Portugal's membership in the European Union (EU) contributed to stable economic growth, largely through increased trade and an inflow of EU funds for infrastructure improvements. Furthermore, Portugal's 1999 entry into the European Monetary Union (EMU) brought exchange rate stability, lower inflation, and lower interest rates. Falling interest rates, in turn, lowered the cost of public debt and helped the country achieve its fiscal targets. Until 2001, average annual growth rates consistently exceeded those of the EU average. However, a dramatic increase in private sector loans led to a serious external imbalance, with large current and capital account deficits that year.
The Government of Portugal managed to keep the budget deficit under 3% in accordance with the Eurozone's Stability and Growth Pact during 2002-2004. However, in 2005 Portugal acknowledged breaching the target when its budget deficit surged to an all-time high of 6.1%. Since that time, the Socrates government has worked hard to bring the budget situation under control. In 2006, the government reduced the deficit to 3.9%, mainly through revenue-generating measures (i.e., increased collection enforcement and higher taxes). The 2007 budget further reduced the deficit to 2.6% through spending cuts and structural reforms, and the 2008 budget brought the deficit down to 2.2%, the lowest rate in 30 years. The proposed 2009 budget projects the same 2.2%, as additional spending is offset by additional tax revenue. Helped in part by a wider EU recovery, the Portuguese economy grew by 1.9% in 2007, up from 1.4% the year before. A slowing regional economy meant the economy grew by only 0.8% in 2008, short of predictions, and the 2009 budget estimates 0.6% growth in 2009. Unemployment was 7.3% in early 2008.
The service sector, comprised of the public service, retail, tourism, and recreation, is now Portugal's largest employer, having overtaken the traditionally predominant manufacturing and agriculture sectors since the country joined the EU in 1986. EU expansion into Eastern Europe has erased Portugal's historic competitive advantage and relatively low labor costs, particularly in the manufacturing and agriculture sectors. The government is working to change Portugal's economic development model from one based on public consumption and public investment to one focused on exports, private investment, and development of the high-tech sector.
Due to slow economic growth, Portugal has lost ground relative to the rest of the EU since 2002. It was projected that Portugal's 2008 per capita GDP would stand at 65.6% of the EU-27 average and that it would drop to 19th in purchasing power parity behind Cyprus, Greece, the Czech Republic, Malta, and Estonia.
Information by U.S. Department of State