Portuguese Finance Minister Vitor Gaspar announced his resignation July 1. Gaspar had been minister since mid-2011, when the center-right government under Prime Minister Pedro Passos Coelho came to power, and he had watched over the implementation of Portugal's three-year, 78 billion-euro ($101-billion) bailout program. In May 2011, Portugal became the third eurozone country to request aid from the European Union and International Monetary Fund, leading to the resignation of the previous center-left government and Coelho's victory in the June 2011 early elections. In return for the aid, Lisbon implemented austerity measures while the economy contracted and unemployment rose.
Nevertheless, Portugal has managed to sustain a certain level of political stability over the last two years. This is partly because Coelho's government was supported by some of the country's unions, reducing the effectiveness of social protests. But since the beginning of the year, Lisbon has had an increasingly difficult time implementing austerity measures, for example due to resistance from the country's constitutional court, which in April rejected some of the measures. A deeper than expected contraction of the economy and growing public protests have compounded Lisbon's problems.
Gaspar said that he had lost credibility and the support of the people and hoped his resignation would strengthen the government. It is unlikely, however, that his resignation will calm the population — especially since unemployment was up to 17.6 percent in May. Gaspar's resignation raises doubts about Portugal's progress in implementing the reforms demanded under the bailout program and comes at an inopportune time. Portugal plans to exit the bailout program by mid-2014 and is still under pressure to implement further spending cuts to comply with EU and International Monetary Fund demands and engender trust among financial markets.
Despite continued economic contraction, in May the Portuguese government announced cuts close to 5 billion euros through 2015 that will involve large layoffs in the public sector. As a consequence, labor unions on June 27 held the fourth general strike since the start of the bailout program.
Ireland is also going through a difficult period, which undermines the country's image as a bailout success story. Ireland is one of the few countries in the European periphery that has seen moderate economic growth in the past few years, growing by 1.4 percent in 2011 and 0.9 percent in 2012, and unemployment fell from 14.9 percent in May 2012 to 13.6 percent in May 2013. However, Ireland's statistical office released revised growth data June 27 showing that the country is back in recession for the first time since 2009. Especially weak demand abroad is hurting the export-driven Irish economy. Dublin requested a bailout amounting to 67.5 billion euros in November 2010 following the strong increase in government debt and borrowing costs after bailing out most of its banks.
Ireland's bailout recently came under heavy criticism when local media revealed telephone conversations among managers of the Anglo Irish Bank, which was nationalized in 2009. Managers of the institution discussed how easy it was to scare the Irish government and European partners into providing aid amid fear of a major financial crisis. The release of these conversations angered the Irish population and reinforced its general distrust of the country's bankers. The scandal occurred a few weeks after the International Monetary Fund admitted to making mistakes in the 2010 Greek bailout, thus casting even more doubt on the ability of the European Central Bank, International Monetary Fund and European Commission, also known as the troika, to handle bailouts.
The Troika's Involvement
For Ireland and Portugal, it is crucial to avoid social and political instability as their bailout programs come to an end, when they will again be at the mercy of financial markets. Also, the troika wants Ireland and Portugal to end their bailout programs successfully and has shown more leniency toward both countries by easing loan repayment terms or granting more time to cut deficits. In early May, Portugal sold 10-year bonds on financial markets for the first time since entering the bailout program, indicating that it has regained some trust. Earlier this year, Ireland also successfully sold 10-year bonds for the first time since the bailout (before these sales both countries had already sold bonds with shorter maturities).
However, negative economic news or political and social instability could quickly erode the financial market's trust. Over the past month, interest rates in Portugal have been rising. This is likely due not only to European developments but also to speculation about future monetary policies of the United States and China.
To help Ireland and Portugal, the European Central Bank will try to suppress borrowing costs indirectly by highlighting its readiness to intervene. However, in light of the continued economic weakness, which again raises the risk of greater political and social instability in countries like Ireland and Portugal, markets will doubt whether the European Central Bank will really intervene. Therefore, it is increasingly likely that there will be a new and milder bailout agreement between Ireland or Portugal and the European Union (including the demand for further reforms), coupled with an actual intervention by the European Central Bank.
Indeed, the coming year will be a test for the credibility of EU institutions. The European Central Bank could be forced to intervene in sovereign markets, and the troika will need to find a balance between its pressure for economic reform and its need to prevent the eurozone crisis from escalating. At the same time, the Portuguese and Irish governments will need to calm international markets while dealing with persistent social discontent at home.
