In 2014, Portugal stood on the brink. Its economy had collapsed amid Europe’s debt crisis, and unemployment had doubled. As part of a bailout program with the International Monetary Fund, which had lent the country 78 billion euros ($90 billion) in 2011, its government imposed drastic cuts to wages, pensions and social security.

But then something remarkable happened. Rather than bow to the demands of its European debtors, the Portuguese government elected to reinvest in its public sector, restoring salaries and benefits to their pre-crisis levels. Four years later, the results speak for themselves.

“The government’s U-turn, and willingness to spend, had a powerful effect,” writes The New York Times’ Liz Alderman. “Creditors railed against the move, but the gloom that had gripped the nation through years of belt-tightening began to lift. Business confidence rebounded. Production and exports began to take off.”

Its recovery remains fragile, with unions lobbying for more public spending to reduce inequality. Still, Portugal’s reversal of fortune would appear to confirm what the 2008 financial crisis made abundantly clear: Austerity—the process of reducing government deficits through a combination of tax […]