Portugal poisons the euro

published 11 April 2013

The troubles just never end in the eurozone. This week Portugal rattled the markets. The constitutional court has blocked part of the government's austerity programme by ruling that some proposed cuts in pay and benefits are unconstitutional. The measures accounted for more than €1bn of the €5bn fiscal consolidation planned for 2013.

The government will now have to find the money elsewhere to ensure it keeps to the terms of its rescue programme, a €78bn bail-out agreed two years ago.

The bail-out package is badly off track, says Ambrose Evans-Pritchard on Telegraph.co.uk. The deficit targets have already been extended by two years: the budget deficit is now supposed to be at 3% of GDP in 2015. And "it is getting worse, not better". Last year the budget deficit grew to 6.4%. The overall public-debt load is set to reach an eye-watering 125% next year.

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Austerity has created a vicious circle, damaging the economy and making the debt problem worse. Output shrank by 3.8% in the fourth quarter of last year, compared to 3.5% in the third. Unemployment has reached 17.5%. "It is not as bad as Greece's self-feeding downward slide, but the same pattern of shrinking tax revenues and labour hysteresis is all too clear." Further measures to cut spending will "almost certainly test [the] government to slow destruction".

"One of the greatest risks" to the single currency is "a popular backlash" against the reforms and austerity being imposed on southern states to boost their competitiveness, says Morgan Stanley. The odds of this are growing.

Last year, Greece barely managed to elect a pro-euro government. A revolt against austerity has thwarted the formation of a government in Italy. "The increasing support for parties that prioritise national objectives over euro unification is a concern."

The relations between the core and the periphery have been "poisoned", agrees Wirtschaftswoche, a German weekly. Anti-German populism is spreading, nationalism is making a comeback and the notion of Europe as a unifying ideal has faded.

The euro's structural flaw has been laid bare, says Sir Christopher Meyer in The Sunday Telegraph. It contains countries admitted for fundamentally political reasons, "which simply cannot keep up with the Germans economically".

Crowbarring disparate countries into the single currency was a gamble a risky means of driving European integration forward. "It is looking increasingly uncertain that [the] gamble will pay off."