Posted on April 8, 2013by 

extra extra newspaperWhether Portugal’s judges realise it or not, they have just ruled that the eurozone doctrine of “internal devaluation” is unconstitutional.

Retired Maria Luisa Cabral (centre) shouts slogans during a protest against austerity measures taking by the Portuguese government in Lisbon. The words on her t-shirt read: “APRE! We are not disposables!”. Photo: AP

2:25PM BST 08 Apr 2013
Source: The Telegraph, UK

Since this is the central thrust of EMU crisis strategy – and the only way offered for Club Med states to regain lost competitiveness within monetary union – the court has essentially said that Portugal may no longer participate in the euro Project as currently constructed.

Specifically, it shot down four of the nine key elements in the austerity budget. Public sector wage cuts must be reversed. So must pension cuts.

Premier Pedro Passos Coelho is discovering that he cannot slash public pay unless he cuts private pay as well, which is entirely beyond his control in a free market system. Nor he can he shrink Portugal’s Leviathan state. The situation is absurd.

The court made it clear that he should raise taxes instead. But raising taxes is not an internal devaluation. It may reduce the budget deficit, but it does not reduce Portugal’s unit labour costs (UCL) or bring about the much needed wage realignment against Germany, or for that matter against China, Turkey, Poland, and Morocco.

This drives a stake through the heart of EMU policy. The European Commission said there can be no “departure” from the agreed bail-out terms. We will see how that goes down.