March 21, 2011

Portugal, Ireland Debt Problems Still Haunt Euro Zone

Portugal austerity vote for Wednesday could cripple government as Ireland mulls concessions

In the midst of turmoil in the Middle East and North Africa and worries over Japan, the euro zone’s debt crisis has not gone away, merely dropped out of the headlines for a bit. However, that could change this week as Portugal plans a vote on government austerity measures and Ireland considers whether to give ground on its corporate tax rate.

Reuters reported that there was sufficient doubt over whether the Portuguese measures would pass that Jose Socrates, the nation’s prime minister, had threatened to quit if it was not approved by the opposition. He has said that failure to pass further cutbacks will put Portugal in the position of having to follow Greece and Ireland into bailout territory.

Pedro Passos Coelho, leader of the PSD (Social Democrats) party, said that initially his group had approved Lisbon’s budget goals as promised to Brussels, but the measures currently under consideration were not adequate and had been prepared in haste. The plan, which was first proposed on March 11, is expected to be put before the parliament on Wednesday.

He told reporters, "We reaffirmed that the measures presented by the government ... do not deserve the support or approval of the PSD since they lay out a profoundly unfair path for the Portuguese." He added, "There are no conditions of trust for any talks to be resumed between the PSD and the government."

Because the government does not have a majority in parliament, it needs the support of the opposition in order to pass the measures; it hopes to put them through before a euro zone summit meeting scheduled to begin on Thursday. However, failure of the measures may topple the government.

Antonio Costa Pinto, a political scientist, was quoted as saying, "I'd say the government's fall is probable, though not inevitable, which shows there is very little room for negotiations." He added, "And the worst thing is that the model of a grand coalition seems more and more unlikely after this fallout, even for this period of the acute debt crisis."

Ireland, meanwhile, is considering something it had earlier dismissed as untouchable: an increase in its 12.5% corporate tax rate. Reuters cited an Irish Times report that said that while Prime Minister Enda Kenny had refused in Brussels earlier this month to consider such a measure, on Monday the country’s ministers were “reluctantly considering” such a plan in order to win concessions on the interest rate for Ireland’s bailout package. This was in response to new European Union (EU) rules about how corporate taxes are calculated, the Common Consolidated Corporate Tax Base (CCCTB).

In fact, on Sunday, Brian Hayes, deputy finance minister, said in a broadcast that he would not rule out such a possibility. “We will look at all these things in the round,” he was quoted as saying. Analysts, as well as other countries, have criticized the CCCTB, however, for a number of reasons, including the facts that it would allow companies to opt out and would also take several years to take effect.

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