the past 40 years teaches us that the initial impact from an assistance programme will only be sustainable if there are structural changes that foster higher potential growth. a long - lasting improvement in the economic welfare of the portuguese depends crucially on the maintenance of a sustainable macroeconomic framework that provides suitable incentives for economic agents and on following a reform agenda that supports long - term sustainable growth. table 2 - the portuguese economy in 1995 - 2018 : some key figures sources : banco de portugal, national statistics institute, eurostat ( 1 ) non - financial private sector ( 2 ) in the first column, average corresponds to the period 1999 - 2007 ( 3 ) nominal. in the last column average corresponds to 2015 - 2016 due to data unavailability for 2017 - 2018 ( 4 ) 1999 = 100 5. exchange rate regime : the euro and potential growth the introduction of the euro has eliminated the uncertainty associated with exchange rate fluctuations. in fact, one of the biggest advantages of the single currency is that it neutralises the “ external factor ” thereby contributing to increased stability. yet, at the same time, it eliminates the possibility of recourse to the exchange rate instrument to manage competitiveness problems even when they result from internal factors. in fact, prior to the introduction of the euro, whenever the economic side “ failed ”, the exchange rate instrument allowed ( directly ) competitiveness to be restored and ( indirectly ) a real depreciation of public and private debt through the inflation that resulted from currency devaluation. with the single currency and the single monetary policy it is no longer possible to use currency devaluation to offset productivity differentials or real appreciations resulting from inflation differences and to restore the competitiveness and employment of a given economy. it is also no longer possible to resort to financial repression through debt devaluation, with the consequent transfer of wealth from creditors to debtors, in particular to the public sector. excessive leverage requires financial adjustment by debtors, so that creditors are not penalised. the euro also eliminates the anaesthetising effect of the exchange rate. in fact, with the loss of the exchange rate “ crutch ”, price and wage deviations have an impact on the unemployment rate and productivity deviations accelerate the perception of the structural weaknesses of the economy and the need for reform. therefore, the single currency makes the need for adequate policies, sound public finances and financial discipline of private actors more visible. it requires institutions and policies that are fit for purpose

improved overall and primary balances, as well as declining debt levels. prudent fiscal management should have led to the boom in private spending being partly offset, even if only by letting automatic stabilisers play their role. when interest rate convergence was complete and the initial impact of emu on growth disappeared, the underlying unsustainable fiscal policies swiftly became apparent. also, structural bottlenecks arising from a lack of competition and an outsized public sector an excessive weight of the public sector in the economy, contributed to an overexpansion of the non - tradables sector, hampering competitiveness and aggravating external imbalances. it cannot be ignored that, as a regime change, emu had a major impact on the setting of expectations, the transmission channels as well as the equilibrium values of key economic variables. this made it extremely difficult to assess developments in real time, causing very reasonable and competent people to disagree about the best explanation, and therefore to advocate different policy responses. in hindsight, it is clear that the pro - cyclical fiscal policy, a less demanding regulatory context, the complacency of international financial markets and the non - existence of macroprudential policies contributed decisively to the accumulation of significant macroeconomic imbalances in the portuguese economy from the mid - 1990s. after 2008 – the global crisis and the 2011 adjustment programme the macroeconomic imbalances made the portuguese economy extremely vulnerable to the international financial crisis that started in 2008 and its contagion effects. when the crisis hit, followed by a global recession, an expansionary fiscal policy was once again adopted, and this time it was particularly intense, despite the imbalances hitherto accumulated and the absence of fiscal space. in 2010, the budget deficit was above 11 % of gdp and gross public debt was around 100 % of gdp. at the same time, in the banking sector, the accumulation of non - performing loans resulting from the volume and quality of credit granted in the decade 2000 - 2010 and the effects of the financial crisis weakened banks'balance sheets increasing their vulnerability and the constraints faced by the portuguese economy. at eu level, the sovereign debt crisis in the euro area brought to the forefront the failures in emu economic governance, and exposed the particular vulnerability of euro area member states to changes in markets ’ sovereign risk perception. the high and rising level of external indebtedness ( gross external debt represented 226. 7 % of gdp at the end of