Portugal Becomes First Eurozone Country to Ratify EU Fiscal Pact

BBC: Portugal First to Approve EU Fiscal Pact
EU Business: Bailed-out Portugal Takes Lead in Ratifying EU Budget Pact
FT: Portugal Ratifies European Fiscal Treaty
WSJ - Portugal Approves EU Pact

On April 13, the Portuguese Parliament became the first country to approve the European Union’s new Fiscal Pact. Both main political parties supported the Pact while three left-of-center parties wanted the treaty to go through a public referendum. The Pact sets forth strict new rules and penalties for countries running excessive deficits and debts. Under the Pact, member countries’ deficits must not exceed 0.5% of the country’s gross domestic product (GDP), debt must be below 60% of GDP, and countries must add balanced-budget rules to their constitutions or national laws. The European Court of Justice has the power to impose fines on the member countries to ensure that they adhere to these rules.

Currently, the Portuguese Parliament is discussing whether it will add the balanced-budget rules to its constitution or instead pass a law that can be overturned by a two-thirds majority vote. The ruling party favors the limits to be set in the constitution, while the Socialists (the second-largest party in the parliament) are in favor of the second option. Likewise, the parliament is also considering whether it should pass pro-growth clauses to offset the negative effects that would arise from the tough austerity measures (spending cuts and tax increases) the country will have to impose to bring the debt and deficit within the Pact limits. Many other European leaders share this desire to spur growth while reducing deficits, including French Presidential candidate Francois Hollande who has pledged to pass such growth provisions if he wins the election in May.

By ratifying the Pact, Portugal aims to demonstrate to the European Union and investors that the country, which received a €78 billion ($102.86 billion) bailout, is committed to bringing down its deficit and debt. As of December 2011, Portugal’s government debt was 90.6% of GDP and its deficit was 5.2% of GDP—well above the limits set out in the Pact. Although Portugal is not expected to immediately abide by the debt and deficit limits (the European Commission will establish the time frame for compliance based on Portugal’s individual economic situation), the country faces a tough road ahead as it imposes austerity measures to comply with the Pact. Economists expect the Portuguese economy to contract by 3.3% this year and unemployment to rise to nearly 15% as there has been a sharp fall in internal demand in the country due to the lower wages and increased taxes.