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European Union states, especially Britain, France, and Germany are due to support an emergency bailout of Portugal to the tune of about $100 billion. While the Socialist government in Lisbon tried to stave off the bitter pill through a series of austerity plans, Prime Minister Jose Socrates’ government finally collapsed.

Now new elections have been called for June. Yet Lisbon’s looming cloud of debt has not disappeared, but has become a foggy miasma on the River Tagus. No matter which party wins the elections, (hopefully it will be the market-oriented Social Democrats, the PSD), the new Parliament nonetheless faces a deepening debt comprising 85 percent of the GDP. (In the USA the debt now equals slightly more than 102 percent of the GDP!) The new Lisbon government will confront the albatross of 11 percent unemployment, and a falling GDP; an aftershock of both the global economic downturn and a legacy of the current Socialist government.

Though a small country of ten and a half million people, in Portugal the State, Estado, has historically played a powerful role through creating a bloated bureaucracy and spending. While impressive free market reforms and an export oriented economy had been part of Portugal in the 1990’s, the state sector remains stifling, burdensome and constrictive.

Now to forestall a wider financial crisis in Portugal, the bankers and Eurocrats are looking at a bailout of between 60 and 85 billion Euros. Just a year ago, the Greek “rescue package” was 110 billion Euros, and Ireland received 85 billion Euros. But European bankers and some politicians are demanding more government cuts and needed austerity in debtor states. “Whoever needs assistance by other European member states and member states of the euro zone, has to deliver sustainable measures for reducing the deficits, because the deficits are the reason why they need help,” advised Germany’s Finance Minister, Wolfgang Schaeuble.

Bankers and politicians worry that “contagion” (a nicer word for falling dominos) of the debt crisis stops here in Portugal. Yet also sharing the Iberian peninsula, Spain stands nervously. Should the “contagion” (let’s be polite) reach across to Spain’s far larger and debt ridden economy, there will be red faces throughout Euroland.

One problem remains that any EU and IMF bailout will impose stiff rules and regulations which while forcing higher taxes and budget cuts will not necessarily encourage needed productivity.

Back in 1983 when Portugal’s economy received an IMF package, the result was higher productivity and exports. But imposing bitter medicine penury on Portugal over needed labor reforms and productivity offers just another stopgap. The key element needed for reviving Portugal’s moribund economy is not higher taxes or a straightjacket of IMF “policy reforms” but labor market reforms to make the country’s quality products internationally competitive.

In the bigger picture, the looming iceberg remains the fate and future of the single European currency, the Euro, which is used by most EU members but not Britain. Countries like Greece, Ireland and Portugal (as well as Spain) are among 17 Eurozone members, largely subsidized by Britain, France, Germany and the Netherlands.

Now that financial realities are setting in, the vaunted European Dream, that of the Euro currency, has become restive and could turn into a nightmare. While it’s easy to brush off Portugal’s crisis as the symptom of small countries with big debts, now look to the United States, a large country with a massive debt.

Profligate government spending and all kinds of bailouts have failed to significantly dent high unemployment or restart a sluggish economy. Currently the United States debt has soared from $9 trillion in 2008 to over $15 trillion in the Obama administration’s current budget. High profile budget battles in Washington have been more feather fights than substance.

Whether it is the European Union or the USA, the bottom line remains governments cannot continue to spend at the same high unsustainable levels until there is a genuine recovery in productivity. And better economies may be held hostage to high debt.