Yet again the eurozone crisis is butting heads with national democracy

After a lengthy absence Portugal returned to the headlines over the weekend with the Constitutional Court ruling that some of the government austerity measures were unconstitutional. Here are the key details:

• The court found that four out of nine key savings measures included in the government’s latest budget were unconstitutional. These measures focused on cuts to public sector wages and pensions – the court deemed these unconstitutional since they hit public sector workers disproportionately hard. They also ruled against cuts to unemployment and sickness benefits.
• The measures amount to savings of €1.3bn (0.8% of GDP) which will now need to be found elsewhere. If they are not found, then Portugal’s deficit this year could reach 6.4% rather than the 5.5% currently targeted.

What does this mean for Portugal and the eurozone?

• The ruling was the cherry on top of a bad week for the government after a close ally of Prime Minister Pedro Passos Coelho resigned and the government faced a no-confidence vote in the parliament. Fortunately, it has so far survived these problems (new elections would bring huge uncertainty) but its support continues to be eroded.
• The previous political consensus in favour of the bailout and the accompanying austerity has now vanished, the opposition is likely to become increasingly vocal in its anti-austerity approach.
• The Commission has warned that the extension of the bailout loans agreed recently will be under threat if the government does not meet its targets.
• The cuts are likely to be found elsewhere but they may have more of a negative impact on growth, although this remains uncertain. One thing that is clear is that the public sector wage and pensions do need to be adjusted if Portugal is to become competitive and particularly if it is to recover through export led growth as the bailout programme currently targets. The inability to adjust these areas could harm Portugal in the long run.
• That said, this is not the first time this has happened. Last July, the court made a similar ruling on public sector wage cuts. The fact that this has happened again suggests the government may be struggling to find savings elsewhere (why else push on with cuts it knows stand a good risk of being blocked), and doing so may take longer than some expect.
• Legal points aside, experience (particularly in the Baltics) suggests that wage cuts in the private sector often follow or go hand in hand with public sector ones – at the very least, buy-in is needed across the economy and the private sector is unlikely to lead such an adjustment unless prompted to (wages are sticky on the downside). In this sense, although the cuts may have disproportionately hit public sector workers initially it may be necessary part of the internal devaluation approach taken (whether this approach is correct or not is another question).
• And of course, this adds further delays and uncertainty in the eurozone – along with lack of government in Italy and capital controls/bailout in Cyprus.

This is likely to rumble on for a while yet as the Portuguese government searches for savings elsewhere which will meet the requirements of the troika. Yet again, the eurozone crisis is butting heads with national democracy, in this case specifically constitutionality. Plenty more of that to come we expect.

No backing down: Germany comes out swinging over claims it is the neighbourhood bully

Given all the Germany-bashing over the last week, in the wake of the Cyprus bailout deal (some of it completely ridiculous), it's easy to forget that the Germans themselves are remarkably united over the agreement. In fact, the feeling is that Germany, collectively, just got a fair bit more assertive over its eurozone policy.

On Friday, before a new agreement was finally reached and with Cyprus’ euro membership on the line, German Chancellor Angela Merkel – reportedly in an angry mood - told MPs from her coalition parties that it was wrong for Cyprus to "test" Europe and that while she preferred to see to see Cyprus stay in the single currency but was prepared for an exit.

And with respect to anti-German sentiments, speaking to ZDF this morning, Finance Minister Wolfgang Schäuble bluntly stated that:

“It is always the case, also in the classroom: When you sometimes have better results, the others, who have difficulties, can be a bit jealous.” 

German Justice Minister Sabine Leutheusser-Schnarrenberger (FDP) called on EU leaders to show more solidarity with Germany, claiming that:

"I wish that that the individuals at the highest levels of the EU including the President of the Commission and the President of the Council also display solidarity with us and defend the Germans against unjust accusations".

Meanwhile the opposition SPD and Greens have said they will both vote to approve the deal. It is not just German politicians who are being increasingly assertive. In our daily monitoring of the German press, we've sensed a hardening of tone and rhetoric throughout the crisis, not least in response to the overtly anti-German tone of many of the anti-austerity protests in the south. Referring specifically to the Nazi-themed nature of the protests, Ulrich Clauß argues in Die Welt that:

“In terms of the endemic prevalence of corruption in government and administration and in close to all parties in their respective parliamentary spectrums, these countries rank alongside third-world dictatorships. On the whole we are talking about countries in which ‘good governance’ seems to be an alien concept… in terms of political culture, there is an extreme divide between North and South in Europe.”

Writing in FAZ, Klaus-Dieter Frankenberger argues that:

“The Cypriots like to see themselves as the victims. It is not however their European partners who are responsible for the mess they are in… In the crisis countries many blame their plight less on corrupt elites and bad policies but on the alleged lack of solidarity in the North for which read: neo-hegemonic Germany.”

Last week, following the Cypriot parliament’s rejection of the original bailout agreement, Bild columnist Hugo Müller-Vogg argued in a piece entitled “We’re the scapegoats” that:

“Politicians there have acted extremely irresponsibly. Now they are extremely brazen in their demands from those who have solidly managed their economies. Moreover, they insult those who are supposed to help them. Without German guarantees there would be no bailout fund. But of all things we Germans are being hit in the crisis countries not only criticism but even open hatred… If it was not an issue of Europe’s future, there would only be one appropriate response: deal with your own mess”.

Writing in Die Welt, Director of the Hamburg Institute of International Economics Thomas Straubhaar describes the Cypriot bailout deal as a “turning-point” in the eurozone crisis, arguing that:

“Up until now, the bankrupt countries have been able to use fear of a domino effect to extort Europe. That is now over because the strong eurozone countries have the better hand – and they should not be afraid to play it”.

The implications of a Germany more prepared to assert its viewpoint has huge implications for the future of the eurozone and the EU as a whole. Remember who holds the cheque book...