courting trouble

Portugal presents a new challenge to the EU-wide austerity program

April 7, 2013
Obsession
Euro Crunch
April 7, 2013

Late Friday (April 6), the Portuguese Constitutional Court struck down provisions that would have cut public-employee wages, state pensions, unemployment benefits, and disability pay. Those austerity measures–which had already been passed by lawmakers–were terms of the country’s ongoing bailout with the European Union and the IMF.

After a special meeting between Prime Minister Pedro Passos Coehlo and President Anibal Cavaco Silva today, a spokesman for the government told reporters (paywall) that the decision “makes it very challenging for the country to fulfill its goals under the bailout and the budget targets it must meet.” With provisions to cut back public wages, pensions, and benefits struck down, however, the country now faces a €1 billion ($1.3 billion) funding shortfall (Spanish).

EU leaders have been singing the praises of Portugal, which was set to run a public deficit of 5.5% this year. The country’s international lenders—the so-called “troika”—repeatedly agreed to relax some stiff demands for austerity last year because the government was bringing in less tax revenue than expected. They even relaxed targets last month. The country was still on track to return to the international bond markets in 2013, an important step towards financial recuperation.

But a legal challenge to austerity could be a different animal. On one hand, it is an outright rejection of austerity policies imposed by EU leadership in Brussels. Although it may not destabilize the country’s leadership (as was feared), the court argued that the measures are unfair because they only target the public sector. Cutting out government bureaucracy is a key piece of EU austerity programs, which are meant to encourage private business.

At the very least, the decision is an embarrassing defeat for troika officials, who are once again facing rejection of their policies in the EU periphery. They have been able to impose austerity measures from Brussels and force local leaders to quiet the populace. But detest and rejection of those policies suggests that northern Europe will have to make more and more unpopular concessions to the South.

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