7th Jul 2022

Portugal and Greece highlight eurozone fragility

  • The eurozone crisis - simmering quietly for several months - may be about to resurface (Photo: EnvironmentBlog)

Political turmoil in Portugal and concerns about the pace of reform in Greece have raised fears that the eurozone crisis may be about to reignite.

Nervous markets pushed up borrowing costs in Portugal to a painful 8 percent Wednesday (3 July) after the governing coalition of Pedro Passos Coelho saw the resignation of its finance and foreign ministers over the social and economic costs of austerity measures.

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The prime minister on Tuesday evening vowed not to resign amid calls from the European Commission on Portuguese politicians to act with "responsibility" as its "financial credibility" risks being jeopardized.

But Coelho's weakened position raises doubts about whether Lisbon - until recently routinely praised for putting into place a series of harsh budget-cutting measures - will be able to meet the terms of the its €78 billion bailout, agreed in 2011.

An economic report on Portugal published last month by the International Monetary Fund (IMF)- one of the country's creditors along with the European Central Bank and the European Commission - painted a gloomy outlook.

"Improvements in external competitiveness indicators remain limited," it said noting that "economic recovery is proving elusive." The country's debt is predicted to reach 130 percent of national output by 2015.

Meanwhile, fellow bailout country Greece is faring little better. It is having problems pushing through the reforms in return for its bailout money. The task of cutting thousands of public sector jobs is particularly difficult. Recently the government almost collapsed over the closure of the public broadcaster, ERT.

Representatives from the lender institutions are currently in Athens to check on reform progress amid rumours of the next tranche of money being delayed. Eurozone finance ministers are due to decide on the issue next Monday (8 July).

There are simmering issues elsewhere too. Spanish banks - which received a bailout in 2012 - face many problems before they are in the clear, Italy is mired in low growth, while Cyprus - the latest recipient of a bailout - has to undertake a swathe of tough reforms.

The increased uncertainty and market nervousness comes after a prolonged period of relative quiet, prompted by the ECB's promise a year ago to do whatever it takes to save the euro.

The calm saw several politicians, including the EU's top duo commission president Jose Manuel Barroso and Herman Van Rompuy, EU council president, say the worst of the eurozone's crisis was in the past.

The intervening months, though markets have been quieter, have seen continued debate on the merits of prolonged budget slashing, with the IMF recently suggesting Greece's bailout programme ought to have been handled differently.

The European Commission - long a fierce promoter of austerity measures - recently gave a series of countries more time to reach the 3 percent deficit required under EU rules.

On Wednesday (3 July), Barroso told MEPs in Strasbourg he was prepared to ease deficit constraints further still, saying that some infrastructure spending, such as transport and energy, will not be counted as deficit spending in 2014.

The aim is to “non-recurrent public investment programmes with a proven impact on the sustainability of public finances," said the commission.

The move would apply to countries that have deficits below 3 percent of GDP - benefitting Italy in particular which has a low budget deficit but large public debt.

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