Prime Minister Pedro Passos Coelho

Portugal makes the Eurozone tremble

The political crisis hitting Portugal is opening up a new period of turmoil for the EU. While some voices are rushing in to declare that the crisis is over, the question of growth is coming up. Can austerity without stimulus do it? And, above all, in politically fragile states?

Published on 4 July 2013 at 14:57
Prime Minister Pedro Passos Coelho

Ministers resigning, a government teetering, and anxiety gripping the markets all over again: who would have imagined just a few weeks ago that Portugal would cause such a stir? Ever since the EUR €78bn rescue plan was approved, the country has been held up as an example. Lisbon, it must be said, has not held back in its efforts to clean up its finances, trim back its civil service and courageously see through the reforms demanded by its financial backers.

Behind the facade of the Eurozone's good student, though, there remain gaping cracks. The fiscal consolidation plan has been pursued at the cost of a severe recession, and the coalition government has lost the support of the public. “Austerity fatigue" has overtaken the country, and today threatens to trigger early elections and precipitate a renegotiation of the aid programme.

Raising spectres

It has also raised the spectre of a forced restructuring of the debt, or even an abandoning of the euro. Portugal is rousing the ghosts from the autumn of 2011 in the Eurozone, when investors saw Greece head straight for bankruptcy, Spain and Italy sink in their turn and the European banks lose the trust of those who financed them. And it is waking those ghosts at the worst possible time: since investors have grasped that they will not be able to rely forever on central banks and their generous injections of liquidity to cushion the shock of the recession and make up for the shortcomings of the politicians, nervousness has ramped up several notches on the markets. What can the ECB really do today, aside from putting pressure on European leaders to speed up reforms?

In these last 12 months the markets welcomed, and rightly, the vigorous action of Mario Draghi to support banks by handing out billions of euros in loans, and then the states, by buying up their sovereign debt. But they had forgotten the key thing: the "peripheral" countries’ sluggish growth and weak credit, their still unbearable debts, high unemployment and the instability of their governments.

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The markets above all hid the disparities between countries in the Eurozone, disparities that remain considerable, if not growing, and that cannot be sustained over the long term. Without conceding new mutualising of resources and the transfer of sovereignty. As it is very unlikely that Germany will make a gesture before its parliamentary elections in September and before the verdict of the Court in Karlsruhe on the legality of the actions of the ECB is announced, the anxiety promises to persist throughout the summer.

View from Spain

‘To rectify is wise’

In the pages of El País, columnist Xavier Vidal-Folch still awaits the “grand rectification" of the austerity policy in Europe in the wake of the political crisis in Portugal –

the good student is disturbed [and] is calling for a large-scale correction of an austerity policy that has gone too far.

It is urgent to do it in a big way, rather than through "multiple operations of correction, in instalments" which is what we are seeing in Europe these days, says Vidal-Folch. One example is the second Greek bailout, in July 2011, which involved a writedown of the debt and better loan conditions for Athens. Another was the June 21 decision of the Ecofin Council to stretch out the repayment terms for Portugal and Ireland. Finally, he quotes the most recent decision of the European Council of July 3 on youth unemployment –

To rectify is wise. Bravo. The problem is that these dribbles of rectification are not the great rectification demanded by the double-dip recession today.[...] If these adjustments had been taken into account from the start, would we not have avoided part of the recession, much disaffection for the European Union and far too much social suffering?

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