Through the Worst?

by Andrew Stuttaford

Here’s the EU’s top bureaucrat, Jose Manuel Barroso, on Wednesday:

(Reuters) – European economies have gone through the worst of the debt crisis, but the situation still remains delicate, European Commission President Jose Manuel Barroso said on Wednesday.

“I believe that the EU has come through the worst of the crisis but the situation is still fragile,” he told reporters during a visit to Prague.

Here’s the Wall Street Journal reporting on the news from his homeland, Portugal, today:

LISBON–The Portuguese government is considering a plan to pay public workers and pensioners one month of their salary in treasury bills rather than cash after a high court ruled out wage cuts, a person familiar with the situation said Sunday.

“This is one of the ideas being considered,” the person said.

Portugal’s government was shaken by a ruling from the Constitutional Court late Friday that said cuts in the wages and pensions of public employees were unfair because they targeted only the public sector. The Portuguese government warned Saturday that the court’s decision will put into question the country’s ability to fulfill its €78 billion ($101 billion) international bailout program.

Specifically, the court rejected plans to cut one of the 14 paychecks that public workers usually get each year and to slash 6.4% from pensions for retirees. It also overturned a planned tax on unemployment and sickness benefits.As a result, the government must plug a hole estimated at up to €1.3 billion in its €5.3 billion budget for 2013, according to calculations by several independent economists.

By paying one month of salary in T-bills to public workers and pensioners, the government would save an estimated €1.1 billion in expenses, narrowing the budget gap significantly.

Hmmm, this is a little reminiscent of California not so long ago, not to speak of the “pharma-bonds” that were issued in Greece a few years back, and, of course, the desperate moves in Argentina as the peso/dollar peg started to unravel in 2001. That peg meant that, like the Portuguese and the Greeks trapped within the euro zone today, Argentina could not (in theory) simply print money, but (as I noted here), the country’s treasuries (provincial and then national) tried to meet this challenge by issuing a series of evocatively named quasi-monies (IOUs, basically). These patacones, porteños, quebrachos,and lecops proved to be harbingers of doom, not a solution.

That Portugal has been mulling the moves it has is not necessarily a harbinger of doom, but, Mr. Barroso, it is another sign that the worst of this crisis may be yet to come. 

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