How did Portugal go from being a colonial empire to Western Europe's poorest country?

The French Invasion in 1807 during the Napoleonic Wars forced the Queen Maria I of Portugal and her court to the colony of Brazil. The empires eventually split, with Pedro I becoming Emperor of Brazil, and his father John VI returning to Portugal to rule. This is a good place to start if you're curious about the decline of colonial Portugal.

Interestingly the invasion of Portugal was, in part, launched due to the Portuguese alliance with Great Britain. The massive fleet that evacuated the court from Portugal to Brazil was only able to safely set sail because of their Royal Navy escorts.

Portugal has had several financial crisis', but I assume you are talking about the 2010 crisis. That's recent, and not appropriate to the sub. To fully answer your question it would help if you were a bit more specific about what you were interested in.

Do you want to know more about the collapse of the empire? Most colonies didn't actually gain independence until 1975, with Macau only gaining independence in 1999.

AskHistorians might be able to help you more with the decline and fall of Portuguese colonialism, but not with the current economic state.

Adding to /u/khosikulu 's answer.

The Treaty of Tordesillas of 1494 divided the world between Spain and Portugal. A North-South demarcation line was set up halfway between Portugal's Azores islands and Spain's claimed Cuba and Hispaniola. Spain was to control lands west of this line, and Portugal east of it. On the other end of the globe, the dispute was solved by the Treaty of Zaragoza of 1494. Effectively all this gave the Americas to Spain except for parts of Brazil to Portugal, in addition to giving the Philippines to Spain. It gave the east Indies (India, Indonesia, most of east Asia) to Portugal, along with ports in Africa.

As a result, the way trade was set up between those colonies and Spain/Portugal was that Spanish ships took westward trajectories across the Atlantic, and then across the Pacific to the Philippines. Portuguese ships went to Brazil or Africa and then to the Indian Ocean and up the east Asian coast as far as Japan.

Spain, or to be more precise the various possessions of Philip II and his descendants had various conflicts around the world, including against a Protestant England and a rebellious, Protestant Netherlands, starting from the mid 1500s and intensifying through the 1600s. While Spain's Army of Flanders was fighting the rebels in the Netherlands, traders from the Netherlands could still trade with Lisbon, thus they became aware of the sea routes to various Portuguese trading posts around the world.

In 1580, due to succession crises in Portugal, Spain's Philip II asserted his claim to the kingship of Portugal, thus setting Spain-Portugal under personal union. As he was at war against the Netherlands rebels and France, and eventually against England, these parties were no longer allowed to trade in Lisbon, and further they had incentive to attack Portuguese ships and posts around the world.

By that point Spain and Portugal had set up parallel trading routes with little overlap. Thus, while on the one hand Portugal now had access to sell goods to Spanish posts (including notably slave trade), Portugal was dragged into Spain's wars with little protection from Spain. In 1592 England captured a Portuguese fleet returning from Asia, thus setting the stage for England's own interest in the region.

The Dutch, previously partners in Portuguese development of sugar cane plantations in Brazil, attacked Portugal there to gain control of their own plantations. In Asia, they set up their own base in Batavia (today's Jakarta), then attacked Portugal's important posts in Angola, then in Goa, then in Japan.

Back in continental Europe, Spain's commitments in the Thirty Years War led to increased taxation in Portugal, and further enmity from belligerents in that conflict. Portuguese royals and merchants saw Spain as providing insufficient help even in Brazil, let alone Asia. Thus, they rebelled and this led to the Portuguese Restoration War. Even before the the restoration was complete, Portugal had started negotiations with England and Dutch that saw Portugal re-gain supremacy over Brazil and the Dutch over Indonesia.

By the time Spain recognized Portugal's independence in 1680, Portugal was already left with a much smaller empire, most of which losses were to a former ally (England) and a former economic partner (the Netherlands).