Portugal's contract to kill the European social model

Portugal has become the first European country to approve the EU's fiscal compact, known to critics as the "permanent austerity" treaty.

Officially known as the Treaty on Stability, Co-ordination and Governance (SCG), the agreement requires the budget of a country to be in balance or in surplus, which means that in structural terms - that is excluding one-off items and business cycle variations - the deficit is capped at 0.5 per cent of GDP.

The country's parliament took this step on Friday and also approved the European Stability Mechanism - the much-derided long-term "bailout" fund.

Portugal is one of three eurozone countries to be "rescued" by the EU and the International Monetary Fund (IMF), as alarm over the state of public finances pushed up borrowing rates on international bond markets to unsustainable levels, first for Greece and then Ireland.

The country is also one of the 17 eurozone countries having the greatest difficulty in meeting deficit targets thanks to punishing austerity measures demanded last year by the troika of EU, IMF and European Central Bank in exchange for its rescue package.

Portugal's ratio of debt to gross domestic product (GDP) is expected to hit 115 per cent at the end of the year, up from around 110 per cent currently, and then gradually decline. Portugal's debt was 93.3 per cent of GDP in 2010.

Prime Minister Pedro Passos Coelho, arguing strongly in favour of the pact in a speech on Thursday to parliament, where he has a comfortable centre-right majority, said that the budget pact "represents our refusal to repeat the errors of the past."

The main opposition Socialist party voted in favour so as not to undermine the credibility of the country.

Despite arguing that the pact does not give enough attention to growth and jobs, Socialist leader Antonio Jose Seguro said that "it is in the name of the option for Europe chosen by Portugal that we shall vote in favour."

Prior to the vote the Socialist party had originally said it would suspend the whip, but changed its mind when a number of rebels - Pedro Nuno Santos, Isabel Moreira, leader of the Young Socialists Pedro Alves, Rui Duarte, Duarte Cordeiro and Joao Galamba - indicated they would vote against.

The Socialists, who were ousted by Coelho's right-wing coalition last June amid rising unemployment and social misery, backed the 2011 troika austerity programme.

The Portuguese government's spending cuts and tax rises to meet the terms of the €78 billion aid plan from the EU and the IMF have allowed it to slash Portugal's budget deficit to 4.2 per cent of output last year, less than half of the 9.8 per cent reported for 2010.

But the austerity has plunged the country into a deep recession. The Portuguese economy is expected to contract by over 3 per cent this year while the unemployment rate will surpass 14 per cent.

The austerity package has included the privatisation of several industries, cuts to public-sector wages, deeply negative reforms to employment laws and a rise in taxes, including the socially regressive value added tax.

Death rates are increasing in part because of health service cuts. Poverty rates, already the highest in the EU, are rising, with 2.7 million living below the poverty line of €434 a month. And there's growing in-work poverty too, with half a million people underemployed - that is working less than they would like or need.

The austerity measures sparked a general strike last month and a string of mass protests in recent weeks and months.

The Left Bloc and Portuguese Communist Party said that the change to the Portuguese constitution implementing the new EU fiscal compact imposed "a rule of lead" on the Portuguese economy and would limit the options of governments forever.

The Left Bloc's Ana Drago accused the prime minister of "a pure negation of truth" in his opening remarks backing ratification, and rejected the claim that there was a general consensus on the pact.

After criticising the right-wing PSD/CDS-PP government she described the pact as "a contract to kill the European social model."

The Left Bloc MP recalled the position of Foreign Minister Paulo Portas when a few years ago he called for a referendum on Treaty of Lisbon. "What do you fear? If the treaty is so important, put it to the Portuguese people."

The parliamentary leader of the Portuguese Communist Party Bernardino Soares stated that the Treaty was "a violent attack on national sovereignty and independence," condemning Portugal to the "prior approval of Germany."

He accused the government of rushing through the law for "fear that the Portuguese become aware of what is at issue and spoil the little arrangement."

"At stake is a huge counterfeiting operation," he said.

The compact in brief

The EU fiscal compact was signed in Brussels on March 2 by 25 of the European Union countries after tortuous negotiations. Britain and the Czech Republic declined.

Ireland has signed the pact but is putting it for approval by referendum.

In Germany, the biggest eurozone economy, the opposition Social Democrats want the pact to include more measures to encourage growth. The country may ratify the pact only at the end of the year even though the government has said it would like to see approval at the end of May.

In France ratification of the pact depends on the outcome of presidential elections. French Socialist presidential frontrunner Francois Hollande has said he would like to renegotiate to include more steps to boost economic growth.

Italy's senate was set to take a vote earlier this week, but this was postponed. Campaigners who staged a sit-in of the upper parliamentary house in Rome last week in anticipation of the vote have promised a repeat protest next week.

Only countries which have debt-to-GDP ratios significantly below 60 per cent can have a bigger structural deficit.

A country with a higher public debt has to reduce it by one-twentieth per year as a benchmark. Transgressors face penalties of 0.1 per cent of GDP.

The SCG is set to come into force once it has been passed by the parliaments of at least 12 countries that use the euro currency, or at least by 1 January 2013.