Evaluating the net-benefits of Portugal entering the Eurozone

The paper asks whether Portugal ended up better off inside the euro area than in a plausible world where Portugal did not join. The question sits at the centre of recent debates: after the financial crisis, the euro‑area debt crisis and austerity, the pandemic, and the recent inflation shock, some view the euro as a straitjacket that makes downturns harder to handle, while others see it as a stability anchor that limits currency turmoil and lowers financing costs. Average growth was 2.9% before 1999 and 1% after 1999, but that contrast alone does not tell us that growth slowed because of the adoption of the euro.

To answer the question, an alternative, plausible world is estimated using quarterly data for the period 1977-2023. The alternative assumes that the adjustments needed to qualify for the euro stop halfway and the move is never completed. Compared with Portugal’s actual path, this “no‑euro” path features higher and less stable inflation and markedly higher interest rates, both short‑term and long‑term. Living standards also diverge: by 2023, real per capita GDP is estimated to be about 17% higher than in the no‑euro scenario. Timing is important: most of the estimated gap opens before the euro’s launch, and by early 1999 the estimated gap is already about 10%.

These results should be read as an estimate of an unobserved alternative history, not a certainty about what would have happened. The main implication of the results is that, for Portugal, the euro’s benefits started materializing before the currency change itself, and came largely through higher GDP, lower inflation and lower borrowing costs.

Click here to go to the paper by Pedro Bação, António Portugal Duarte, and Fátima Sol Murta.