Portugal might be the next stop in the euro crisis

Matt O'Brien

Europe's governments can survive anything other than austerity, which is to say they can't survive much at all.

Portugal has been the latest country to find this out. Now, it's true that its center-right government did actually win the most votes despite pushing through tough budget cuts, but it didn't get enough to form a government. Instead, the Socialists, Communists and Left Bloc banded together — which they hadn't done in almost 40 years — to create a new anti-austerity majority. The result is that Portugal will either get a caretaker government until new elections can be held next year, or the Socialists will get a crack at forming their own.

This isn't what was supposed to happen. Portugal was supposed to be at least an austerity success story, if not the one, that budget-cutters could tout. After all, it finished its bailout program last year and is now able to borrow from private markets again — and at the super-low rate of 2.5 percent over 10 years. Even better, though, its economy has started growing again, albeit at just a 1.5 percent pace. Still, that's no small feat for a country that has grown only 8 percent — in total — the past 15 years. It's been enough for unemployment to come down from a catastrophic 17.5 percent two years ago to a slightly-less-so 11.9 percent today.

But Portugal's problem is that its austerity didn't end when its bailout did — and won't for at least a generation. Portugal's debt is still 129 percent the size of its economy, so, according to Europe's rules, it has to run primary budget surpluses until that comes down to 60 percent. But, as economists Barry Eichengreen and Ugo Panizza point out, this requires a level of fiscal restraint that has almost never been achieved in history. Indeed, Portugal already might have gone as far as it can go, politically speaking.

The question, then, is whether Portugal's mini-political crisis turns into an economic one, like it did in Greece, or leads to a mini-compromise that keeps the status quo intact with only some cosmetic differences. (It's safe to say the odds of Europe changing its mind about austerity are close to nil.) And the answer is: We don't know! On the one hand, Portugal's Socialists aren't against austerity in general, but rather against this much austerity. They want to spread spending cuts to protect their poorest people from losing too much too fast. But, on the other hand, the Socialists' coalition partners want to reverse a lot of these cuts and restructure the country's debt. That's more or less the same platform that Greece's at-one-time-radical Syriza Party tried to get Europe to acquiesce to, before ditching lest they be forced out of the euro. Would Portugal's Socialists be able to avoid that kind of confrontation if they depended on the votes of people who wanted one? Who knows.

What we can say, though, is that Portugal better be prepared to stop using the euro if it wants to try to stop austerity. That's because Portugal's banks still depend on loans from the European Central Bank, and, as it showed in Greece and Ireland, the ECB is more than willing to take that money away if the government doesn't do what it's supposed to. In that case, the only way Portugal could keep its banks from going under would be to leave the euro and start printing its own money to bail them out with.

But if it doesn't want to do that — and a majority of its people don't — the worst-case scenario wouldn't be that Portugal is forced to do all the austerity it already is. It's that Portugal would be forced into doing even more austerity. Why? Well, this kind of standoff would scare off private lenders to the point that Portugal wouldn't be able to borrow on anything other than punitive terms again. So it would have to go back for another bailout, which would come with more budget cuts attached. Not to mention that this would make Portugal's recovery go from nascent to nonexistent.

Portugal, in other words, has to decide whether it hates austerity more than it loves the euro. The two are inseparable. If you want to use Europe's currency, then you have to play by Europe's budget rules.

No election can change that. 

Matt O'Brien is a reporter for Wonkblog covering economic affairs. He was previously a senior associate editor at The Atlantic, The Washington Post, November 23, 2015