Nothing is sacred to Pedro Passos Coelho, not even Carnival. Portugal's prime minister expects government employees at their desks and working on Entrudo, the traditional high point of the country's Carnival celebrations, which falls on this Tuesday.
This is "not the time to talk about tradition," the conservative head of state has commanded those of his citizens who see the move as an attack on their culture. Rather, he says, they should stop "whining" about austerity measures. It's time, the prime minister adds, to break free of old structures and to change "lazy and sometimes self-involved patterns of behavior."
Fans of Carnival celebrations are not the only ones affected -- churchgoers and nationalists will have to make bitter sacrifices as well. In response to this national state of emergency, the Portuguese government plans to do away with four public holidays. Corpus Christi and Assumption are to be crossed off the calendar without a replacement, and public holidays celebrating Portugal's first republic and the 1640 end to its union with Spain will no longer be commemorated.
Fears of Default
This readiness to make sacrifices comes as welcome news to the so-called troika, made up of the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB), whose officials are currently in Lisbon to evaluate the country's reform program. The troika hadn't even asked for such drastic measures, and their austerity watchdogs' findings are sure to be positive. In recent months, the Portuguese government has also implemented brutal tax hikes and cut pensions and unemployment benefits.
All this makes Portugal a poster child for austerity measures in the eyes of Brussels and Berlin. German Finance Minister Wolfgang Schäuble went so far last week as to promise his Portuguese counterpart Vítor Gaspar additional aid, even though the international community has already provided the country with €78 billion ($101 billion) worth of support. "If there would be a necessity for an adjustment of the Portugal (program), we would be ready to do that," Schäuble told Gaspar, who dutifully expressed his thanks. The exchange, caught by a camera crew, quickly became a popular video clip on YouTube.
But does Portugal really have a better chance of avoiding bankruptcy than Greece does? Or is the country simply the next domino destined to fall in the course of the euro crisis?
Financial markets take a far more critical view of Portugal than does the troika. They are assuming there is a 71 percent probability that the country will default within the next five years, as reflected in insurance premiums on Portuguese government bonds -- so-called credit default swaps -- in early February. Deutsche Bank writes that market participants expect that "leading European politicians' assurances notwithstanding, the private sector will become involved in the case of Lisbon as well, or a debt default may even occur."
The €78 billion in aid is enough to last until September 2013, since Portugal has also managed, thanks to the European bailout, to place some short-term bonds on the market. Still, the moment of truth won't be long in coming. "Emergency plans, in case Portugal is not able to return to the capital market, need to be specified soon and in a credible fashion," major Swiss bank Credit Suisse says.
For now, Portugal finds itself in a deep recession. As a result of the government's drastic austerity measures, most people have considerably less money at their disposal than they had before. With domestic demand collapsing, unemployment has risen to record levels. Last year, 30 percent fewer cars were sold in Portugal.
At least 200,000 people marched through the streets of Lisbon on Feb. 11, starting in three different areas of the city and converging on the centrally located Praça do Comércio on the Tagus River. "No to inequality, no to impoverishment," they shouted.
Just as in demonstrations that have taken place in Greece, German Chancellor Angela Merkel was a favorite subject of their signs. One showed the chancellor as a dominatrix, forcing a naked Prime Minister Coelho to his knees.
Competitive on the Global Market
Rogério Hortelão is one person who hasn't lost his optimism despite all the problems. "We're good at improvising," says the president of auto parts supplier Incompol. Hortelão, a former mechanic with the Portuguese Air Force, started his business 25 years ago with a lathe and three men. Now, 350 employees at his factory in Samora Correia use heavy equipment to stamp out metal components for BMW and other customers. In 2009, the last time that demand within the automotive industry collapsed, Hortelão took the same approach to fighting the crisis as many mid-sized German companies did. He didn't fire a single employee, but instead gave them further training. It enabled him to fulfill a personal dream. Incompol now uses high-tech equipment to weld together individual components for aircraft manufacturers such as Embraer in Brazil and Pilatus in Switzerland.
Most of Hortelão's products go to buyers in other countries, and even his domestic customers are subsidiaries of international corporations. This allows the company to remain independent of the government's austerity programs.
Unlike Greece, Portugal certainly has competitive companies capable of succeeding on the global market. Europe's largest and most modern paper factory, for example, is located near the Portuguese port city of Setúbal.
Portugal has gradually overtaken Scandinavia when it comes to producing high quality copy paper. "Each year we sell each person in Germany at least 500 sheets of paper for photocopying," Hermano Mendonça, marketing director for Portucel, says in fluent English. Portucel, a publicly traded company that is majority owned by a single Portuguese family, exported nearly €1.5 billion worth of paper in 2011.
The reason behind this success is the large eucalyptus forests that now grow in Portugal. Conservationists take a critical view of these monocultures, but the trees' long fibers provide good raw material for paper. Portucel owns 120,000 hectares (300,000 acres) of woodland and also buys timber from thousands of private landowners. The hunger for raw material is so great that the company has plans for additional timber plantations in the former Portuguese colonies Mozambique and Brazil.
Too High Costs
Export-oriented industries are the ones still doing good business here in this country at the far southwestern corner of Europe. When Portugal joined the EU in 1986, several German corporations became heavily involved here, before the advent of strong competition from locations in Eastern Europe and Asia. Portugal is still benefiting from investments made during that period.
Volkswagen, for example, has 3,600 employees producing its Sharan minivan, as well as its Eos and Scirocco models, at its facility near Setúbal. Production increased by a third last year, with almost 100 percent of vehicles destined for export. German engineering and electronics company Bosch also has several thousand employees in Portugal and runs Europe's largest manufacturing facility for car radios in Braga in northern Portugal. The company's thermotechnology subsidiary is even based in Portugal.
In more recent years, though, German companies have stopped making major investments in Portugal. The country is certainly a competitive location, because salaries haven't risen nearly as much as in Greece, but transportation costs for the 2,000-kilometer (1,200-mile) trip to the periphery of Europe are so high, and local markets so small, that in recent years most companies have preferred to relocate to Asia.
Subsidies from Brussels, meanwhile, meant that many Portuguese citizens felt little incentive to pursue their own ventures. German Chancellor Merkel had sharp criticism for costly bridges and tunnels constructed on the Portuguese island of Madeira, whose governor managed to rack up €6 billion in public debt. The highways around Lisbon are also among the best in Europe.
The Oranges that Are Too Expensive to Pick
The troika's inspectors have also discovered that agrarian Portugal imports €2.5 billion more agricultural products than it exports. The inspectors plan to address this issue in meetings with the Portuguese government this week. Those familiar with agriculture don't find the situation surprising. Many fields lie fallow because it was easier to collect subsidies for olive trees than to actually harvest the olives. The Algarve region has a bafflingly high number of orange trees bursting with fruit. Farmers lament that harvesting the oranges is no longer profitable, now that hiring the Romanians who used to pick the fruit has grown so expensive.
Even the tourism industry has collapsed in the wake of the financial crisis. With the British pound so weak, many of the English tourists who usually blanket the Algarve's beaches have elected to stay at home. German tourists, meanwhile, have been scared off by 12-story concrete blocks in Algarve cities such as Portimão. Built in the days of easy money a few years ago, these buildings now wait in vain for buyers.
Seemingly socially beneficial policies on the part of the government have actually contributed to the country's plight, for example by preventing rents from rising in line with inflation decades ago. The result is that many Lisbon residents still pay €50 a month in rent, but live in buildings that are falling into disrepair. In many Portuguese cities, property owners have started simply nailing their windows shut, rather than renting out the apartments.
With new rental contracts almost impossible to obtain, young people looking to move out of their parents' homes were forced to put themselves deeply into debt buying their own homes. That wasn't a problem in the days of the economic boom, when Portuguese banks were happy to make loans that even covered more than the purchase price of a house. "They asked me if wanted to go on vacation as well," remembers single mother Paula Dias.
Exporting the Educated
Now, the banks themselves are struggling to survive, and they're increasing pressure on those borrowers who are still able to pay. Dias, who is German-Portuguese and works at auto parts supplier Incompol, teaches German at various language institutes to help make ends meet.
There's no shortage of demand for language courses, and many of Dias' students have in fact left Portugal for Germany. Ever since the crisis began, well-educated university graduates have become the country's new export.
Alexandre de Sousa Carvalho, a gentle and good-looking revolutionary with dark hair, was prompted to think about the issue after more and more of his friends moved away. Last year, Carvalho and a few others used Facebook to mobilize nearly 500,000 demonstrators under the slogan "geração à rasca," or "desperate generation."
Young people are the ones most affected by Portuguese laws that are meant to benefit society but in reality do anything but. Job protection laws covering normal employment contracts are extensive, with employers required to pay their employees a severance package even when a temporary contract expires. The result is the widespread use of so-called "recibos verdes," or "green receipts." Meant as a method of contracting freelancers, this system has become a way to deny full-time employees their rights. Young people are required to pay social security contributions, but without themselves benefiting from the system. They can't claim Christmas bonuses or vacation pay, and of course can be fired without notice.
Carvalho says he believes nine out of 10 university graduates are scraping by this way. He cites a Portuguese saying: "The mustard has reached the nose." In other words, they've had enough.
But clearly the mustard has not yet risen far enough. Lisbon hasn't had any of Athens' burning barricades, and Carvalho himself doesn't believe in the "tabula rasa of the revolution." Instead, he wants to get his Ph.D. in political science first.
Grasp on Reality
This forbearance and solid grasp on reality have proved Portugal's greatest strengths in the crisis. In the country's last elections, 85 percent of voters chose parties that support Coelho's reform policies. Most people in Portugal are aware that they were living well beyond their means and are willing to cut back, even if that's not easy in a country where the average annual salary, before taxes, is €17,000.
Disposable income is expected to drop by a further 6 percent this year, thanks to tax increases and pay cuts for civil servants. This is not exactly the ideal environment in which to achieve a growth rate of at least 2 percent, the figure that will be necessary for Portugal to overcome the crisis.
Because of these conditions, the troika's inspectors, who plan to present their latest progress report next week, won't demand any new austerity measures. The inspectors, led by Jürgen Kröger from Germany, will instead call for structural reforms aimed at making Portugal competitive. The country still imports far more goods than it produces, just as Greece does.
In addition, extensive deregulation of the job market is meant to give young people a chance. Reforms are also planned for the justice system -- with 1.5 million cases pending, judges have simply given up. Rental laws need to be changed in such a way that landlords no longer board up their properties. The commission also wants to know why dockworkers in Portugal, a country that has always depended on its sea routes, earn considerably more than their counterparts in other European port cities such as Hamburg or Rotterdam.
Still, it will be a while before these structural reforms have an effect. One internal European Commission estimate suggests Portugal won't be able to regain the confidence of the capital markets until 2015 or 2016. That would mean the EU and IMF would still need to cough up an additional €25 billion, by the most conservative estimate.
But Portugal can be stubborn too. Lisbon, Porto and a number of other cities have decided their employees are allowed to celebrate Carnival this year -- despite the crisis.