Portugal has become the third EU country, after Greece and Ireland, to ask for a European bailout.
The Portuguese “caretaker” government, headed by prime minister José Socrates, asked the European Commission for financial assistance last week. It is another sign that the Europe-wide drive to austerity is backfiring.
The Portuguese plea comes just a few weeks after Eurozone states adopted the “Pact for the Euro”. The pact makes it easier for countries such as Germany and France to impose neoliberal measures on weaker European economies.
The Portuguese government asked for assistance after a run on Portuguese government bonds that pushed up its cost of borrowing.
The run was triggered by the government’s failure to push a fourth set of austerity measures through parliament and by its subsequent resignation.
Both these events raised further doubts among financial investors about the Portuguese state’s capacity to honour its commitments.
Moody’s, one of the detested credit ratings agencies, downgraded Portuguese sovereign debt twice in the period between the government’s resignation and its request for financial assistance.
The New York Times reported that Portuguese banks pressured the government into asking for assistance. The Irish and Greek experiences have shown that the austerity drive, far from being a quick road to recovery, has pushed weaker economies into more trouble.
The Greek economy is expected to contract by as much as 3 percent in 2011. The financing needs of the Greek state, originally estimated at 45 billion euros for the period to 2012, have been re‑evaluated to approximately 110 billion.
Stress tests on Irish banks in late March showed they needed to be bailed out for the fifth time as they were running short of capital by as much as 24 billion euros.
As austerity backfires economically, the political crisis it fuels grows deeper. Greece has been rocked by a wave of general strikes over the past year and the recent Irish elections showed the extent of anger against austerity.
Portugal has been no exception. A general strike shook the country last autumn.
Pressure is building on the opposition Social Democrats—actually a centre-right party—to reject the latest round of austerity measures.
In this context, the bailout is a way of forcing Portuguese workers to accept the austerity measures that were rejected in the streets and in parliament.
A string of European officials, ranging from economy commissioner Olli Rehn to French finance minister Christine Lagarde, have said that assistance would come at a price.
That price is a serious commitment by Portuguese parties to “set public finances right”—a massive privatisation programme and “structural reforms”.
But negotiations for this third EU bailout are set to be much more difficult than in the two previous cases.
As Financial Times columnist Vincent Boland noted, Portugal has no government (until elections on 5 June) and there is no consensus on accepting the conditions that will be attached to the bailout.
This, then, has the potential to throw the EU back into turmoil, just as the euro-crisis seemed to be easing.
The European Commission and the European Central Bank cannot afford to be too lenient on the Portuguese government. This would legitimise calls by Greece and Ireland to renegotiate the terms of their bailouts—something the German government is strongly opposed to.
And more turmoil will only raise the risk of contagion, whose next victim seems likely to be Spain. Such a scenario could really be disastrous for the EU as Spain is a much bigger economy than Ireland, Greece or Portugal.
The road to austerity is proving a minefield for European ruling classes.
Christakis Georgiou is a member of the NPA anti-capitalist party in France