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2002-2003: The agony after the ecstasy
It was the first recession in the euro era, when monetary policy was no longer in the hands of national authorities.
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2002-2003: The agony after the ecstasy

In the 1990s, the country was on the road to joining the single currency, lowering the deficit, debt, inflation and interest rates. Its goal was achieved and Portugal was one of the frontrunners adopting the euro in early 1999. But this came with some imbalances. The strong and consistent reduction in interest rates, motivated by the growing credibility of a country that would be handing its monetary and exchange policy over to the European Central Bank, led to increased indebtedness among companies and private individuals.

Cheaper money and competition between banks in granting loans increased household indebtedness for the purchase of homes and cars and credit to firms that were often not productive. For the state, the budget leeway generated by the reduction in the government debt burden was largely used to increase current public spending.

From the “quagmire” to the country that was “picked clean”

After joining the single currency, the country was subject to new budget rules that limited the budget deficit to 3% of the GDP, as required by the Stability and Growth Pact defined by the European institutions. Soon, the government accounts were incompatible with this goal. Following a defeat in the local elections in December 2001, Prime Minister António Guterres resigned due to the lack of political conditions for preventing the country from falling into a “quagmire”.

After the early general election, the new government led by Durão Barroso further emphasised the negative aspect, saying that he had inherited a country that was “picked clean”.

Government instability, the pessimistic political discourse and the perspective of public spending cuts and tax increases helped to make widespread a negative outlook of economic agents as to economic developments.

Economic sentiment fell, consumption and investment contracted and the recession was inevitable.

The difficulty in containing the imbalance in State accounts

General government balance (% of the GDP)


A Portuguese crisis

This recession was caused almost exclusively by the domestic situation in the country. Unlike previous recessions, this crisis was not shared with Portugal’s main European and trade partners. Although the USA experienced a brief recession in 2001, there was no decline in the Gross Domestic Product in Europe.


The new government in 2002 found it necessary to implement a restrictive fiscal policy in order to get the budget deficit back down below 3%, after breaking the European limit the previous year.


To do this, public investment was cut and the increase in public spending was halted. Private consumption also dwindled following the erosion of confidence in the economy, thus aggravating its decline.


It was the first recession in the euro era, when monetary policy was no longer in the hands of national authorities.

The main indicators

GDP per capita

The economic slump between 2002 and 2003 was relatively deep, with a maximum difference of 2.9% in real GDP per capita. The peak for this business cycle was reached in the first quarter of 2002.

The trough came over a year later, in the second quarter of 2003.


Euros (€), chain-weighted, base year 2011


Unemployment rate

The labour market underwent profound changes. In the 20 previous years, the unemployment rate was only slightly countercyclical, but it did not fall after this recession.


Economic Sentiment Indicator

The economic sentiment indicator fell sharply during the recession, reinforcing a trend that had begun two years before.


Indicator, 100=February 2002

The beginning of the lost decades

This recession marked a turning point in the Portuguese economy which took on structural contours. Since 2001, the average growth rate has been modest for extended periods of time. So much so, that the first two decades of the 21st century are considered to be lost decades.


The stagnation in productivity and the misallocation of capital are some of the main causes for this prolonged anaemia.


It was also the first recession when the macroeconomic policy tools that Portugal had used in the two previous decades were no longer available.

The country could no longer lower interest rates, which were now in the hands of the European Central Bank. The inability to create a cushion in the public deficit below the limit of 3% during the years of economic expansion made it impossible to reduce taxes or increase public spending during the years of the recession, which could have stimulated the economy.


Finally, one of the most immediate effects of this recession was the rapid increase in unemployment, which went from values of under 4.5% in late 2001 to over 7% in 2014. After the recession had ended, the unemployment rate did not fall, remaining high during the following years, which was unusual in the Portuguese economy of two decades previously.


There was a roller coaster of expectations that impacted the reaction to private investment and consumption
Professor at Nova School of Business and Economics
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The 2002-2003 recession by José Tavares, Professor at Nova School of Business and Economics