A NATO country has shot down a Russian plane. The refugee influx is threatening to unravel the Schengen Treaty of free movement. Germany’s Merkel celebrated her tenth anniversary as Chancellor this past weekend, but she faces one of the most serious challenges of her tenure.  

Portugal accounts for less than 2% of the eurozone GDP. We argue, that like Greece, Portugal’s importance is greater than the size of its economy.Among the political challenges Europe faces, the Iberian peninsula should not be under-estimated.  

Portugal had been heralded as a success of the austerity regime. When others in southern Europe whined about the counter-productiveness of austerity during an economic downturn, the creditors would point to Portugal to show what was possible. Portugal completed its assistance program last year. It has been able to return to the capital markets. Unemployment has fallen from around 17.5% to below 12%.   

Portugal has begun growing. After contracting in 2011-2013, the Portuguese economy expanded by almost 1% last year and is on track for a little more than 1.5% this year. The official forecasts call for near 2% growth next year and 2017. 

Growth helps ease the debt burden. However, despite the growth and decline in bond yields, Portugal’s growth is less than the average interest rate on its debt. This means that debt as a percentage of GDP is still rising.It stands near 130% of GDP. The EU fiscal rules require country’s with debt in excess of 60% of GDP to run budget surpluses to bring the debt levels down. Even if the fiscal rules are not vigorously enforced, Portugal is facing demands for austerity for years to come. This is untenable. 

The majority center-right government lost its majority in the recent election. As a minority government,t it could not win acceptance of its budget, and the government collapsed. A loose alliance of the Socialists, Communists and Left Bloc defeated the minority government, and after a lot of back and forth, the president is allowing the head of the Socialists Costa to form a new government.