April 8, 2013 2:08 pm

Portugal: new challenge

The country has to start living within its means, in real time

Parts of southern Europe really do exist in a different dimension. In salary terms, Portugal’s year has two extra months. Most employees get their monthly salary or wage, and extra payments in the summer and at Christmas. The government wanted to remove one of the two bonus payments as part of austerity measures to meet the terms of its €78bn bailout agreed in 2011. But the constitutional court has struck down the move, and three others. The ruling could derail Portugal’s ability to return to the financial markets. If the government is smart, it will use the setback to get more serious about structural reform.

Portugal might be the forgotten victim of the eurozone crisis, but it had been beavering away at reforms since 2011 and was starting to impress investors. True, the stock market has shed about 30 per cent since then. But that is no worse than neighbouring Spain. The yield on 10-year Portuguese bonds has roughly halved to about 6.2 per cent.

The latest bout of jitters about its ability to meet its commitments has taken its toll, however. Portuguese bank shares were walloped on Monday – down about 5 per cent – while the wider stock market has given up all its 2013 gains in the past couple of weeks.

Pedro Passos Coelho, the prime minister, is one of the eurozone’s few cheerleaders for austerity. So the court ruling is a blow. He must find additional savings of about €1.3bn, equivalent to 0.8 per cent of gross domestic product, to match the savings rejected by the judges. That could be tough given that he appears to have exhausted the scope for tax rises. The eurozone could help by easing the bailout’s terms, which have already been extended a bit. In the end, though, the court ruling will be a test of how serious Portugal really is about structural reform, especially of its bloated and unaffordable public sector.

Portugal wasted its first decade in the eurozone. Even Italy was more dynamic. There is a danger that this pattern will be repeated unless the country starts to live within its means. Ideally in real time

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