So much for the German constitutional court. Until now, markets have assumed that the most likely challenge to the various periphery eurozone bail-outs would come from Berlin. Shockingly, it has come from Lisbon.
The thirteen Portuguese judges charged with assessing the acceptability of the Troika-approved austerity measures implemented by the social-democrat administration led by Pedro Passos Coelho have ruled that they infringed constitutional norms on equality, among other things.
The result is deeply unhelpful for Portugal — and for the Troika. Sure, it is being welcomed by a good chunk of the country's populace, eager to stick two fingers up to the eurocrats that are perceived to be making their lives a misery since the country took a €78bn bail-out two years ago.
More informed political opponents of Passos Coelho are making hay from the fact that it was he and finance minister Vitor Gaspar that have been the architects of the spending squeeze.
That willingness to embrace the tough life has made Passos Coelho and Gaspar the darlings of the Troika. Senior bankers working with troubled periphery economies say that they are well respected externally for having been seen to accept the need for tough changes without some of the cajoling seen elsewhere.
But when it comes to the changes being imposed on the public sector, Passos Coelho has appeared a little too eager for some to stomach. But those changes have been sorely needed. Public employees from teachers to civil servants have long been living well, retiring on 100% pensions and benefiting from a pay scheme that includes two bonus months — the extra slugs helping them through the summer and Christmas holiday periods.
At the same time, many have looked at richer European nations with envy, imagining standards of living they can only dream of — without noticing, from a purchasing power perspective, whether in terms of property or the little luxuries like eating out, that they already had them, or better.
Scrapping the holiday bonuses completely had already been ruled unconstitutional last July. But the latest court decision — reached through a seven-six vote — has ruled that it is unconstitutional to impose a much broader set of cuts on the public sector if they mean more severe treatment than is being meted out on others.
What now?
So what does Passos Coelho do, now that he has a fresh €1.3bn hole in Portugal’s budget? He has said that he will not impose more tax pain, after record increases in January. In the minds of some Portuguese bankers, that leaves only one real option to reduce the size of the state — cutting jobs.
Public spending will also now be reined in even more. Gaspar said on Tuesday that all spending by government ministries would now be banned until each department has agreed new spending cuts — only salaries and contractual obligations will be honoured until then.
The Troika would now be well advised to grant Portugal some additional flexibility on budget deficit targets — even though the country’s bailout plan is now in its seventh iteration. The European Commission has urged the country to stick to its 5.5% deficit target for 2013, but realistically Gaspar needs something to take back to the country after the next Eurogroup meeting at the end of this week.
The last thing external creditors want now is to lose a Portuguese government that has shown itself willing to do what it is asked — and nor do they want to have to cough up for another bail-out.
Finance minsters in a Troika-monitored eurozone economy have a strange existence — and very little room for manoeuvre. Shorn even in normal times of the ability to manipulate currency or rates, under supervision they must also adhere to a tough set of externally mandated targets.
The constitutional court has just knocked out much of what little autonomy Gaspar had. The Troika must decide whether to give him a little back, or have another headache to deal with. One periphery eurozone country without a government is probably enough to be getting on with.