Portugal warned not to abandon path of austerity after ruling on deficit cuts

Berlin and the European Commission have urged Portugal to stay on the path of austerity, after the country’s top court clashed with the government and deemed recent deficit-cutting measures illegal.

On Friday the constitutional court announced that certain government cuts to payments for pensioners, civil servants and unemployment benefits were unlawful and should be reversed. The decision, with which conservative prime minister Pedro Passos Coelho said he does not agree but accepts, leaves his government needing to find €1.3 billion to cover the shortfall as it struggles to meet EU deficit targets.

German finance minister Wolfgang Schäuble yesterday warned that Portugal, which received a €78 billion bailout in 2011, cannot afford to veer off target after the court ruling.

“Portugal is about to gain access to financial markets but Portugal must now take new measures after the decision,” he told a German radio station.

In a televised address on Sunday, exactly two years after his predecessor José Sócrates requested the bailout, Mr Passos Coelho said he had no choice but to pursue alternative austerity policies and he vowed to cut spending in other areas. Otherwise, he said, a second rescue would be necessary.

“After this decision by the constitutional court, it’s not just the government’s life that will become more difficult: it’s the life of the Portuguese that will get more difficult and make the success of our economic recovery more problematic,” he said.

Portugal’s economy is headed for a third consecutive year of negative growth, with GDP expected to shrink by 2.3 per cent in 2013. Unemployment, currently at 17.5 per cent, is forecast to rise to 18.5 per cent next year.

Deficit target
The country is aiming to meet a deficit target for 2013 of 5.5 per cent of GDP, a figure the International Monetary Fund, European Commission and European Central Bank loosened from 4.5 per cent during a recent visit to Lisbon.

The clash between the government and judiciary has predictably unsettled the troika, which has financed the country’s rescue loan.

“Any departure from the programme’s objectives, or their renegotiation, would in fact neutralise the efforts already made and achieved by the Portuguese citizens,” the commission said in a statement released just hours after the prime minister’s address.

“It is essential that Portugal’s key political institutions are united in their support.”

However, opposition to austerity has been mounting in recent months and in March hundreds of thousands of people protested across the country against government policy.

Besides the economic challenges the court ruling presents, it could also unleash a political crisis, with opposition Socialist leader António José Seguro calling on Mr Passos Coelho to resign and call early elections.

“This government no longer has any authority or credibility, it has reached the end,” he said.