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A currency dealer walks past a screen displaying the exchange rate between the U.S. dollar and the euro at the headquarters of the Korea Exchange Bank in Seoul.

JO YONG-HAK/Jo Yong-Hak/Reuters

Severe austerity programs are being rolled out across the European Union as lavish spenders, under pressure from their new paymasters in Brussels and Washington, suddenly take the view that the Greek debt horror may not be an isolated case.

On Thursday, Portugal was the latest country to attack its gaping budget deficit. The effort includes a 5-per-cent pay cut for top government officials and a "crisis tax" on wages and big corporations. "These measures are absolutely necessary to defend our country, Europe and the euro," said Portuguese Prime Minister Jose Socrates.

Portugal's effort came the same day that Britain's new coalition government, led by David Cameron, approved an immediate 5-per-cent pay cut for senior ministers; and one day after Spain unveiled an accelerated deficit reduction program. All three EU countries are struggling with record deficits, rising debt and economies mired in recession or barely growing.

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But the ramped-up austerity programs failed to convince investors that the worst was over. The euro lost one-third of a per cent Monday, taking the currency used by 16 EU countries to its lowest level - $1.26 (U.S.) - since March, 2009.

Investors and economists fear a no-win situation. Mounting public resistance to the austerity programs could reduce the governments' will to see them through, raising the likelihood of a prolonged debt crisis. At the same time, the austerity measures threaten to dampen the growth that the highly indebted countries need to help repair their fiscal health.

Traders and strategists said there was no compelling reason to own the euro because of the uncertainty over the success of the austerity efforts and the grim outlook for growth in the euro zone, the 16 EU countries that share the euro.

In note published Thursday, Alan Ruskin, head of Royal Bank of Scotland's foreign exchange strategy, said the euro "can easily head through parity" with the U.S. dollar if the deficit crisis persists. He thinks the euro could drop to as low as $1.16 by the end of the year and $1.14 by the middle of 2011.

The Portuguese and Spanish austerity efforts met with anger from trade unions. Spain's General Union of Workers, announced a strike for June 2 to protest against the new pay cuts. Portuguese union leaders called for a "mobilization" against the new measures and Greek workers promised more general strikes later this month. Athens has been paralyzed by strikes and protests on and off since the start of the year, including one last week that killed three people.

Greek resistance to the austerity efforts is mounting by the day because workers think it will wipe out employment opportunities for years. That sentiment was reinforced Thursday when the official Greek unemployment rate jumped almost a full percentage point to 12.1 per cent, a six-year high, although the unions think the true figure is higher. The International Monetary Fund has forecast that Greek unemployment will climb to 14.8 per cent in 2012.

The Washington-based IMF and the European Commission, the EU's executive arm, announced a €750-billion ($960-billion) emergency stabilization mechanism Monday. It will allow struggling EU countries to roll over their bonds and finance their deficits in the event they can't do so themselves. But access to the loans is conditional on the implementation of stringent austerity measures, which will be monitored by the IMF.

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Under pressure to meet the EC and IMF conditions, Portugal now vows to reduce its budget deficit to 4.6 per cent of gross domestic product, compared with its previous estimate of 5.1 per cent and its actual 2009 deficit of 9.4 per cent, a record high.

To get there, the Portuguese government put in place a 5-per-cent pay cut for government officials, a one-percentage-point rise in the value-added tax, a 2.5-point rise in company taxes (except for small businesses) and a partial freeze on pensions, among other measures. The goal is to crunch spending by €15-billion over two years.

Spain's new fiscal measures were similar, though even more aggressive. On top of a 5-per-cent public sector pay reduction, some 13,000 civil service jobs are to disappear in 2010.

Economists predict Spain faces years of misery even if its fiscal repair effort brings down its bond yields and restores liquidity. That's because Spain has no obvious growth engine. "To solve its problems, Spain needs economic growth, probably of the same magnitude as the growth that was generated by the unsustainable housing construction boom of the past decades," UBS said in a report. "With no clear substitute for the construction sector as a growth engine, we think that growth will be far slower than in the boom years."

German Chancellor Angela Merkel suggested again Thursday that future crises can only be avoided if the euro zone countries come together, meaning some economic and political sovereignty will have to be sacrificed.

"If the euro fails, not only the currency fails. Europe fails too, and the idea of European unification," she said. "We have a common currency, but no common political and economic union. And this is exactly what we must change."

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EU austerity measures

Portugal

Prime Minister Jose Socrates and opposition leader Pedro Passos Coelho drew up steps to slash the budget deficit, including 5 per cent pay cuts for senior public sector staff and politicians, and increases of the VAT sales tax, income tax and profits tax ranging from 1 to 2.5 per cent.

France

In an effort to keep a lid on the budget deficit, France has said it will freeze all spending, except pensions and interest payments, between 2011-13 and cut state operating costs by 10 per cent over the same period.

Greece

Greece has approved a pension reform bill and plans to narrow its budget shortfall from 13.6 per cent of GDP in 2009 to 8.1 per cent this year, 7.6 per cent in 2011 and 2.6 per cent in 2014. Austerity measures include public sector pay freeze; tax hikes on fuel, cigarettes and alcohol; and a one-time tax on highly profitable companies.

Spain

Spending cuts will total €15-billion ($19-billion) in 2010 and 2011; civil service salaries will be cut by 5 per cent in 2010 and frozen in 2011, while more than €6-billion will be cut from public investment.

Ireland

Has seen three austerity budgets since October, 2008; the first two focused on tax increases, while last December's budget 2010 drew praise as it delivered spending cuts of €4-billion, including a cut in public sector pay.

Reuters

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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