IT WAS supposed to the European summit when the crisis of the euro would finally be resolved with a comprehensive set of responses. The economic-governance reforms were supposed to be a “game changer”, in the view of José Manuel Barroso, president of the European Commission. It was not to be. The game has been postponed to June.
The reason? Democratic politics at the farthest ends of Europe: Finland and Portugal. The two countries, whose prime ministers are pictured, embody the split in the euro zone: north and south, snow and sun, fast-growing and sluggish, tight public finances versus yawning deficits. The crisis is weakening both creditor and debtor nations, and the political crise mean the European Union has stumbled yet again just when it thought it was reaching the finishing line.
Start with Portugal. For months now, it has been the next candidate for an EU bailout, after Greece and Ireland. But its minority Socialist government, led by José Sócrates, has vowed not to seek external help. Portugal’s experience of IMF programmes in the late 1970s and early 1980s has been seared in its politics. The IMF is even subject of a famous song by José Mario Branco (FMI). Rather than subject Portugal to such humiliation again, Mr Socrates has pushed through one austerity package after another.
His latest one, though, failed to get support in parliament and Mr Sócrates has handed in his resignation. Elections are likely in May or June. With bond markets driving up the yield on Portuguese government debt, the crisis may well hasten the moment when Portugal has to ask for help. If so, the electoral contest may be decided by who gets pinned with the blame. Will Mr Sócrates be deemed guilty of failing to reform Portugal’s sclerotic economy? Or will Pedro Passos Coelho, leader of the main centre-right opposition (confusingly called the Social Democrats, PSD), take the rap for bringing down the government, rattling the markets and delaying reforms?
The Portuguese crisis is hardly welcome news at the summit. Not for the first time, the EU’s slow-moving decision process has been overtaken by events. But senior officials and diplomats claim to see a silver lining: the Social Democrats agree with the government’s overall fiscal targets, but disagree with the methods Mr Sócrates has chosen. And if the election means that Portugal gets a government with a clear majority and a mandate to carry out reforms, that may be better for Portugal, and for the euro, in the longer term.
That said, the crisis in Portugal highlights the fact that the “comprehensive” bargain to address the sovereign-debt crisis is still incomplete. The EU’s existing rescue funds may have enough money to rescue Portugal. But can they help Spain if, as many expect, it is next to be infected? Probably not.
That is why a central part of the package deal is to increase the lending capacity of the EU bailout funds to ensure they can give out the full headline amount of €500 billion. The main fund, the European Financia Stability Facility (EFSF), can only lend about €250 billion of its headline figure of €440 billion.
Boosting the fund required, first of all, agreement on the shape of the permanent fund that will come into being in 2013. This was supposed to have been settled by finance ministers earlier this week, but Angela Merkel, the German chancellor, re-opened the issue because she wanted a longer period for countries to pay in the capital (not least to avoid too large a payment in 2013, the year of German parliamentary elections). That now seems to have been agreed.
Boosting the current “temporary” EFSF has also been agreed in principle, except that the final accord has been pushed back to June. That is because of political problems in Finland.
The government in Helsinki is refusing to sign up to any increase in the lending capacity of the EFSF until after its election next month. In part this is a constitutional issue, as parliament would have to be recalled for an emergency session to endorse any increase in Finland’s contribution, be it in terms of cash or guarantees. In part the reluctance is also a bit of electioneering. The centre-right National Coalition party, led by Jyrki Katainen, Finland’s finance minister, is expected to win the largest number of votes. But he is acutely sensitive to the strong challenge posed by the True Finns, a populist anti-immigrant and anti-EU party that has surged in the polls – in large part because of popular resentment at Finland having to contribute to the bail-outs of Greece and Ireland.
Asking Finland to reach again for its credit card before the election would only boost the True Finns, as would have to bail out Portugal. So in both Portugal and Finland, political leaders are hoping that Portugal does not have to ask for money any time soon.
