Financialization in the European Periphery and the Sovereign Debt Crisis: The Portuguese Case

Abstract:

The financial sector has acquired great prominence in most developed economies. Some authors argue that the growth of finance is at the root of the financial and economic difficulties of the past decade. This article aims to analyze this claim by looking at financialization in the European periphery, focusing on the Portuguese case. The emergence of this phenomenon is contextualized from a historical, economic and international perspective. Based on the analysis of several indicators, the article concludes that the Portuguese economy exhibits symptoms of financialization that are typically found in Southern European countries and that these differ significantly from the patterns characterizing financialization processes in more advanced economies. The article discusses how the increasing importance of financial actors and motives in the Portuguese economy played a decisive role in the emergence of the crisis.

Keywords::

• Portugal
• financialization
• liberalization
• deregulation
• globalization
• sovereign debt crisis

JEL Classification Codes::

• B50
• E44 and E60

Notes

¹ These two expressions are normally used interchangeably. Henceforth, we will only refer to the concept of financialization.

² The revolution put an end to 48 years of conservative dictatorship, and instituted a democracy.

³ This is based on IMF Financial Soundness Indicators; for Italy we used 2011 data and for Germany 2007 data.

⁴ According to Eurostat, financial assets include currency and deposits, securities and other shares, loans, shares and other equity, insurance technical reserves and other instruments receivable/payable.

⁵ In the second half of the 1990s, Portugal was the EU country where investment gave the highest contribution to GDP growth, mostly as a result of private investment – both by households and NFCs (Mamede et al., 2016). Household debt in Portugal was mostly used to finance house purchases, not current consumption.

⁶ Simonazzi, Ginzburg and Nocella (2013) argue that the deleterious impact of Asian competition on Southern European exports was reinforced by the more-stringent income constraints on poorer German families (associated with the Hartz reforms and other policy choices), which explain both the reduction in demand for domestically produced consumption goods (reflected in the low growth of German imports from the euro area Southern periphery) and the substitution of consumption goods of intermediate quality imported from the European periphery with lower-quality products imported from emerging countries, especially China.

⁷ Source: Eurostat (available at: http://ec.europa.eu/eurostat/web/products-datasets/-/tipspd20).

⁸ Finn M. Körner and H. M. Trautwein (2015) use data of sovereign bond ratings from 1990 until 2012 to show that EMU countries received a rating bonus on euro-denominated debt before the European debt crisis.

⁹ Note, incidentally, that other peripheral financialised economies outside the euro area have higher interest rates (Becker et al., 2010).

¹⁰ It should be noted that interbank loans are not related with mortgage backed securities. Instead, they are mostly unsecured loans between deposit-taking institutions for a period that can go from one day to one year, which aim to reallocate liquidity between institutions: the ones that have excess liquidity lend funds to the ones that are short of liquidity.

¹¹ According to UNCTAD (2011), the measures to support the financial sector in the EU27 (including recapitalisation schemes, guarantees, asset relief interventions and liquidity measures) accounted five times the overall amount of State aid to other sectors.

Additional information

Notes on contributors

Ricardo Barradas

Ricardo Barradas is a Visiting Assistant Professor at Instituto Universitário de Lisboa (ISCTE-IUL), Associate Reseacher at Dinâmia’CET-IUL, and Visiting Assistant Professor at Instituto Politécnico de Lisboa (all the aforementioned institutions are located in Lisbon, Portugal). Sérgio Lagoa and Ricardo Paes Mamede are both Assistant Professors at ISCTE-IUL and Associate Researchers at Dinâmia’CET-IUL. Emanuel Leão is Assistant Professor at ISCTE-IUL and Associate Researcher at CEI-IUL-Centro de Estudos Internacionais, Lisboa, Portugal. The authors are grateful for the helpful comments and suggestions of two anonymous referees, Ana Santos, Andrew Brown, Christopher Brown, David Spencer, Nuno Teles, Slim Souissi, the participants in the 1st FESSUD Annual Conference (Berlin, October 2012), the participants in the Financialization Seminar (Centre for Social Studies – University of Coimbra, December 2012), the participants in the 3rd International Conference in Economics (Universidade Portucalense—Infante D. Henrique, May 2013), the participants in 4th Annual Conference in Political Economy (Erasmus University Rotterdam, July 2013) and the participants in Dinâmia’CET-IUL Workshop on Dinâmicas Socioeconómicas e Territoriais Contemporâneas (ISCTE-IUL, June 2015). This article received funding from the FESSUD project under the European Union’s Seventh Framework Programme grant number 266800. The usual disclaimer applies.

Sérgio Lagoa

Ricardo Barradas is a Visiting Assistant Professor at Instituto Universitário de Lisboa (ISCTE-IUL), Associate Reseacher at Dinâmia’CET-IUL, and Visiting Assistant Professor at Instituto Politécnico de Lisboa (all the aforementioned institutions are located in Lisbon, Portugal). Sérgio Lagoa and Ricardo Paes Mamede are both Assistant Professors at ISCTE-IUL and Associate Researchers at Dinâmia’CET-IUL. Emanuel Leão is Assistant Professor at ISCTE-IUL and Associate Researcher at CEI-IUL-Centro de Estudos Internacionais, Lisboa, Portugal. The authors are grateful for the helpful comments and suggestions of two anonymous referees, Ana Santos, Andrew Brown, Christopher Brown, David Spencer, Nuno Teles, Slim Souissi, the participants in the 1st FESSUD Annual Conference (Berlin, October 2012), the participants in the Financialization Seminar (Centre for Social Studies – University of Coimbra, December 2012), the participants in the 3rd International Conference in Economics (Universidade Portucalense—Infante D. Henrique, May 2013), the participants in 4th Annual Conference in Political Economy (Erasmus University Rotterdam, July 2013) and the participants in Dinâmia’CET-IUL Workshop on Dinâmicas Socioeconómicas e Territoriais Contemporâneas (ISCTE-IUL, June 2015). This article received funding from the FESSUD project under the European Union’s Seventh Framework Programme grant number 266800. The usual disclaimer applies.

Emanuel Leão

Ricardo Barradas is a Visiting Assistant Professor at Instituto Universitário de Lisboa (ISCTE-IUL), Associate Reseacher at Dinâmia’CET-IUL, and Visiting Assistant Professor at Instituto Politécnico de Lisboa (all the aforementioned institutions are located in Lisbon, Portugal). Sérgio Lagoa and Ricardo Paes Mamede are both Assistant Professors at ISCTE-IUL and Associate Researchers at Dinâmia’CET-IUL. Emanuel Leão is Assistant Professor at ISCTE-IUL and Associate Researcher at CEI-IUL-Centro de Estudos Internacionais, Lisboa, Portugal. The authors are grateful for the helpful comments and suggestions of two anonymous referees, Ana Santos, Andrew Brown, Christopher Brown, David Spencer, Nuno Teles, Slim Souissi, the participants in the 1st FESSUD Annual Conference (Berlin, October 2012), the participants in the Financialization Seminar (Centre for Social Studies – University of Coimbra, December 2012), the participants in the 3rd International Conference in Economics (Universidade Portucalense—Infante D. Henrique, May 2013), the participants in 4th Annual Conference in Political Economy (Erasmus University Rotterdam, July 2013) and the participants in Dinâmia’CET-IUL Workshop on Dinâmicas Socioeconómicas e Territoriais Contemporâneas (ISCTE-IUL, June 2015). This article received funding from the FESSUD project under the European Union’s Seventh Framework Programme grant number 266800. The usual disclaimer applies.

Ricardo Paes Mamede

Ricardo Barradas is a Visiting Assistant Professor at Instituto Universitário de Lisboa (ISCTE-IUL), Associate Reseacher at Dinâmia’CET-IUL, and Visiting Assistant Professor at Instituto Politécnico de Lisboa (all the aforementioned institutions are located in Lisbon, Portugal). Sérgio Lagoa and Ricardo Paes Mamede are both Assistant Professors at ISCTE-IUL and Associate Researchers at Dinâmia’CET-IUL. Emanuel Leão is Assistant Professor at ISCTE-IUL and Associate Researcher at CEI-IUL-Centro de Estudos Internacionais, Lisboa, Portugal. The authors are grateful for the helpful comments and suggestions of two anonymous referees, Ana Santos, Andrew Brown, Christopher Brown, David Spencer, Nuno Teles, Slim Souissi, the participants in the 1st FESSUD Annual Conference (Berlin, October 2012), the participants in the Financialization Seminar (Centre for Social Studies – University of Coimbra, December 2012), the participants in the 3rd International Conference in Economics (Universidade Portucalense—Infante D. Henrique, May 2013), the participants in 4th Annual Conference in Political Economy (Erasmus University Rotterdam, July 2013) and the participants in Dinâmia’CET-IUL Workshop on Dinâmicas Socioeconómicas e Territoriais Contemporâneas (ISCTE-IUL, June 2015). This article received funding from the FESSUD project under the European Union’s Seventh Framework Programme grant number 266800. The usual disclaimer applies.