Development and Finance from issue 2009/3

Márta Zádor

Economic Crisis in Spain and Portugal, with Lessons for Hungary

- Abstract -

While Spain and Portugal implemented structural reforms, liberalisation and privatisation at difference speeds and in different phases after signing the accession treaty, they still became euro area members at the same time. The question is what state the crisis found the Mediterranean economies of Spain and Portugal in, which joined at the same level of development and conditions as Hungary, and to what extent it is affecting them.

This crisis differs from earlier ones in many respects. The global nature of crisis very much narrows the recovery possibilities. Export-driven growth is an impossible or barely feasible solution for most countries. Euro area members cannot count on currency devaluations and the financial sector ballooned more in the pre-crisis upswing than before earlier crises. All these contribute to the fact that the losses of real economy caused by the financial crisis could be much higher and longer lasting.

However, on the other hand we find that the institutional and legal background necessary for government intervention is much stronger today than before. The Spanish government took consistent crisis management measures relatively quickly which were backed with good communication. Yet, as a result, the accumulated budget surplus turned into a deficit, and is growing at a fast pace. The government has no further budgetary options at its disposal.

In Mediterranean countries, an important role in the successful implementation of the convergence programmes was played by global economic activity as well as the falling and the low level of international oil and non-oil prices. There was a greater interest in the EU to have Mediterranean countries join. The European Central Bank secured the intervention of central banks with short-term loans, and after joining ERM2 this reduced currency risks considerably. In the new currency regime, speculation attacks decreased and the currency was able to follow real economic fundamentals more closely, leading to higher credibility for economic policy. The inflow of community funds was also more significant than in any future euro area member. Joining ERM2 and the target date of euro area membership acted as ‘stabilising anchors’. This contributed to the consistency of budget policies.

At the same time, we can draw the conclusion for Hungary that euro area membership does not necessarily provide protection against external shocks. Structural tensions were even camouflaged by euro area membership. As economic policy coordination at community level did not grow during the crisis, the responsibility of certain countries to observe the recommendations of the ‘excessive deficit procedure’ grew, as this was the only possible way to avoid spiralling debt and a protracted crisis with the related unemployment and other social tensions.

Another conclusion for Hungary is that if the crisis management supports inefficient employment and hinders the dismantling of excessive capacities, one can expect that after the lengthy recovery economies will be faced with lower productivity and permanently high unemployment. Under such circumstances, productivity can be boosted if crisis management focuses on innovative branches.

Márta Zádor, economist, deputy director (Ecostat Government Institute for Strategic Research of Economy and Society)

Márta Zádor

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