EU leaders know that financial bailouts have political consequences

The sovereign debt crisis that has already produced three eurozone bailouts poses dangers for politicians across the European Union.

The financial crises that have hit Greece, Spain and now Portugal since the start of 2010 continue to wreak political devastation across Europe. Governments in Ireland and Portugal have fallen in recent months; Premier Papandreou survived the turbulence that hit Greece last year only because he had been in office for a mere seven months when the crisis hit.

This week, as Portugal swallows its pride and approaches the EU for a loan that could reach 80bn euros, political reverberations from the edges of the European Union have again touched Germany, cornerstone of the euro and Europe's economic powerhouse.

The announcement this week that Portugal has asked the EU for financial assistance in the face of mounting government debt came after the Portuguese parliament rejected a package of austerity measures designed to avert precisely such an eventuality.

On 23 March Prime Minister Jose Socrates submitted his resignation to President Anibal Cavaco Silva. Socrates remains Portugal's caretaker premier ahead of the general election in June, but opinion polls suggest he will be replaced by Pedro Passos Coelho, leader of the centre-right Social Democratic Party.

If the EU does bail out Portugal, the country will become the third eurozone member to suffer such a humiliation in less than a year. Georgios Papandreou became Greece’s 182nd prime minister in October 2009. Seven months later, his country was bailed out by the EU and IMF to the sum of 110bn euros after it emerged previous governments had consistently misreported economic statistics to conceal the size of the Greek deficit.

Then, in November, the government of the Irish Republic, under former Taoiseach Brian Cowen, took £85bn from the EU and IMF. At the heart of Ireland's financial malaise was its banks' exposure to the Irish property bubble. Cowen and his Fianna Fail government were the inevitable political casualties of Ireland's bailout, with Fine Gael's Enda Kenny replacing him as Taoiseach on 9 March.

Portugal's problems are the direct consequence neither of financial impropriety nor rashness. Excessive debt, combined with relatively high government spending in recent years, has pushed the country into a spiral of low growth, with double-dip recession on the horizon.

The result is that Portugal has had to raise yields on its bond issues. The return on its 10-year bond currently stands at 8.59 per cent, down on yesterday's record high of 8.78 per cent. Difficulty in raising money on international markets prompted Portuguese Finance Minister Fernando Teixeira dos Santos to announce yesterday: "I believe it is necessary to resort to the financing mechanisms available in Europe."

The fear is that Spain, the eurozone’s fourth largest economy, will be infected by financial contagion from its Iberian neighbour. Guru economist Nouriel Roubini has said: "Spain is too big to fail, on one side - and also too big to be bailed out." But its unemployment rate stands at 20 per cent, its real estate market – like Ireland's – was devastated by the economic crisis of 2008, and its economy is mired in a cycle of sluggish growth.

Finance Minister Elena Salgado insisted this week that her nation would not require intervention. In recent months Spain Socialist government has pushed though a range of austerity measures, which have reassured investors. And yields on Spanish bonds in the wake of Portugal's announcement appear to have been unaffected.

Meanwhile, Germany's Angela Merkel continues to play her domestic and international audiences off each other. And her hawkishness on the subject of sovereign bailouts is in contrast to her finance minister, Wolfgang Schauble, who has hailed Portugal's rescue request as a "sensible and necessary step".

With Germany enjoying high economic growth, the European Central Bank raised interest rates to 1.25 per cent - which could, in turn, add to the problems of debt-ridden countries. "The paradox," says Waltraud Schelkle of the LSE's European Institute, "is that she cannot capitalise at the moment on German economic growth that is astonishingly good."