Europe's Debt Crisis: Five Threats to the Common Currency

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An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems. Zoom
DPA

An anti-capitalist piece of graffiti in Athens: Greece's debt crisis is just one of the euro zone's many problems.

Portugal: An Impotent Government

As well as Greece, concerns about Portugal have also triggered tremors on the markets in recent days. European Monetary Affairs Commissioner Joaquin Almunia is partly responsible for that. "Greece, Portugal, Spain () and others in the euro area share some features," he told a news conference last week. "In those countries we can observe a permanent loss of competitiveness since they (became) members of the Economic and Monetary Union."

The indirect comparison with Greece did not do Portugal any favors. The risk premiums for Portugal's 10-year government bonds soared, with the so-called spread over benchmark German bonds widening to as much as 1.5 percentage points at times.

Key Facts: Portugal

Debt ratio: 77.4 percent of GDP

Budget deficit: 9.3 percent of GDP (2009)*

GDP growth: -2.9 percent (2009 estimate)

Share of euro zone's GDP: 1.8 percent (2008)

Source: European Commission
*revised forecast by the Portuguese government

Portugal is indeed facing enormous challenges. The budget deficit has skyrocketed, reaching 9.3 percent of GDP in 2009. And although the debt ratio at 77.4 percent of GDP is still around the European average, it threatens to rise to 85 percent in 2010. If the government does not take determined action soon, more and more investors may start doubting the creditworthiness of the country.

But whether the government can act with the necessary toughness remains an open question. Prime Minister Jose Socrates is the head of a minority government, meaning that the opposition can force laws through parliament against the will of the government. Recently, it managed to torpedo Socrates' planned austerity measures. In a parliamentary vote, both conservative and left-leaning parties approved a bill that provides additional financial transfers to the autonomous regions of the Azores and Madeira and which will create a €400 million hole in the budget over the next four years. Unsurprisingly, the move made investors nervous.

Socrates needs to get the country's budget deficit under the euro zone's limit of 3 percent of GDP by 2013. The government has announced it will cut civil service jobs and freeze salaries. However there is little prospect of far-reaching austerity measures or structural reforms. Portugal's agricultural sector is inefficient and outdated and the tourism sector is still being developed. The country has failed to increase its competitiveness against the northern EU members since it joined the euro zone.

In 2008 per capita income in Portugal was only 76 percent of the EU average. With a powerless government, it will be difficult to turn things around.

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