EU debt woes

The improved bailout fund for the European single currency took a step closer to realization at the European Union's spring summit in Brussels this week.

But the latest crisis in Portugal, where the government lost its leader on the back of public anger over his austerity plan, shows that bailouts trumpeted by politicians and leaders are of little value unless they are supported by the populace.

A possible Portugal bailout seems perhaps more dramatic than it actually would be. In truth, the EU has long been expecting such an eventuality. Alarm bells would only truly go off if a nation like the much-larger Spain were at risk of bankruptcy.

Outside of this scenario, however, it is the circumstances of the Portuguese issue that are worrying. In the eyes of the EU, the government of the now-resigned Portuguese Prime Minister Jose Socrates did everything by the book: it launched an unprecedented austerity program with a freeze on pensions, increased taxes and even cut public sector wages - something the German government has not ventured to do itself. But sometimes the people - or in Portugal's case the parliament - turn around and say: "No, we will no longer go along with this."

In Brussels, where the EU summit took place, thousands marched in the streets to protest against austerity plans and cuts to social services. "Why should we bleed and incur income losses and poorer working conditions for the mistakes of the financial markets?" they asked.

It is a near-miracle that the people of Greece, Portugal, Ireland and Spain have remained silent for so long. What will pass if there is a general mood shift? This would be something governments have not reckoned with. All in all, the euro fund - with its grants, its economic coordination, its funding policies - represents a tricky compromise. Overall, it is a good package. But its effectiveness will rely on whether European voters play along.

It sounds trite, but perhaps European heads of state and governments have not taken this into account. What concerns the average person most is that they might end up picking up the bill. This is why it's dangerous that private creditors have so far escaped unscathed.

Fortunately, this should change under the long-term stability mechanism. A financial transactions tax would set a good example in this regard. But calls for such a tax have so far been rejected, or European institutions have simply passed the buck from one to another.

Let there be no misunderstanding: it is not about hindering the required debt reduction and reforms. But the policies must be balanced.

Author: Christoph Hasselbach / dfm
Editor: Martin Kuebler