Faced with the collapse of the government of debt-troubled Portugal, European leaders on Friday called on competing political parties in Lisbon to commit to tough financial targets, while Spain sought to protect itself from contagion by announcing new economic policies.
The moves followed a two-day meeting in Brussels, which was originally intended to put a capstone on the euro debt crisis but ended up being overshadowed by the resignation of the Portuguese prime minister, José Sócrates, who lost a parliamentary vote Wednesday.
During a highly charged news conference, Sócrates insisted Friday that Portugal would not need a bailout — even though the leader of the 17 euro zone ministers, Jean-Claude Juncker of Luxembourg, had just publicly speculated that a backstop of around 75 billion euros, or $106 billion, might be required.
“Portugal will not need help,” Sócrates insisted, banging his fists on the table for emphasis. And as he left the news conference, Sócrates told a reporter: “We are not going around begging — we have money, we have dignity.”
Still, most analysts expect that the failure of Sócrates to get the latest austerity measures passed will push Portugal closer to a bailout from Europe and the International Monetary Fund, following Greece and Ireland.
In Lisbon on Friday, Portugal’s political parties rejected the possibility of forming a coalition government and opted for new elections, which are expected to be in late May or early June. In the meantime, Portugal is expected to continue facing borrowing costs in the bond market that have reached levels the country’s finance minister has described as unsustainable in the medium or long term.
At the summit meeting in Brussels, European leaders finally agreed on tighter rules for the euro and a long-term backstop fund of 500 billion euros for the currency, starting in 2013. But some analysts questioned whether the single currency had yet faced up to its central challenge.
This week, Standard & Poor’s estimated that if Greece, Ireland, Spain and Portugal suffered a sharp contraction forcing them to default, banks in Western Europe would need to raise 250 billion euros — half the amount Europe plans to set aside for its stability fund. But the politics of using that money to bail out European banks would be highly complex.
For now, even as investors in financial markets see a Portuguese bailout as inevitable, the central question facing European leaders is whether Portugal’s plight will endanger the much larger Spanish economy.
To try to win more confidence in financial markets, Spain’s prime minister, José Luis Rodríguez Zapatero, announced a series of structural reforms that he said would be part of a new, German-inspired pact for euro zone nations.
These include an initiative to link salary growth to productivity gains and a separate measure to restrict the rise of public spending so that it climbs no faster than growth in the economy.
The pressure on Spain may have eased, at least temporarily, since any bailout for Portugal is likely to be delayed by an election campaign expected to last two months. Only a government with a mandate would be able to agree to the austerity measures certain to be demanded in exchange for financial help. In the meantime the most likely outcome is that a caretaker government will seek to issue short-term bonds pending elections.
The German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, both called on the main Portuguese political parties to stress their commitment to deficit reductions.
“I made clear that the government, but also the opposition, must not only stick to the fiscal goals for 2012 and 2013, but also back specific targets that are necessary for achieving these goals,” Merkel told a news conference. “This is crucial if the markets are to be calmed.”
As for Spain, Madrid sought to avert fears that its much larger economy would suffer collateral damage.
“We are on a stable path,” Zapatero said during a news conference. “Independent of Portugal — which I hope will not provoke a new debt crisis — we are going to do our job. It is not more or less urgent because of the situation in Portugal.”
Merkel insisted that the worst of the crisis has passed. But she acknowledged that a long struggle lay ahead.
“The euro has survived a critical test, but there is lots of homework to be done,” she said. “Member states face many years of work to atone for past sins.”
©2011 The New York
Times News Service
