Portugal’s government teeters as Europe debates austerity

LONDON -- After lying relatively dormant for months, Europe’s debt crisis threatened to flare up again as political instability spread through some of the continent’s most financially troubled nations Wednesday.

The Portuguese government teetered on the brink of collapse over internal disagreements regarding the country’s tough austerity program, which Lisbon was forced to implement to qualify for an international bailout in 2011. Two Cabinet members resigned this week, including the finance minister, who said that political and public support for his fiscal crackdown had evaporated.

Prime Minister Pedro Passos Coelho vowed to soldier on in a nationally televised address Tuesday night, despite calls to resign and regular public protests over the country’s shrinking economy and rising unemployment. The Portuguese stock market tumbled Wednesday, at one point by more than 6%, and spooked investors pushed interest rates on government bonds to their highest level in months.

Jose Manuel Barroso, the president of the European Commission, warned that continued instability risked unraveling Lisbon’s progress in regaining financial credibility and could prove “especially damaging for the Portuguese people, particularly as there were already preliminary signs of economic recovery.”

“This delicate situation requires a great sense of responsibility from all political forces and leaders,” said Barroso, a former Portuguese prime minister.

The tensions in Lisbon come amid heightened uncertainty in other European capitals where the German-led insistence on budgetary discipline is increasingly under attack. Critics, including many independent economists, say that collective austerity has caused the longest-ever recession in the Eurozone, which consists of 17 countries that use the euro currency, and served only to worsen struggling countries’ financial distress.

The government of Greece, the epicenter of the debt crisis, is hanging by a thread as a result of its unpopular attempt to shut down the country’s public broadcaster to save money. Analysts question how long the year-old unity coalition can survive.

International debt inspectors, responsible for monitoring Greece’s progress on fulfilling its bailout conditions, warned this week that Athens is in danger of not receiving its next installment of emergency loans if it fails to meet its fiscal targets. Without the money, the government will have to scramble to pay its bills.

Italy also is backpedaling on its commitment to austerity because of resistance led by former Prime Minister Silvio Berlusconi, whose support of the government in Rome is needed for its survival. Italy’s economy, the Eurozone’s third largest, is stagnant, and the government is more than $2.5 trillion in debt.

“What we’ve seen in Greece and Portugal in the past few days is just that austerity isn’t sustainable in both political and social terms,” said Megan Greene, chief economist at Maverick Intelligence in London. “I don’t think we can expect stability going forward.”

But Greene does not see stronger northern European countries backing down on their insistence on austerity. Germany is holding an election in September, and Chancellor Angela Merkel does not want to alienate voters who oppose leniency for countries they see as financially irresponsible.

Merkel hosted a Europe-wide summit in Berlin on Wednesday to address the continent’s dire youth unemployment crisis. In countries such as Greece and Spain, more than half of young people are out of work. The European Union has pledged to spend billions of dollars to tackle the problem, but experts fear the possibility of a lost generation.

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