Every unhappy family might be unhappy in its own way, but the same isn't quite true of every unhappy euro country. The common currency's troubled economies all relied on foreign borrowing during the boom, and all went kaput when that money disappeared during the bust. But, as Michael Lewis put it, not all piles of borrowed money were created equal. Greece got a government bubble; Spain and Ireland got housing bubbles; Italy didn't even get a bubble, just anemic growth -- and Portugal got one of the quietest catastrophes in economic memory.

And it's not entirely clear why.





Even this relative poverty looked like it might fade into history with the advent of the euro in 1999. Adopting the common currency meant deeper integration with Portugal's main trade partners and lower borrowing costs, both of which should have augured a boom.





That's not how things turned out.





Between 2000 and 2012, Portugal's economy grew less on a per capita basis than the U.S. during the Great Depression or Japan during its lost decade. This wasn't a case of the bust erasing the boom, because there was no boom. As you can see in the chart below from Ricardo Reis , a professor at Columbia University, Portuguese real GDP per capita flatlined during the "good years" before falling during the bad. Incredibly, Portugal was richer 12 years ago then it is now.

It's an economic whodunit without any clear culprits. Yes, Portugal has real structural problems (which we'll get to), but so do Spain and Greece, neither of which slumped before the slump. For his part, Reis speculates that Portugal's immature financial sector is to blame: it misallocated the foreign capital that poured in to low productivity, non-tradable sectors like wholesale and retail trade. In other words, it wasted money on things that never had a chance of paying off. Now, Portuguese banks certainly did make a lot of bad bets ... but so did German ones in Portugal. Something else must have been going on.

Part of that something else is Portugal's small business culture. As Matt Yglesias of Slate points out, most of southern Europe, Portugal included, suffers from too much corruption and regulation. Businesses choose to stay small, because it makes sense to just deal with people you personally trust when you can't reliably appeal to the authorities sans-kickback. Businesses can stay small, because the laws make it hard to get big and achieve economies-of-scale. It's a mom-and-pop nightmare of low productivity.

And it's gotten worse since 2008. Not only do small-and-medium-sized enterprises (SMEs) play a, well, outsized role in Portugal's economy, but now even they are in retreat. For one, austerity has crushed their customers; for another, SMEs are facing a credit crunch. As you can see in the chart below from Credit Suisse, the more euro-economies depend on SMEs, the less those SMEs can get loans, Portugal no exception.







It's not a particularly Portuguese problem, but it is particularly bad in Portugal. The chart below from the European Commission shows that, outside of Cyprus, Portugal's SMEs face the highest one-year borrowing costs in the euro zone -- and that despite falling government borrowing costs.





But we're back to where we started: with a puzzle. Credit-starved (and inefficient) SMEs help explain why things are so bad now, but not why they have been so bad for so long. Or why things weren't bad before the bust in Spain and Greece. What is clear is that Portugal needs help from the rest of Europe to finally get back to growth. That means delaying more austerity -- JP Morgan estimates Portugal is only 55 percent of the way to structural balance -- and ending the delay on more unconventional monetary policy. The European Central Bank (ECB) has already ruled out a big SME loan program , but it shouldn't; yes, Portugal needs to rebalance away from SMEs, but a credit crunch isn't the way to do it. More broadly, the ECB should be doing much, much more to revive a moribund euro-economy. Indeed, it's no accident that Portugal's euro-area exports have stagnated while its non-euro ones have surged ever since the ECB raised rates back in 2011. As you can see in the chart below from Portugal's Institute of National Statistics , a big gap has opened up between its euro and non-euro export growth for the first time since 2000.





Of course, Portugal still has to fix its structural problems. This can often feel like a hand-wavey catchall, but, among other things, it means making it easier to fire permanent workers who are very much so; making it easier to start and expand a business; and making it easier to enforce contracts. After all, Portugal's stagnation between 2000 and 2008 shows that adequate demand isn't sufficient in the face of these deep problems -- but it is necessary. That's why Europe needs to stop insisting on punishment as the path to prosperity.





If they don't, the idea of euro exit might not just be the topic of a popular Portuguese book . It might be the platform of a popular Portuguese party.

In 2001, Portugal seemed set to embark on a brave new economic future. The previous quarter-century had seen it move from dictatorship to democracy, from a managed economy to markets -- and the results were positively startling. Paul Krugman was among the cadre of MIT grad students advising the newly-free government in the late 1970s, and he scarcely recognized Lisbon by the turn of the century -- in a good way. The city was no longer an eclectic mix of post-revolutionaries and post-Victorian architecture. It was just another part of Europe, albeit a poorer part, but a part nonetheless.