MADRID — Portugal was once seen as a role model in the euro debt crisis as its conservative government stuck to the stringent terms of a 78 billion euro bailout negotiated with international creditors two years ago. But it has now earned a very different distinction as the test case of the limits of the austerity plans that have been prescribed across Southern Europe.

Last Friday, Portugal’s constitutional court struck down four of nine contested austerity measures that the government had introduced as part of its 2013 budget. The measures rejected by the court represented between 1 billion euros and 1.4 billion euros, or $1.8 billion — more than a fifth — of the 5 billion euro austerity package of spending cuts and tax increases. Among its rulings, the court drew a line on cuts aimed specifically at civil servants, who it said were being singled out for punishment and therefore discriminated against.

The decision has now called into question how the government can meet its budgetary goals in the near term and raised the broader issue of just how much austerity will be tolerated, not only by disgruntled citizens but also by justices who often act as the guardians of the Continent’s cherished social welfare system.

“The ruling could be interpreted as saying that all public spending cuts that affect civil servants are unconstitutional,” Fitch, the credit rating agency, wrote on Monday. “If that interpretation is correct, the ruling represents a setback to future fiscal adjustment efforts in Portugal.”

It added, “This is a greater concern than its immediate impact.”

On Sunday, Prime Minister Pedro Passos Coelho warned his citizens to prepare for more hardship as his government would impose deeper spending cuts in areas like health and education to compensate for some austerity measures struck down by the country’s constitutional court.

While Mr. Passos Coelho’s determination to stick to the austerity script won immediate praise from Brussels, creditors are due back in Lisbon in coming weeks to assess just how far Portugal’s budgetary planning has been derailed by the court ruling.

The creditors may well find that Portugal has been left “between a rock and a hard place” — the headline of a Barclays Capital report issued Monday, in which analysts warned that “negative growth, rising unemployment and delayed fiscal targets could even push Portugal to require additional official funding in 2014.”

Portugal’s constitutional court — made up of 13 judges, most of whom are elected by lawmakers — can rule on the conformity of all legal statutes and as such has taken issue with provisions in the state budget in the past. In fact, Diogo Ortigão Ramos, a partner at the law firm Cuatrecasas, Gonçalves Pereira in Lisbon, said the court’s latest arguments against possible fiscal discrimination between public and private sector employees were “not surprising” and in line with a similar ruling by the court last year.

But Luis Cabral, a Portuguese economist and professor at New York University, said the court still went beyond a legal ruling and delivered what amounted to “a significant political statement,” which means that “effectively, government expenditure cannot be reduced.” In terms of Portugal’s budgetary commitments, Mr. Cabral added, “when you put it all together, it’s clear that things do not add up.”

Politicians in some other ailing euro economies are watching the latest upheaval in Lisbon closely, aware that they, too, might soon be forced to revise their fiscal calculations, as their country’s financing problems grind on, their economies remain in recession and their own courts review some of their recent economic measures.

In Spain, for instance, the constitutional court agreed last November to consider a complaint filed by left-wing Spanish politicians against the government’s labor market reform, which loosened collective bargaining agreements and made it easier and less costly for employers to lay off workers. The plaintiffs want the court to strike down the overhaul as an unconstitutional breach of the “democratic model of labor relations.”

Article source: http://www.nytimes.com/2013/04/09/business/global/09iht-euportugal09.html?partner=rss&emc=rss