Banking System and Monetary Policy in Portugal report - Essay Example

All of these threats pose serious challenges to the overall health of the Portuguese economy and hence corrective measures are needed to correct the flaws in the system and to make it more competitive and self-sustaining. The assessment of banking system shows that the procedure for borrowing money from banks is easier than other EU countries. As a result, the household debt is as large as 120% of the income. Unemployment trend in the Portuguese economy is also very alarming. It is growing exponentially and poses serious threats to the policy makers to devise strategies to curb this trend.

Unemployment can be dangerous for any economy and Portuguese economy is no exception. Unemployment reduces the production potential of a country and results in less output being produced than what can be produced. This hampers the economic growth of an economy and leads government into paying unemployment benefits funds for which the government has to indulge in debt financing. Debt financing can be very dangerous to an economy in the long-run. Current unemployment rate of Portugal stands at around 11%.

(Lipsey and Chrystal, 2003) The fiscal situation of the Portuguese economy shows another flaw in the financial system of the country. Portugal is highly geared and has large levels of debt financing. In fact the debt financing ration has crossed the sixty percent of the GDP mark in the recent years. This makes the Portuguese economy more susceptible to international borrowing and aid which has negative effects in the long-run. According to the estimates published by Banco de Portugal and IMF, the current account position of the country is growing out of control.

In the recent years, the current account deficit has widened to around 72% of the total trade carried out by the country. Portugal has been using Euro as its official currency since 1 January 1999. Before that the official currency of Portugal was Escudo. The reason why Portugal shifted to Euro was the weak position of its currency. It was weak and unstable making it very difficult to carryout international trade using Escudo as a “unit of account” and a base for setting of prices and settling of accounts.

As a result, it was deemed that a country like Portugal moved to a more stable monetary base and system that would allow itself to carry out its international trade with traders not having to worry about the fluctuations in Escudo. European Central Bank is playing a vital role in maintain the economic stability throughout the Eurozone. ECB is also responsible for setting up the monetary policy of Portugal and other countries that use Euro as a base currency. Euro banknotes are also issued by ECB and only coins can be issued by the member states and that also only after the consent of ECB.

(Eurostar, 2010) Portugal is an active trader in the international markets. It understands the importance of international trade and actively participates in international trade for the mutual benefits of its importing and exporting partners. Its major imports include wine, fish, agricultural products, computers and heavy machinery. Similarly, Portugal mainly exports wood, copper, clothing and other important minerals. The most important trading partners of Portugal are Spain and Germany which have the highest percentage of trade of done with Portugal.

The overall condition of