Azores and Madeira Islands occupy strategic locations along western sea approaches to Strait of Gibraltar

Portugal has become a diversified and increasingly service-based economy since joining the European Community - the EU's predecessor - in 1986. Over the following two decades, successive governments privatized many state-controlled firms and liberalized key areas of the economy, including the financial and telecommunications sectors. The country joined the Economic and Monetary Union in 1999 and began circulating the euro on 1 January 2002 along with 11 other EU members. The economy grew by more than the EU average for much of the 1990s, but the rate of growth slowed in 2001-08. The economy contracted in 2009, and fell again from 2011 to 2014, as the government implemented spending cuts and tax increases to comply with conditions of an EU-IMF financial rescue package, signed in May 2011. A modest recovery began in 2013 and gathered steam in 2014 due to strong export performance and a rebound in private consumption. Although austerity measures were instituted to reduce the large budget deficit, they contributed to record unemployment and a wave of emigration not seen since the 1960s. A continued reduction in private- and public-sector debt could weigh on consumption and investment in 2016, holding back a stronger recovery. The prior center-right government passed legislation aimed at reducing labor market rigidity, and, this, along with sustained fiscal discipline, could make Portugal more attractive to foreign direct investment. Under the center-right government, the budget deficit fell from 11.2% of GDP in 2010 to 3.5% in 2015, reaching the EU-IMF target of 4%, but still above its EU fiscal obligations, under the excessive deficit procedure. EU-IMF financing expired in May 2014. The new center-left Socialist government, however, has signaled that it will unwind spending cuts associated with austerity while remaining within EU fiscal targets.