New austerity for Portugal

Market fears calmer:

PORTUGAL: Portuguese leaders agreed tough austerity measures on Thursday, joining a coordinated euro zone push that has calmed market fears of a spreading Greek-style crisis but provoked talk by Spanish unions of a general strike.

Prime Minister Jose Socrates and opposition leader Pedro Passos Coelho drew up steps to slash Portugal’s budget deficit, including 5 percent pay cuts for senior public sector staff and politicians, and increases of VAT sales tax, income tax and profits tax ranging from one to 2.5 percent.

The cabinet approved the programme later. The government said it would cut the deficit to 7.3 percent of GDP this year and 4.6 percent in 2011. Last year it hit 9.4 percent, prompting a sell-off of Portuguese assets by investors.

“I ask all my compatriots for us to make this effort to defend the country, to defend the euro and Europe,” Socrates, a Socialist, told a news briefing.

In neighbouring Spain, painful measures were announced on Wednesday including 5 percent reductions in civil service pay and job cuts.

“We radically reject this austerity plan and both (main) unions are starting protests that could lead to a general strike very soon,” said Ignacio Fernandez Toxo, general secretary of Spain’s biggest union Comisiones Obreras.

A public sector strike is planned for June 2. Union leaders said the austerity plan breached pension pacts and that economies should come from tax increases rather than cuts.

The belt-tightening is the price indebted euro zone states must pay for protection by the 750 billion euro ($950 billion) safety net announced by the EU and IMF at the weekend.

German Chancellor Angela Merkel said on Thursday the EU faced an “existential” crisis.

“If the euro fails, not only the currency fails. Europe fails too, and the idea of European unification,” she said. “We have a common currency, but no common political and economic union. And this is exactly what we must change. To achieve this — therein lies the opportunity of this crisis.”

In the decade since the euro was created, Germany has resisted the idea of tightening economic policy coordination, fearful states like France could exploit such a discussion to try to exert influence over the European Central Bank.

German public opinion is resentful of the potential financial burdens being shouldered by Berlin in the rescue package for weaker economies. A poll on Thursday showed waning public enthusiasm in Denmark for adopting the troubled euro.

LISBON, Friday, Reuters