In late May German Chancellor Angela Merkel traveled to Portugal for meetings with Portuguese President Marcelo Rebelo de Sousa and Prime Minister António Costa. The 24-hour trip reaffirmed the relationship between two of the Eurozone’s strongest economies at a time when expressions of solidarity between Northern and Southern Europe are needed in order to calm beleaguered markets.
The Economic Ties That Bind
As of 2016, Germany accounted for 14% of Portuguese exports and 13% of its imports. This makes Germany one of Portugal’s most important economic partners. Portugal’s trade deficit widened during the first quarter this year, partly due to a 6% drop in exports in March. Maintaining its trade relationship with Germany and possibly expanding exports into that market is therefore crucial for Portugal’s continued economic growth.
One of Merkel’s first stops during her trip was to Braga in northern Portugal. The city is home to a technology centre run by Bosch, a German engineering firm. Bosch recently invested more than €300 million in the centre, which is set to employ 200 engineers to help develop sensors and software for self-driving vehicles.
Germany is the top source of foreign direct investment in Portugal, with German companies taking advantage of Portugal’s increasingly skilled workforce. As one Bosch board member explained, the decision to establish the technology centre in Braga “reflects our confidence in the expertise of Portuguese engineers.”
Auto parts and vehicles are two of Portugal’s main export products and German investment has been key to developing this lucrative industry. In addition to Bosch, Volkswagen has also recently upped its investment in Portugal. The company has operated in Portugal for more than 25 years and like Bosch, it announced back in April that it would open up a technology centre in Lisbon.
The Ups and Downs of Friendship
This trip to Portugal was Merkel’s first in over five years. During that period, Portugal went through a deep financial crisis, resulting in GDP falling by 3.2% in 2012 and unemployment soaring to 18%. Germany’s prescription for Southern Europe’s plight has been a consistent call for greater austerity. However, following the formation of a left-wing coalition government in Portugal, austerity was abandoned in favour of more pro-growth economic policies. The German reaction to Portugal’s one-eighty was highly critical. Germany’s then finance minister, Wolfgang Schäuble, admonished the Costa government, claiming its policies would lead to another bailout program.
Much to the surprise of German naysayers, Portugal became the first Southern European country to climb its way back to economic health. While Germany previously denounced the country’s economic policies, it changed its tune as the data painted an increasingly rosy picture of Portugal’s economy. Schäuble has since described Mário Centeno, Portugal’s finance minister, as the “Cristiano Ronaldo” of EU finance ministers. In fact, Germany even backed his candidacy for the head of the influential Eurogroup last year.
Unity on Display
While Portugal has returned to growth and has a stable coalition government, political uncertainty in Spain and Italy has left markets unnerved. Merkel’s visit took place in the context of a no-confidence vote in Spain’s parliament and protracted negotiations over Italy’s next government. During a joint press conference, Merkel and Costa displayed a united front in expressing their desire to pre-empt another European crisis and to engage with the new Italian government in an open-minded way.
The positive rapport between Costa and Merkel is a good omen for the upcoming European Council meeting at the end of the month where controversial topics such as jobs, growth, migration and defence will be on the itinerary. Portugal’s newfound clout and the respect it has garnered from one of the EU’s most influential member states means that it is in a strong position to ensure the interests and concerns of Southern Europe are heard.