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Why We're Ungovernable, Part 11: Portugal Stages A Coup

Wow. Portugal just did something extraordinary.

In its most recent election, parties of the left -- anti-austerity, anti-business, mistrustful of the euro and other extra-national institutions -- gained a parliamentary majority, which gives them the right to form a government.

But the president, whose permission is necessary for the process to go forward, said nope, that's not going to happen, thus setting off a constitutional crisis that might be a sign of things to come in the eurozone. Here's a brief excerpt from a longer must-read article by the Telegraph's Ambrose Evans-Pritchard:

Eurozone crosses Rubicon as Portugal's anti-euro Left banned from power

Portugal has entered dangerous political waters. For the first time since the creation of Europe's monetary union, a member state has taken the explicit step of forbidding eurosceptic parties from taking office on the grounds of national interest.

Anibal Cavaco Silva, Portugal's constitutional president, has refused to appoint a Left-wing coalition government even though it secured an absolute majority in the Portuguese parliament and won a mandate to smash the austerity regime bequeathed by the EU-IMF Troika.

He deemed it too risky to let the Left Bloc or the Communists come close to power, insisting that conservatives should soldier on as a minority in order to satisfy Brussels and appease foreign financial markets.

Democracy must take second place to the higher imperative of euro rules and membership.

"In 40 years of democracy, no government in Portugal has ever depended on the support of anti-European forces, that is to say forces that campaigned to abrogate the Lisbon Treaty, the Fiscal Compact, the Growth and Stability Pact, as well as to dismantle monetary union and take Portugal out of the euro, in addition to wanting the dissolution of NATO," said Mr Cavaco Silva.

"This is the worst moment for a radical change to the foundations of our democracy. After we carried out an onerous programme of financial assistance, entailing heavy sacrifices, it is my duty, within my constitutional powers, to do everything possible to prevent false signals being sent to financial institutions, investors and markets," he said.

Mr Cavaco Silva argued that the great majority of the Portuguese people did not vote for parties that want a return to the escudo or that advocate a traumatic showdown with Brussels.

This is true, but he skipped over the other core message from the elections held three weeks ago: that they also voted for an end to wage cuts and Troika austerity. The combined parties of the Left won 50.7pc of the vote. Led by the Socialists, they control the Assembleia.

The conservative premier, Pedro Passos Coelho, came first and therefore gets first shot at forming a government, but his Right-wing coalition as a whole secured just 38.5pc of the vote. It lost 28 seats.

The Socialist leader, Antonio Costa, has reacted with fury, damning the president's action as a "grave mistake" that threatens to engulf the country in a political firestorm.

Mr Costa vowed to press ahead with his plans to form a triple-Left coalition, and warned that the Right-wing rump government will face an immediate vote of no confidence.

The point of this series of posts is that debt works the same way for countries as for families: Borrow too much and life becomes unmanageable.

For Portugal, as for most eurozone and indeed most developed world countries, the borrowing binge of the past 30 years has left no palatable solutions. Staying the present course means continued austerity, which in turn means a long slow descent into poverty for most citizens, who understandably want to avoid this fate. But installing an anti-austerity (and therefore anti-euro) government means a Greek-style crisis that accelerates the slide to Third World status. And that's pretty much it as far as national-level options go.

No surprise, then, that European voters are skewing both far-right and far-left. While Portugal is bringing communists into the government, France, for instance, is going the other way. See French far-right Le Pen family set for regional power wins: poll.

This means several things. First, the euro crisis is about to enter a new, even more dangerous stage in which democracy -- already diminished by the beating Greece took when it defied Germany and the IMF -- might soon be banned in favor of solidarity. Put simply, the eurozone might become a de facto dictatorship in which elections, when they're held at all, don't matter.

Second, while there are no national solutions to the eurozone debt crisis because member countries no longer control their own currencies, there is a regional fix, which is to aggressively devalue the euro. That will partially satisfy the left by making money easier and (presumably) growth faster, as exports to the rest of the world pick up. Coupled with immigration restrictions to placate the right, a major devaluation might calm things down for a while.

Which is why over-indebted countries from time immemorial have used devaluation to get out from under past mistakes. At a certain point it becomes the only way to prevent a revolution.

But of course it's only a temporary fix. Devaluing the euro by, say, 50% would send its over-leveraged trading partners into crisis, forcing them (not that they need much prodding since they've got basically the same problems as Europe) to devalue in turn. Until, as Jim Rickards likes to say, they figure out that the one thing they can all devalue against is gold.


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