Stoppage strikes at the very heart of Portugal

The Christmas lights are already on in Lisbon, but there was precious little festive cheer in the Portuguese capital yesterday. Certainly not at 6am outside the municipal bus depot at Pontinha. The buses that should have carried Lisbon's commuters to work stood idle while their drivers huddled against the rain.

The Pontinha drivers are the front line of a trial of strength between the government and the CGTP trade union confederation which called a one-day strike yesterday over plans to reform the labour laws. It marks a new low in the union's battle with the government as private as well as public workers were called out.

"The government is too autocratic," says Carlos Fonseca a 34-year-old married man with two children. He joined the strike even though his union is not affiliated to the 800,000 strong CGTP. "It is a clear attempt against workers rights. If this is passed we could be compelled to work overtime without getting paid."

Across from the bus depot is the Pontinho's smart new Metro station. The station, however, is deserted. Outside, a handful of disappointed commuters cluster hoping something might turn up. Marcos, a middle-aged man is less than impressed. "I can understand to an extent but it can't be a good thing," he mutters. Just then the radio reveals that the bus company hired to supply replacements for the metro trains has been hit by a strike too. Marcos wasn't the only one finding getting to work a problem. The strike disrupted rail and bus services across the country.

Other public services such as fire, hospitals and local government were affected while the CGTP also claimed support from the private sector, though it is impossible to tell how many supported the strike and how many simply couldn't get to work because of the lack of transport.

Pickets at Volkswagen's Auto-Europe plant claimed 80% of the factory's 3,300 employees had backed the strike though the company put the figure at 60% and said it had been able to maintain production.

The strike comes at a critical time for Portugal. The centre right coalition which took over earlier this year is a model of eurozone economic orthodoxy. After the previous centre-left government drove a bus through the eurozone's stability and growth pact rules by running up a budget deficit of 4.1% last year, the new team pledged itself to the cause of fiscal rectitude.

It slapped a two percentage point increase on VAT and is cutting spending. As if that wasn't enough, it is now pushing through extensive reforms of the country's labour laws - the issue which has prompted the CGTP to strike but which wins plaudits from the central bankers in Frankfurt who see structural reform as essential to budget discipline.

Such behaviour could conceivably cast Portugal as a test bed for eurozone economics, especially in the context of enlargement which will bring in a raft of new members anxious to play economic catch-up with their richer neighbours. Manuel Carvalho da Silva, head of the CGTP reckons it already has. He believes there is an attack on workers rights which is more intensive in southern Europe. "We are guinea pigs," he says.

Modernisers insist that Portugal needs to amend parts of its labour legislation. Though it has been reviewed many times it was originally drawn up just after the establishment of democracy in Portugal in the 1970s and for that reason has a resonance for some beyond the strict letter of the code.

Some blame it for an overly bureaucratic civil service and for encouraging absenteeism. They see the creation of a more flexible labour market as essential if Portugal is to boost its productivity to compete for investment against the European Union's new entrants.

Mr da Silva acknowledges the need for reform but dismisses arguments that labour market rigidities are costing Portugal badly needed foreign direct investment. Companies such as car makers Volkswagen and Opel, tyre-maker Continental and electronics group Siemens, he says, have come to Portugal and have brought the vocational training the country needs. Much better to have that kind of investment than to attract investors interested only in a kicking contest with the likes of Chinese producers over who can turn out the lowest cost shirts.

Nor is there likely to be any backsliding on budget rigour. Sources say this is not a question of bullying Brussels being beastly to plucky Portugal. They argue that Portugal is paying the price for profligacy in the 1990s when a booming economy and cheap credit saw a surge in consumer demand, strong growth and healthy revenues. Blame the previous government not the European commission, they say.

The snag is the government will find it tough to get the country's budget busting finances back under control. It has pledged to do so this year but, with the economy barely in forward motion, that looks as likely as San Marino winning the European Championship. The Bank of Portugal, for example, said in September that it was concerned about the government's ability to meet its deficit slimming aspirations. Since then it has downgraded its forecast to "unlikely". Enough said.

The immediate future does not look that bright either. With consumer demand on the floor and government spending on the leash, Portugal is heavily dependent on the rest of the EU - which accounts for 85% of exports. The OECD says 1.5% growth next year and around 2.5% in 2004. Don't hold your breath.

Still that may be no more than a political embarrassment for the government. Sources suggest Brussels has accepted that, as the 2001 deficit was only discovered in 2002, then 2002 itself should not constitute a second successive year of deficit excess.

Not that the unions are too impressed with the argument that where there is a monetary union there have to be rules. If the government is to meet its targets expect more pain. Yes, but only if it's shared by everyone, says Mr da Silva. Don't expect the workers to make all the sacrifices. Maybe the tax dodgers and the black economy should be prepared to contribute their share, too.

Meanwhile the government says it will continue to try to win agreement for the code. The CGTP remains adamantly opposed. Marcos may find a few more mornings when the journey to work proves trickier than usual.