The Iberian Cousins Are Going Their Separate Ways

(Bloomberg) -- Spain and Portugal may have endured the same pain during the euro zone's debt crisis. When it comes to the recovery, the two nations are taking different paths.

While Spain's growth rates are some of the strongest in the 19-nation region, with confidence in economic prospects fueling a surge in investment, Portugal is paying the price for backtracking on key reforms. That's according to Holger Schmieding, chief economist at Berenberg Bank.

The divergence between the Iberian neighbors started in 2015 when Portugal's Socialist party overtook a conservative government with the help of far-left groups. Since then, Prime Minister Antonio Costa has raised the minimum wage, increased the number of public holidays and boosted pay for civil servants. Growth slowed and investment declined.

Credit-rating firm DBRS has fired the latest warning shot, saying recently that it is concerned about the weak economy and the political will for reform. That's a problem because Canadian DBRS is the only one of the four biggest ratings companies that considers Portugal's sovereign bonds as fit for investment. Losing that standard would make the country's debt ineligible for European Central Bank's biggest stimulus program - quantitative easing.

Meanwhile in Spain, the economy has shrugged off the political impasse that has left the country without a government for eight months. Despite the complicated political scenario after two inconclusive elections, investment has ticked up and job creation has rebounded, helping maintain growth rates of about 3 percent, twice those of the euro zone and triple those of Portugal.

But Spain has challenges ahead as well. Acting Prime Minister Mariano Rajoy, who is facing a confidence vote on Aug. 31 to secure a second term in office, is still running short of support in parliament. Losing the vote could put the nation on track for a third election, diverting attention from implementing much-needed structural reforms and reducing an excessive deficit.


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