Coelho forecast, noting recovery will likely start that year. "Exports will have to act as shock absorbers," because domestic consumption continues to decline at a rapid clip, he said. In 2013, the economy is expected to grow by 1.2%, which is a slight revision from an earlier forecast of 1.3%, he said.

Note that the Prime Minister talks about how exports need to drive his economy in the short term to prevent things from being even worse.  Then think about how exports cannot rise in a world economy that is experiencing slow growth or recession.  Then think about how using exports cannot benefit every country, that in fact when one country’s economy is helped by exports, another country’s economy may be hurt by the increase in imports. 

Then think about how Europe is following the right policy.  Can’t do it, can you?