Custom essays on PORTUGAL AND EUROPEAN CRISIS

PHYSICAL FORCES
Investors should consider not only the actual balance of payment but also physical forces that influence Portuguese economy. In fact, investors should be aware that the EU-Portugal relations are not mere business but it is also politics. In this regard, it is worth mentioning the fact that the Portuguese government’s resignation in 2001, leaving the country without a fully-operating administration until a June election, amplified market fears (EU Economy Crisis #3, 2011). Hence, the political situation in the country may and does have the direct impact on the economic situation in the country. The further political uncertainty or instability may aggravate negative effects of the economic crisis. Moreover, the country will be just unable to recover from the economic recession if there is no stable government and clearly-defined economic policy in the country. Therefore, politics is probably the major force influencing the economic situation in Portugal along with sheer economic factors. In addition, the support of Portugal by the EU is also not only the manifestation of the economic cooperation between the EU member-states but also the manifestation of the political will of the EU to maintain stability in the union.
CURRENT SITUATION IN PORTUGAL AND ITS IMPACT ON THE EU
In fact, the current situation in Portugal is extremely dangerous for the EU economy because the deterioration of the economic situation in Portugal will inevitably affect the EU. The negative impact of the economic crisis on the EU economy can be clearly traced today. For instance, any negative trends in the Portuguese economy affect the currency rate of euro. In such a situation, some specialists forecasts the upcoming default of Portugal because unlike previous attacks on the euro project, the latest downgrade of Portugal’s debt by the ratings agency Moody’s feels like the beginning of the end (Imman, 2011). The default of Portugal will affect the EU economy and aggravate the economic situation in Europe. In this regard, the ECB and other financial institutions of the EU will suffer probably the most significant negative effects, in case of Portuguese default.
In actuality, the crisis in Portugal also raises new questions about whether the European Union will come to grips with the other side of its crisis: the banks. Banks in well-off countries like Germany, France and the Netherlands, as well as Britain, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe (Erlanger, 2011).
However, what is the most disturbing about the economic crisis in Portugal is the fact that many economists are a good deal more alarmed, most notably because the bailout formula European leaders keep applying to their most indebted member nations shows no signs of working (Erlanger, 2011). This means that the EU may fail to help Portugal to recover. In stark contrast, Portugal can become an unbearable burden for the EU, consuming huge funds with little, if any improvements. In such a context, the EU can loss substantial funds, while supporting Portugal, while the default of Portugal may have a disastrous impact on the EU’s economy as well as on the political life of the union.
In actuality, Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high (Erlanger, 2011). In response to the deterioration of the balance of payments of Portugal and its economic crisis, the EU has developed a stimulus plan to support Portugal. The plan, which may include a loan to Portugal of about 60 billion euros ($78 billion) and purchases of outstanding Greek debt, would mark an attempt to contain a crisis that has frustrated unprecedented efforts by policy makers to calm markets and raised questions about the health of the 17-nation euro economy (Neuger, 2011). The implementation of this plan may help Portugal to start recovering. Analysts expect that Lisbon will ultimately need up to $115 billion in loans and guarantees. The amount would be covered fairly comfortably by the bailout fund created by the EU last year to address the widening euro debt crisis, but would come with stringent conditions that Lisbon rein in public spending (Chu, 2011)
However, Portugal has brushed aside suggestions that it will have to fall back on EU help, noting that last year’s deficit was less than the target of 7.3 percent of gross domestic product (Neuger, 2011). In fact, the decision of Portuguese policy makers is not as absurd as it may seem to be. In actuality, Portugal is already unable to pay off its debt, whereas borrowing more money from the EU may lead the country to the dead-end, where the only way out is default. Therefore, Portugal cannot just afford borrowing more money, especially at high interest rate. In such a situation, Portugal and the EU should elaborate an effective program of the economic interaction to make the EU aid really effective.