Just 24 hours before Europe’s presidents and prime ministers are due to gather in Brussels to finalise a deal intended to shore up the eurozone’s debt-ridden peripheral economies, one of the countries they are trying hardest to save could collapse before their eyes.
Officials and diplomats in Brussels fear the Portuguese government’s likely failure on Wednesday to win parliamentary approval of European Union-backed austerity measures could leave Lisbon rudderless for months – particularly if José Sócrates, the prime minister, follows through with his threat to resign.
“Can a caretaker government request international assistance?” asked an EU official involved in economic issues. “Can it implement a fully-fledged programme of restructuring?”
José Manuel Barroso, a former Portuguese prime minister who is now president of the European Commission, the EU’s executive branch, said he did not believe a sudden call for Portuguese elections would hamper Lisbon’s ability to manage its way through its debt crisis. He told journalists other eurozone member states had been able to deal with controversial issues despite political turmoil.
“If in one of the countries we have an interim government – I think Belgium is [an interim government] for almost one year – it will not be the only case,” Mr Barroso said. “So far, that was not considered a major problem, at least from a European perspective.”
Pedro Passos Coelho, leader of the centre-right Social Democrats, the main opposition party which enjoys a significant lead in opinion polls, argued that “a broad coalition for change” resulting from an early election would lend greater authority to Portugal’s deficit-reduction programme.
In a statement issued in English – a sign it was aimed at London and New York-based financial markets – Mr Passos Coelho said his party remained committed to the same budget targets as the current government agreed to with the EU, but disagreed on how to get there.
Nonetheless, the markets are growing concerned. In a recent report, Gilles Moec, head of European economic research at Deutsche Bank, said political instability remained the biggest roadblock to the country getting its fiscal house in order.
“The major flaw in this plan in our view is that political conditions for a swift parliamentary approval of the new package are very difficult to meet,” Mr Moec wrote. “The complicated political situation would probably make the negotiation of a deal with the EU and the IMF cumbersome and possibly a source of volatility.”
The problems would become even more acute if elections are called, which would likely not be held until May. Portugal must refinance €4.5bn ($6.4bn) in debt in April and another €5bn in June, and analysts remain unsure whether Lisbon has the financial wherewithal to meet those obligations. Without a government, political uncertainty could make the markets even more wary to lend.
Even if Portugal were to ride out the storm with its government in limbo, European officials worry that failure to pass the EU-backed measures on Wednesday and Mr Sócrates’ resignation could overshadow the upcoming summit.
“If there is a fall of the Portuguese government, we’re in trouble,” said one senior European diplomat involved in economic negotiations. “How do you sell this as a credible collective response?”
European leaders had also hoped to finalise a deal with Ireland at the summit to lower the interest rates on Dublin’s bail-out loans, which now stand at about 6 per cent, but officials said an agreement by week’s end was unlikely.
France and Germany have insisted that Ireland raise its ultra-low corporate tax rate in exchange for a one percentage point decrease, however, and Irish ministers meeting in Brussels on Monday continued to say the tax rate was off the table.
According to European officials, intensive talks are under way in an effort to find another Irish concession, but officials said they were not bearing fruit.
Additional reporting by Peter Wise in Lisbon and John Murray Brown in Dublin
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