GDP went down due to weak domestic demand, which went further down after a decline. 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 poorer European countries investing in Portugal to discourage or prevent their leaving the country and prevent the impending social explosion that could result from continued economic decline (O'Flynn).
Spain. After joining the EU, the Spanish government under Jose Maria Aznar continued with its programs of liberalization, privatization and deregulation of the economy and some tax reforms consistently (Wikipedia 2005). Unemployment steadily decreased but remained high at 11.7%. It had a satisfactory growth rate of 2.4% in 2003, considering that it had an unstable economy. Incoming President Rodriguez Zapatero planned to reduce government intervention in business, fight off tax fraud and support innovation, research and development efforts. He also, however, intended to reintroduce labor market regulations scrapped by the Aznar government. Following its membership in the EU in 1986, Spain experienced strong economic growth and trade expansion, which made it the 10th largest in the world in 2002. Sanitation, infrastructure, and health care have been at optimal levels, although its GDP has remained at 87% of that of the four leading European economies.
The enlargement of the European Union was calculated to deepen the crisis of Portuguese capitalism (Wikipedia 2005). Companies investing in poorer European countries would receive less substantial support or subsidies from the EU, far less than what Portugal receives from the EU or can afford to give these companies to prevent them from leaving Portugal. Portugal now confronts new challenges, mainly this slowdown in foreign investments and a growing budget deficit that threatens to exceed the limit established by the EU for countries using the euro (Internal Study Programs 2004). These new problems could be made worse by the imminent loss of EU funding to poorer member states in Central and Eastern Europe. Many expect that the Portuguese government would cut corporate and income tax, cut back on government spending, which is said to be among the highest in the EU, and reform state health service (ISP).
Meantime, the next few years would be a crucial test to a new Socialist government in Spain with the enlargement of EU membership, which will open greater competition for Spanish companies from developing nations under the EU (Kollmeyer 2005). Many expect that the Socialists would continue reasserting themselves within Europe. Aznar's government was often accused of being too soft and pliable with the U.S. At the expense of fellow member states in the EU. Many would not expect Spain's economy to dramatically suffer from feared terrorist attacks, such as those of 9/11, which could take out a tenth up to two-tenths of a percentage off Spain's growth. The cost in terms of human lives could be very high, but not in terms of infrastructure, which was the case of the U.S. terrorist attacks on September 11, 2001 (Kollmeyer).
Portugal's case is often viewed by anti-euro advocates in Britain a consequence of Portugal's adoption of the single currency. But opponents contend that the true cause is the changed global position of Portugal, which took over Spain's status as the cheap labor platform of Europe. With this change, it rose ahead of other EU countries with an average economic growth of 3.5%. With support from the EMU, confidence went too far and public debt mounted to beyond 3% of EU's limit. EU sanctions later clamped down on Portugal's growth rate to a slow, difficult pace.
It was quite different for Spain. Since Spain joined the EU in 1986, it went ahead ofhe pack at 277% (Kollmeyer 2005). It was.8% ahead of Germany and 3.6% of France. The Maastricht Treaty was the initiative that helped transform Spain from one of Europe's poorer nations into a phenomenal economic force. Unemployment rate may still be high but it has been reduced from 24% a decade ago to 11% last August. Spain now enjoys an enviable GDP in comparison to those of France and Germany.
Manuel Balmaseda, chief economist for Spain and Europe, attributed the huge economic spur to the European Monetary Union and the Maastricht Treaty (Kollmeyer 2005). Spain was among those countries, which took advantage of the new wave and got ahead of other countries like Portugal and Italy, according to him. The worst terrorist attack happened in Madrid last March, killing 191 and injuring 1,400 and was linked…