TAKING THE PLEDGE?

3/25/11

Wednesday night, Portugal’s parliament rejected an austerity package proposed by its auspiciously named Prime Minister Jose Socrates. In the wake of that rejection, as the Wall Street Journal reports, “Portugal is almost certain to need a bailout” from one of the European rescue funds concocted in the wake of the troubles in Greece and Ireland.

Hmm…

Accept austerity, don’t get a bailout. Reject austerity, get a bailout. Talk about perverse incentives!

Mr. Socrates argues that the conditions behind an EU bailout will be far harsher than the austerity package he proposed, and one suspects they will. But how will the EU enforce such conditions or, more properly, will they enforce such conditions? One suspects not simply because the EU has no means of employing such enforcement. Portugal can simply get the bailout by pledging to abide by the conditions and then reject the accompanying austerity when it becomes too tough or when it becomes merely uncomfortable. Then what will the EU do? Let Portugal default, defeating the whole purpose of the bailout mechanisms and possibly taking down not only Spain but the euro itself? So why in the world should the Portuguese accept austerity measures in order to avoid an unenforceable, flaccid package of only theoretically harsher austerity measures?

Optimists, defined as those who consider rejecting reality a virtue, will doubtless point to the examples of Greece and Ireland as success stories for the EU bailout mechanism. Austerity, however, has not been greeted with overwhelming enthusiasm in either corner of Europe occupied by these two financial basket cases; ask the now out of work Fianna Fail parliamentarians or the Greek police charged with keeping peace in the wake of street demonstrations inspired by the rigors of austerity in the cradle of European civilization. One suspects, further, that one has not seen the last, or the limits, of Irish, Greek...or Portuguese…rejection of austerity imposed from Bonn or Paris.