Portugal orders fiscal 'shock' as Europe steps up debt war

13th May 2010, Comments 0 comments

Portugal on Thursday ordered deep wage and spending cuts and higher taxes to slash the public deficit by more than half as Spanish unions called strikes against public sector wage cuts.

As governments stepped up their war on debt, German Chancellor Angela Merkel warned that the whole European Union would be under threat if the euro was allowed to fail in the debt crisis. But global shares mainly rose as markets took cheer from efforts made so far by governments to control deficits.

After Greece's financial turmoil and debt downgrade to junk status, international attention has turned to Portugal and Spain, which have also had their debt ratings lowered.

Portugal's Socialist Prime Minister Jose Socrates cut the wages of civil servants and public officials, including ministers, brought in a new profits tax and increased value added tax by one percentage point to 21 percent as he vowed to reduce the national deficit from 9.4 percent in 2009 to 4.6 percent by the end of 2011.

He said a new income tax surcharge of between one and 1.5 percent would be levied on higher earners.

"All these measures will remain in place until the end of 2011," Socrates told a press conference.

The government is also to freeze major public works such as a new Lisbon airport and according to the premier, with the public deficit brought down to 7.3 percent of gross domestic product by the end of this year.

Portuguese media called the government programme a "fiscal shock" and protests are expected.

As a eurozone member, Portugal must keep its annual public deficit under 3.0 percent of output. Its public debt, 76.6 percent of GDP last year, is projected to widen to 86 percent in 2010, beyond the 60 percent eurozone rule.

Spain's Socialist Prime Minister Jose Luis Rodriguez Zapatero on Wednesday ordered a five percent pay cut for public workers, a partial freeze on pensions and the scrapping of a 2,500-euro-payout for new births as he seeks to save an extra 15 billion euros over two years.

Spain announced a 50-billion-euro (63-billion-dollar) austerity package in January designed to slash the deficit to three percent by 2013 from 11.2 percent last year.

But the move infuriated unions and the UGT union called a civil service strike for June 2. The CCOO union has also threatened a strike. The UGT called demonstrations for May 20 when Zapatero's measures go before parliament.

The Italian government is now considering a freeze on public sector salaries and new hiring, Il Sole 24 Ore newspaper reported. The government this week renewed a pledge to reduce Italy's public deficit from 5.3 percent last year to 2.7 percent in 2012.

Britain's new centre-right coalition also started discussing the economy on Thursday. The government has promised an emergency budget in 50 days that will aim to start slashing public spending.

World stock markets mainly rose in reaction to the new measures announced by governments on top of the 750-billion-euro (one-trillion-dollar) fund set up by the EU and International Monetary Fund to help debt-stricken eurozone countries.

Many analysts say the euro remains under pressure however because of Greece's problems raising money and fears this could spread. Germany's Merkel said this was a threat to the whole EU.

"If the euro fails, it's not only the currency that fails but much more, it's Europe that fails and with it the idea of the European Union," Merkel said.

Merkel called the crisis "the biggest test" for the EU, possibly since the founding Rome Treaty in 1957, but that it should strengthen the bloc.

"We have a common currency but we don't have economic and political union," she said, adding that one day "all European Union member states will have the euro as means of payment."

Australia's central bank warned that Europe's financial turmoil could pose a risk to Asian growth.

Assistant governor of the Reserve Bank of Australia (RBA) Phillip Lowe said: "Despite the recent announcements having stabilised confidence in Europe, concerns about public finances could build again."

© 2010 AFP

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