The euro: No easy way out

Eurozone leaders are in danger of setting Portugal on the same road as Greece

The meeting of European finance ministers has become a theatre of low expectations. Gone are the heady statements that the eurozone crisis can be fixed.

The ministers are quietly satisfied that a bail-out for Portugal has been agreed. Greece - which was supposed to have been patched up a year ago - is in deep trouble again. There is no agreement on a remedy. It must wait for another day, another report.

The interesting feature of the bail-out for Portugal is that it largely draws from the Greek play-book; it's based on a plan that is failing to work in Greece.

The word used repeatedly to describe the Portuguese deal is "ambitious". State industries are to be privatised, the public sector slimmed down. Labour markets are to be loosened up and reformed. Education will be retooled to make college leavers fit for the 21st Century.

The challenge here is not just to squeeze the red ink out of the accounts but to change Portugal's culture. And it is a mighty task. Portugal's first decade using the euro was marked by low growth. But borrowing was cheap, and wages between 2000 and 2009 soared by 37%. Productivity stagnated. Labour costs went up and the country became uncompetitive.

Another lost decade?

Now, under the rescue plan, all of this has to be turned around. Ambitious it sure is. The chief executive of Banco Espirito, Santo Ricardo Salgado, says that if public finances are not dealt with and productivity improved, Portugal can look forward to four years of recession.

When you listen to Portugal's economists there are doubts everywhere. "The key question," says Emilie Gay of Capital Economics, "is whether Portugal can avoid another lost decade of low growth."

So is Portugal ready for a cultural revolution or, like Greece, will it start down the reform road only to encounter opposition, age-old resistance, in which the mood for change quietly burns out?

And the point is that without major changes the EU/IMF plan fails - as it has with Greece. "Without a structural reform agenda," says Antonio Garcia Pascual of Barclays Capital, "it is unlikely the country will grow out of its indebtedness."

In which case Portugal, like Greece, will be back in the emergency ward.

Credibility risk

Which, of course, brings us to Greece.

The truth of the Greek story is relatively simple. In exchange for reducing their deficit they were loaned funds by the EU and the IMF. They set about cutting spending and raising taxes. They promised an era of reform. Twelve months on their debt mountain is only growing. The latest flicker of economic growth will have little impact.

Old practices are returning. Tax revenues are less than expected. A former anti-terrorist boss has been despatched to root out the tax evaders. Only this week a minister was talking about introducing evaluations into the civil service. He said "one of the many problems of the Greek state is that there is no such evaluation system... so no one ensures or has any incentive to perform better." The revolution in Greece has scarcely begun.

The Greek government has played what it considers its best card; 50bn euros (£44bn) of privatisations. The rest of Europe is watching and is yet to be persuaded this is happening.

Sony Kapoor, a former banker, says: "Greece has shown the limits of what can be achieved by austerity alone, without a much stronger focus on growth." He, like so many other economists, favours a restructuring of Greek debt.

The German Chancellor, Angela Merkel, is strongly opposed. She sees it as being incredibly damaging to the eurozone as a whole. "It would raise doubts about our credibility if we were simply to change the rules in the middle of the first programme," she says.

So officials struggle to find a way forward. They fear restructuring and yet they have no realistic plan to slim down the Greek debt mountain.

In Brussels there has been a discussion of re-structuring, yet not in public. They speak of a "re-profiling" whereby Greece's private creditors might be persuaded to agree to an extension of the period over which they get their money back. It will not address the fundamental problem and some finance ministers, like France's Christine Lagarde, oppose it anyway.

So the more likely option is more of the same. The hope that a cocktail of slashing spending, reforming labour markets, and privatising will finally work.

But Portugal has started on a road that has not worked for Greece.