Portugal stood up against austerity, and won

LISBON — Ramón Rivera had barely gotten his olive oil business started in the sun-swept Alentejo region of Portugal when Europe’s debt crisis struck. The economy crumbled, wages were cut, and unemployment doubled. The government in Lisbon had to accept a humiliating international bailout.

But as the misery deepened, Portugal took a daring stand: In 2015, it cast aside the harshest austerity measures its European creditors had imposed, igniting a virtuous cycle that put its economy back on a path to growth. The country reversed cuts to wages, pensions and social security, and offered incentives to businesses.

The government’s U-turn, and willingness to spend, had a powerful effect. Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off — including at Mr. Rivera’s olive groves.

“We had faith that Portugal would come out of the crisis,” said Mr. Rivera, the general manager of Elaia. The company focused on state-of-the-art harvesting technology, and it is now one of Portugal’s biggest olive oil producers. “We saw that this was the best place in the world to invest.”

At a time of mounting uncertainty in Europe, Portugal has defied critics who have insisted on austerity as the answer to the Continent’s economic and financial crisis. While countries from Greece to Ireland — and for a stretch, Portugal itself — toed the line, Lisbon resisted, helping to stoke a revival that drove economic growth last year to its highest level in a decade.

The renewal is visible just about everywhere. Hotels, restaurants and shops have opened in droves, fueled by a tourism surge that has helped cut unemployment in half. In the Beato district of Lisbon, a mega-campus for start-ups rises from the rubble of a derelict military factory. Bosch, Google and Mercedes-Benz recently opened offices and digital research centers here, collectively employing thousands.

Foreign investment in aerospace, construction and other sectors is at a record high. And traditional Portuguese industries, including textiles and paper mills, are putting money into innovation, driving a boom in exports.

“What happened in Portugal shows that too much austerity deepens a recession, and creates a vicious circle,” Prime Minister António Costa said in an interview. “We devised an alternative to austerity, focusing on higher growth, and more and better jobs.”

Voters ushered Mr. Costa, a center-left leader, into power in late 2015 after he promised to reverse cuts to their income, which the previous government had approved to reduce Portugal’s high deficit under the terms of an international bailout of 78 billion euros, or $90 billion. Mr. Costa formed an unusual alliance with Communist and radical-left parties, which had been shut out of power since the end of Portugal’s dictatorship in 1974. They united with the goal of beating back some of the toughest aspects of austerity, while balancing the books to meet eurozone rules.

The government raised public sector salaries, the minimum wage and pensions and even restored the amount of vacation days to prebailout levels over objections from creditors like Germany and the International Monetary Fund. Incentives to stimulate business included development subsidies, tax credits and funding for small and midsize companies.

Mr. Costa made up for the givebacks with cuts in infrastructure and other spending, whittling the annual budget deficit to less than 1 percent of its gross domestic product, compared with 4.4 percent when he took office. The government is on track to achieve a surplus by 2020, a year ahead of schedule, ending a quarter-century of deficits.

European officials are now admitting that Portugal may have found a better response to the crisis. Recently, they rewarded Lisbon by elevating the country’s finance minister, Mário Centeno, who helped engineer the changes, to president of the Eurogroup, the influential collective of eurozone finance ministers.

The economic about-face had a remarkable impact on Portugal’s collective psyche. While discouragement lingers in Greece after a decade of spending cuts, Portugal’s recovery has pivoted around restoring confidence to get people and businesses motivated again.

“The actual stimulus spending was very small,” said João Borges de Assunção, a professor at the Católica Lisbon School of Business and Economics. “But the country’s mind-set became completely different, and from an economic perspective, that’s more impactful than the actual change in policy.”

The brighter outlook has lifted companies like Elaia, the olive oil producer. Its parent company, Sovena, opened Elaia as a start-up on a vast agricultural plain in southern Portugal in 2007, just before the downturn. Its timing could hardly have been worse, but managers persisted, paving the way for a surge in production when the crisis ebbed.

Elaia says it generates 14 percent of Portugal’s olive oil today, contributing to a renaissance in Portuguese exports, which now constitute 40 percent of economic activity. Drones buzz over vast olive groves, precision-planted with 2,000 trees per hectare, or roughly 2.5 acres, compared with around 150 trees for a traditional farm, monitoring crops for insect infestations, water levels and optimum harvesting time. Olives are picked by machine. Instead of field hands, the company hires technicians to operate the robots, and it has teamed up with universities for research.

“Portugal has benefited a lot after the tough years we had,” said Jorge de Melo, Sovena’s chief executive. “The mood is much better than it was before, and that’s important for the economy.”

Yet Portugal’s success is still vulnerable.

Growth is cooling from 2.7 percent last year, as Mr. Costa keeps public investment at a 40-year low to cut the deficit. While he restored public sector salaries to previous levels, they have barely budged since before the crisis. Social precariousness lingers, worsened by the spread of low-paying part-time contracts. And the minimum wage of 580 euros a month, although up, remains one of the lowest in the eurozone.

Portugal’s unions are now threatening strikes to press the government to more fully reverse austerity, increase wages and unlock more public spending to reduce inequality.

Mr. Costa insists that the government must keep cutting the deficit to offset the biggest threat to Portugal: its enormous debt, still one of the eurozone’s largest. Portuguese banks are saddled with bad loans from the earlier crisis, and the country remains vulnerable to any financial market turmoil that might be stirred up by problems in nearby Italy.

“We didn’t go from the dark side to the bright side of the moon,” the prime minister said. “There’s still a lot to do.”

“But when we started this process, a lot of people said that what we wanted to achieve was impossible,” he added. “We showed that there is an alternative.”

To cement the growth cycle, the government is putting what little investment it makes into targeted initiatives like tax breaks for foreign companies and training for the unemployed.

An hour and a half east of Lisbon, in Évora, a five-acre factory built by the French airplane-parts maker Mecachrome rises from rolling plains fringed with cork trees. Lured in 2016 by government incentives and European Union loans, it invested €30 million in a vast aerospace park where bulldozers are plowing fields to make way for roads and businesses.

Robots forge precision parts for Airbus, Boeing and other industry giants. Most of the 150 technicians were recruited nearby by an unemployment agency that started an intensive retraining program with the government.

Luis Salgueiro, 29, an apprentice with Mecachrome, was jobless during the crisis. He eventually got work as a waiter, and then in a tomato factory, before landing again at the unemployment office. At the Mecachrome plant, however, he was helping to code a complex machine to fashion a titanium airplane part. Completing the apprenticeship is expected to lead to a full-time job.

“The future looks really bright for me now,” he said, beaming as he gestured around the factory.

Christian Santos, Mecachrome’s director in Portugal, said he plans to hire 150 more workers and to make millions in additional investments in the next three years.

“Things are happening in Portugal,” he said. “There’s an enthusiastic mojo here.”