Analysis

Portugal Will Test Germany’s Austerity Plan For The EU
Portuguese Prime Minister Pedro Passos Coelho (left) talks with British Prime Minister David Cameron at an EU Summit in Brussels, January 30, 2012 (RIC FEFERBERG/AFP/Getty Images)
February 28, 2012
| Economics
| Europe
Summary
While the announcement last week that Portugal’s exports grew by 12 percent in the fourth quarter of last year was welcome news, it could not disguise the ongoing problems of the Portuguese economy, which has contracted for the last five years. With austerity measures imposed as part of its bailout deal with the EU, its burden is even heavier. The stakes are high as Portugal has now become a test case which could determine whether Germany’s austerity plan for the EU as a whole is feasible.

LIGNET believes that it will be difficult, if not impossible, for Portugal to turn back the tide of long-term economic contraction with the additional burden of cutting spending. Its economy is therefore likely to underperform in 2012, which in turn will provide useful ammunition to critics of Germany’s plan to impose similar austerity throughout the entire EU. If this scenario unfolds as expected, Merkel’s government in Berlin will come under increased pressure to adopt a Keynesian approach and spend more money to prevent a long-term recession from setting in across the continent.

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