For Portugal to request an international aid package that will include assistance from the International Monetary Fund, the political and central bank authorities in Lisbon will need to comply with certain prerequisites as a quid pro quo. The issue at hand is no longer Portugal actually requesting a bailout from the IMF, the European Union and the European Central Bank, but that Lisbon will have to agree to a high level of conditionality regarding further austerity measures, legitimacy of the negotiated package and commitment to play by the agreed rules.
However, the Portuguese case has introduced a new twist in the yearlong saga of European bailout politics. Greece was Exhibit A in the eurozone?s sovereign debt calamity. While it exposed fiscal indiscipline and economic mismanagement in Athens, the response also highlighted chaotic crisis management in Brussels, Berlin and Paris. By contrast, the Irish example in November 2010 underlined how a once-praised star pupil of fiscal rectitude had slipped under the radar of EU monitors and ECB policymakers. Over a decade, the Celtic Tiger allowed its banking sector to hold a country and democracy to ransom.
But now, the Portuguese challenge poses questions about the democratic legitimacy of bailout packages and whether a government has the authority to enter into agreements with international organizations when it is only operating in a caretaker capacity. Following the collapse of Prime Minister Jose Socrates?s minority Socialist government on March 23 after its failure to get the fourth austerity program passed in parliament, early elections are looming while the pundits are betting when Portugal will finally request international financial assistance.
The events in Portugal underscore the growing political instability of governments in the eurozone. Two out of the 17 member states have already claimed the political scalps of prime ministers. While the social costs of austerity are immediate and painful, the political price to pay is also rising. As Ireland has illustrated and Portugal confirmed, the plight of individual governments reminds us not only of the escalating social and economic costs of the crisis but equally the huge political risks inherent in trying to identify solutions.
The flip side of the eurozone crisis is the various failed and incomplete attempts to chart its resolution. The grandiose rhetoric of ?whatever it takes to save the euro,? ?grand bargain? or ?comprehensive package? suggests a crisis management capacity and building momentum to reassure the ?invisible hand? of the markets. However, to date the consequences of these efforts are all too clear to see. They include unsustainable debt dynamics on government budgets, the complete absence of burden sharing between taxpayers and creditors, as well as a manifest democratic deficit in the whole endeavor of administering the bitter medicine.
Resolving such a crisis through early elections may appeal to those currently sitting on the hard opposition benches of parliament. Moreover, holding a government to account for the mess it got itself and the country into as was the case in Greece and Ireland is an act of political decency and gives voice to citizens in a democracy. While the Greek elections in November 2010 and the early Irish ones in February 2011 were watershed events in both countries? politics, they have not (yet) contributed to a ?game changer? regarding the dynamics of the crisis and the options available to solve it.
The case of Portugal is at the same time more clear-cut and more complex. A minority government is always at a major disadvantage when facing a crisis of such magnitude and the odds are stacked against it. Given the enormous domestic and international pressure that Portugal?s Socrates had been under for a year, it was only a matter of time before local politics and external factors took their toll on his administration.
But is an early election the appropriate policy response when the country is staring into the abyss, successive credit rating downgrades are driving borrowing costs to euro-era record highs and the reputational costs for Portugal are rising in tandem? Can you simultaneously prepare for an election and turn to the European financial stability facility, the EU?s bailout fund? The chances of Portugal managing without external support until new elections are held and a government formed are diminishing by the week.
At present the soaring borrowing costs Portugal has to pay for sovereign debt constitute a daily referendum of bond markets against Lisbon, a permanent vote of no confidence by speculators and traders. Remarkably, the yields on three-, five- and six-year Portuguese debt are now higher than the interest rate on the 10-year bond. Under such dire circumstances, efforts to regain or at least remind the citizenry of the primacy of democratic politics and policies over capital markets appear to be a gargantuan task.
The caretaker government in Lisbon faces two major challenges. For one, its capacity to refinance maturing debt obligations in the bond markets is severely impaired. Furthermore, the political vacuum created by the resignation of Socrates raises the question of who, if anybody, has the political authority and institutional credibility to enter into negotiations with the IMF and the EU? There are no easy answers to this political conundrum with underlying constitutional implications.
Democratic legitimacy includes popular acceptance, i.e. giving citizens a say in the proceedings. Neither the European Commission nor eurozone member states can afford to force an agreement on Portugal that risks being reopened and renegotiated by any new government not currently party to the deliberations. The Irish understand what the Portuguese may be facing.
The bigger challenge rests with a backlash from citizens who are deeply frustrated by the unfair burden placed on them as taxpayers and from voters who want to be taken seriously in a democracy worth its salt. We therefore have to remind ourselves in Athens, Dublin and Lisbon that the bailing out states and banks puts democracy itself at risk. While you can put a price tag on governments and financial institutions, democratic politics is priceless.
Jens Bastian is currently visiting fellow for the political economy of Southeast Europe at St Antony?s College in Oxford, UK, and senior economic research fellow at the Hellenic Foundation for European