Portugal’s woes


The ruling of the Portuguese constitutional court on Friday will certainly have sent a shudder through Merrion Street. If, God forbid, their brethren in Dublin were to take the same view of Croke Park . . . The court had declared illegal a series of measures agreed with Portugal’s own troika which would have reduced holiday bonuses and other public sector privileges. They were an attempt, the judges said controversially, unfairly to distribute the burden of austerity by excluding private sector workers from the pain .

The result, a €1.3 billion hole in prime minister Pedro Passos Coelho’s budget – the equivalent of 0.8 per cent of GDP – and Coelho will have to find the money elsewhere to comply with the terms of the country’s €78 billion loans from the EU-IMF. He says he will do so through cuts in public spending, probably on schools, pensions and hospitals, rather than tax increases – January’s budget saw the largest tax hikes in memory.

The problem is that Portugal has already promised €4 billion in cuts by 2015 and the further measures are likely to severely curtail domestic demand, inhibiting any prospect of growth, not least with exports stymied by EU-wide doldrums. The economy is expected to contract by a further 2.3 per cent this year and the rate of unemployment stands at almost 18 per cent.

The European Commission and Germany have urged Lisbon speedily to find new savings to keep its bailout programme on track. But lenders have already eased the country’s deficit targets twice in the face of its acknowledged determined efforts to comply, particularly its reform of labour laws, and may well have to do so again – Portugal is unlikely to make the 5.5 per cent target for 2013. And bond rates are rising, raising fears Portugal may next year be heading for another bailout.

The troika should cut Portugal some more slack; an extension – like Ireland – of the maturity on its loans would help. As would growth-promoting measures in the euro zone.