The euro zone’s future hangs on Portuguese elections

BRUSSELS, Belgium — Portugal goes to the polls on Sunday to elect a government whose decisions will be vital for all 17 countries in the euro zone, not just the nation of 10 million on Europe's western seaboard.

The key question is whether any party can obtain a majority in parliament that will enable the new government to push through tough economic reforms demanded by the European Union and the International Monetary Fund (IMF) in return for 78 billion euros in emergency loans to keep the country's faltering finances afloat.

The Socialists (PS) have been in power since 2005 and the latest opinion polls show them falling behind the center-right opposition.

“The absolute majority that I'm asking for is not to give me an easy time,” opposition leader Pedro Passos Coelho told supporters on the campaign trail Thursday. “The majority I'm asking the country for is to make sure that we'll have a government that won't fail, a strong, coherent and cohesive government.”

With the country mired in recession and struggling to pay its debts, both the center-right and the Socialists have accepted the package of unpopular austerity measures proposed as part of the international bailout.

Campaigning against the bailout terms are two radical left-wing parties. While they have no chance of winning, they could snatch enough votes away from the mainstream parties to prevent the formation of a majority government.

Such a result could reverberate around the euro zone. Fears of protracted political instability in Portugal would risk undermining market confidence in the country's ability to slash its budget deficit and reform labor markets in line with the EU/IMF demands.

As Greece appears likely to need a second bailout, more turmoil in Portugal would add to the wider euro zone jitters.

Markets should be reassured if the latest opinion polls prove correct and the main opposition Social Democratic Party (PSD) wins Sunday's vote with sufficient seats to form a majority government in alliance with a smaller, conservative party, the Democratic and Social Center (CDS).

PSD leader Passos Coelho, 46, is politically untried and has never held high national office, but his background in business could serve him well. Immediately upon forming a government, he would need to work out the details of plans to increase the country's competitiveness and slash the budget deficit from 9.1 percent of GDP last year to 3 percent of GDP by 2013, in line with the bailout terms.

In other European nations such as Germany and Sweden, the name Social Democrat is used by left-leaning parties, but Portugal's PSD is right-of-center and is aligned with the parties of German Chancellor Angela Merkel and French President Nicolas Sarkozy.

Formed after the 1974 revolution that returned Portugal to democracy after almost 50 years of dictatorship, the PSD's left-sounding name was chosen to stress its distance from the discredited right-wing regime.

Passos Coelho engineered the collapse of Prime Minister Jose Socrates' minority Socialist government in March by joining with the far left in voting down proposed austerity measures. The move precipitated the elections and forced Socrates to follow the leaders of Greece and Ireland in appealing for a rescue from the EU and IMF. Passos Coelho has since acknowledged that the country needs the stringent reform package demanded by the international creditors, albeit with minor modifications.

Standing against him, Prime Minister Socrates, 53, is a wily and experienced campaigner who has surprised his opponents by bouncing back from defeat in March. He's kept the Socialist Party within striking distance of Passos Coelho's Social Democrats.

However, while the PSD has a natural coalition partner on the right, Socrates would be in no position to form an alliance with the two radical parties to the left of the Socialists.

Portugal has long languished as Western Europe's poorest country. It's forecast to remain in recession for at least two more years and unemployment stands at a record 12.4 percent. In line with the bailout terms, public sector salaries will be frozen, social security cut and state jobs lost.

Dissatisfaction with mainstream politics runs high and polls show the old-style Portuguese Communist Party (PCP) and the rival Left Bloc (BE) winning about 15 percent of the vote. Both parties reject the IMF/EU loans and propose wealth taxes and a debt default as alternatives.

“If they are in government [the three main parties] are committed to promoting unemployment, to keep the Portuguese economy locked into austerity,” Left Bloc leader Francisco Louca told supporters this week. “PS, PSD and CDS are kidding you that the solution for the country is always an ever more cruel collapse of the economy.”

If the far left's score rises so that neither the center-right nor the Socialists can form a majority, the two main parties will have to find a way of working together. To do that, they will need to overcome the poisonous relations and spate of mutual recriminations since the March crisis that forced the country into the bailout.