The court ruled that the Portuguese government violated that constitutional requirement for an equitable distribution of austerity and prevents the discrimination of state workers over the private sector. Four of nine austerity measures were rendered unconstitutional.
These include the suspension of civil servants holiday pay, the cut in pensions, the tax on unemployment and health benefits and the cuts salaries for teachers, researchers, and scholarship holders. All told around 1.3 bln euros of savings (~1% of GDP) were disallowed and it is not just about what happens going forward, the court decision is retroactive to the start of the year and the government will have to compensate the state workers and pensioners.
The government expressed shock at the decision and met on Saturday. Last year the court blocked the intended reduction in state workers' pay in 2013 and 2014 (though allowed the cuts in 2012). The new measures were devised to replace those that had been struck down last year.
The implications can be momentous. It could jeopardize the next tranche of aid payment. It could jeopardize the government's effort to return to the capital markets. It could deter the euro group of finance ministers from agreeing to extend the maturities on Portugal's EFSF/ESM borrowings, which was possible toward the end of next week. The court ruling could embolden the opposition and strengthen trade union pressure, after the government survived a vote of confidence in the middle of last week.