Between 2000 and 2012, the Portuguese economy grew less than the United States during the Great Depression or than Japan during the Lost Decade. This paper asks why this happened. It makes four contributions. First, it describes the main facts between 2000 and 2007, proposing a narrative for why the country did not grow. Second, it puts forward a model of credit frictions where capital inflows are misallocated, so that more integrated capital markets can lead to losses in productivity and an expansion of unproductive nontradables at the expense of productive tradable. Third, it argues that this model can account for the Portuguese slump, as a result of misallocated capital inflows and increases in taxes. Fourth, it shows that the crash after 2010 came with a sudden stop of capital flows, combined with fiscal austerity, downward nominal rigidities, and a diabolic loop between banks and sovereigns. Writing ten years after the introduction of the euro, the vice-president of the ECB stated unequivocally that: “The euro has been a resounding success” (Papademos, 2010). The euro was by then a reserve currency and inflation was stable and on target. Economic growth was the same as in the previous two decades but employment had increased significantly, while capital markets had become more integrated and souther Europe had benefitted from sustained low interest rates. Papademos further argued that the countries within the Euro-area had been better protected from the financial crisis of 2007-08 than others in the European Union.