Portugal's austerity woes

Portugal was long considered an exemplary pupil among the EU's crisis-stricken countries. The country received 78 billion euros in financial injections in 2011 in exchange for the implementation of drastic austerity measures. As the countries providing those loans continually remarked upon, the country followed up on its promises to great success.

Now the backlash: the Portuguese constitutional court has ruled that four of the nine austerity measures will have to be amended. The court took particular issue with deep cuts in unemployment benefits and in vacation pay for civil servants.

Portuguese Prime Minister Pedro Passos Coelho and his conservative party coalition will now be forced to search for alternatives. Passos Coelho recently announced that would be no increases in taxes, implying instead that savings will have to come from cuts to welfare benefits, health care, education and from state-owned companies.

More demonstrations

Citizens will most likely take to the streets to protest the new proposals. Economists, however, consider the government's decision to be the only one possible.

"The goal is to make the country economically dynamic again," said Jens Boysen-Hogrefe at the Kiel Institute for the World Economy (IfW). To that end, Boysen-Hogrefe told DW, he sees tax increases as counterproductive.

What remains unclear, though, is how much of the original five billion euros in government reductions planned for 2013 will now be rendered moot by the court's decision. According to media reports, that number could be anywhere from 900 million to 1.35 billion euros.

Matthias Kullas at the Centre for European Policy (CEP) in Freiburg believes that even though the court has weighed in against cuts in unemployment benefits and vacation pay for civil servants, reductions to those benefits still remain on the table.

"Cuts to these areas don't have to remain off-limits if you're making cuts in other areas, too," Kullas told DW. He believes that what bothered the courts was the fact that reductions were not spread evenly throughout the public sector.

No to 'no confidence'

The Portuguese government has done good work so far, Kullas says, above all in budgetary consolidation. It should therefore remain at the helm.

Hans-Joachim Böhmer, the managing director of the German-Portuguese Chamber of Commerce and Industry, feels the same. The court's verdict was a "setback," he told DW, but not a "KO criteria for the government." It's simply a part of a "normal, democratic process."

But even if the government were to be dissolved in light of recent developments, the country's austerity course would not be allowed to change. In May 2011, the country committed itself to savings of five percent of GDP between 2012 and 2014. At the time of that agreement, the Socialist Party was in power. The current conservative government, a coalition of Social Democrats and the junior People's Party, has also agreed to that plan.

Even though it was the Socialists - now a part of the opposition - who negotiated the original aid package conditions, they are now placing pressure on the governing coalition. The government's rigid austerity policies have "made the country poor and required huge sacrifices from the Portuguese, without any results," wrote Portugal's Socialist and Left Parties in a joint attempt to initiate a motion of no confidence. That motion, however, failed.

Aid-package addendum?

Nor are the constitutional court's ruling and the motion of no confidence the only areas where the Portuguese government has been hit by setbacks to austerity measures. "There were already problems with implementation," said IfW expert Boysen-Hogrefe. "Portugal already had a tough recession that, together with austerity, is far from being overcome."

When the aid package conditions were negotiated in 2011, such developments weren't foreseeable, he says. "There's good reason to be skeptical as to whether Portugal will really be in a position to return to financial markets in the coming years."

It's not unlikely, he argues, that at some point the EU, IMF and ECB "troika" will offer the country concessions.