Political turmoil has set the euro zone on edge again, threatening the fragile stability of the past several months.
Political instability in Portugal, combined with troubles in Greece and Italy, raise the prospect of an austerity backlash, rather than the gaping budget deficits that have been a hallmark of the debt crisis in the 17-member monetary union.
The resignations of the finance and foreign ministers in the centre-right government of Prime Minister Pedro Passos Coelho plunged Portugal into political chaos, helping to drive down European stocks and send the country’s sovereign bond yields spiking.
The fear among investors and European political leaders is that Portugal’s coalition government will collapse, putting its austerity programs into disarray. A political vacuum in Portugal would send voters back to the polls two years ahead of schedule, possibly electing an anti-austerity government bent on undermining reforms and spending cuts agreed in 2011, when the European Union and the International Monetary Fund sponsored a €78-billion ($107-billion) Portuguese bailout package.
This underscores the fact that political turmoil is emerging as the biggest risk on the euro zone’s Mediterranean frontier, where the economies are in recession and unemployment is rising.
Read more: Political turmoil rattles Europe’s fragile economies - The Globe and Mail