PORTUGAL’S VOTE HIGHLIGHTS ANOTHER EU DEBT-PLAN FLAW

Washington, March 24 (MarketWatch)- In between making puns about the resignation of Jose Socrates -cue up the hemlock, please- Wednesday’s vote in the Portuguese parliament highlights a pretty basic flaw as Europe tries to unravel its growing debt crisis.

The flaw is simple, there’s basically no incentive for a debt-ravaged country that isn’t bailed out to take further debt-slashing steps.

Why should Portugal hike taxes or cut spending at this point? The international bond market has already shoved them into the arms of the European Union and International Monetary Fund, with sky-high payments that make it unrealistic for the country to roll over debt that’s about to mature.

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Portugal, by European standards, hasn’t even been that bad an actor -it hasn’t played financial hokey-pokey like Greece, and didn’t have a wildly unregulated banking sector like Ireland. But it hasn’t been growing fast enough to support its generous safety net and so the inevitable bailout awaits. Read full story about Portugal’s parliament rejecting austerity plan.

The bigger question that Germany’s Angela Merkel and France’s Nicolas Sarkozy have yet to answer is how exactly the struggling countries are supposed to escape their predicament. The very austerity measures they are taking are worsening, rather than improving, their fiscal situation. On a quarter-on-quarter basis, Greece’s economy contracted 1.4% in the fourth quarter, Portugal’s fell 0.3%, Spain rose a modest 0.2% and Ireland, well, the data still isn’t even in yet, but isn’t likely to be great.

Perhaps the idea is to weaken the euro-zone laggards to such an extent that German exports will grow still faster in the face of fading competition. Then, the euro zone’s largest economy will implement the Big Rescue in 2013 when new rules will allow a country to share the cost of a default with private bond holders as well as sovereign nations.

That is, if German voters allow it. In the meantime, back up the truck and buy the DAX.

And even were a still-bigger German rescue in the offing, a restructuring is only as useful as deep as it goes, so start the debate now on whether Greece should be able to write off 25 cents or 50 cents or 75 cents on the dollar.

Of course, assuming Germany has any plan is probably overstating the matter. Europe’s creditors have ambled from crisis to crisis with barely a thought as to the next week yet alone year.

Now Europe’s debtors are doing the same. And who can blame them.

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