Mon, Nov 12, 2012 - Page 9 News List

Lisbon hopes to deliver success story to Merkel

Portugal is edging closer to returning to bond markets, but protests and strikes are more common amid fears of poverty

By Axel Bugge  /  Reuters, LISBON

German Chancellor Angela Merkel will hear a reassuring message when she visits Portugal today — a likeminded, center-right leader will tell her he believes deeply in the tough reforms his country is undertaking under a 78 billion euro (US$99.15 billion) bailout.

However, the latest review of Portugal’s economy by the EU and IMF, which starts on the same day, could be a stark reminder of the problems with Lisbon’s bailout script, which mean economic risks are rising by the day.

Germany has heaped praise on Portugal, hoping for a southern European success story to contrast with Greece, where Merkel is widely blamed for the country’s parlous economic state.

However, the “troika” of lenders — the European Commission, European Central Bank and IMF — have already agreed to relax Portugal’s budget goals as tax revenues fell short due to the worst economic slump since the 1970s.

And the IMF has warned that risks to the bailout have “increased markedly” due to growing resistance to austerity and the likelihood of a third year of recession next year.

“Portugal is going through a moment of great uncertainty over the [bailout] program and whether it will succeed,” University of Lisbon analyst Antonio Costa Pinto said.

Portuguese Prime Minister Passos Coelho has repeatedly insisted that Portugal’s best bet is to end its dependence on foreign creditors as soon as possible by strictly meeting budget goals under the bailout.

He will be able to tell Europe’s most powerful politician that Lisbon has launched labor market reforms, sold state assets, sharply cut spending and is edging closer to returning to bond markets next year.

“Austerity policies implemented in Europe have not been imposed by Germany’s chancellor, they are the result of too much debt taken on by European governments for too many years,” he said last week.

That will be music to Merkel’s ears on her first official bilateral visit to Lisbon.

A month ago, she paid her first visit to Greece since the euro crisis erupted, and the two trips reflect a shift in her tone on the currency bloc’s weakest members, whom she spent much of last year chastising.

Less than a year before a German election, she is keen to send a message to her domestic audience that tough reforms in Europe’s southern periphery are paying dividends. After deciding the risks of a Greek exit from the eurozone outweigh the benefits, she also wants to send a message of German solidarity to markets worried about the future shape of the bloc. In Portugal, a planned protest dubbed “Merkel doesn’t call the shots here” is likely to be far smaller than the one which greeted her in Greece.

“We believe we can be the success story in the southern rim of Europe that the EU needs,” Portuguese Ambassador to Germany Luis Almeida Sampaio told journalists last week.

However, Passos Coelho can no longer count on the broad consensus behind austerity that existed during the first year of the bailout, that had set Portugal apart from countries like Greece.

That changed at the end of summer, when the government proposed a hike in social security contributions, prompting the first mass protests in Portugal in years.

Since then, protests and strikes have become common and the junior party in Passos Coelho’s ruling coalition, the CDS, balked at the largest tax rise in Portugal’s modern history, central to next year’s budget.

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