Third time lucky for Portugal - and the eurozone?

What's the difference between a developing country financial crisis and a European one? The answer is that emerging market crises are usually done and dusted in a matter of weeks - whereas in Europe they really like to drag things out.

Watching the eurozone these past two years has been like watching a car crash in really, really slow motion.

It was more than two years ago that senior policy makers - on both sides of the Atlantic - started worrying about a European "leg" of the financial crisis that peaked in the autumn of 2008. European policymakers were urged to think long and hard about the state of their banks, and the deep financial and economic imbalances that had built up in the first 10 years of the single currency - and how they would respond, if and when, these vulnerabilities came to a head.

By and large, these pleas were ignored. European officials preferred to offer short-term support for their banks and their economies - and hope that their long-term weaknesses would quietly go away. Surprise, surprise, that didn't happen. Now Portugal is the third eurozone country to be asked to resolve the single currency's contradictions the hard way.

Unlike the other countries in the mix, Portugal does at least have recent experience of negotiating with the IMF. This will be its third emergency loan from the Fund in the past 25 years. It also had help in 1977 and 1983.

In announcing this deal, the caretaker Prime Minister, Jose Socrates, suggested that the terms of the bail-out were less severe than they had been for the Republic of Ireland and Greece. He is in the middle of an election campaign - we can't know whether that's true until we see more details, notably the interest rate being charged and the structural conditions.

But there's a reason why Portugal was the third in line for a bail-out, not the first: its fiscal situation is not nearly as bad as the Greeks', and its financial system is not nearly as weak as the Republic's - and has not infected the sovereign balance sheet to anything like the same extent. (Though we expect that up to 20bn euros of the 78bn euros will earmarked for the banks.)

It would be surprising, in these circumstances, if Portugal's programme was as tough as the others. But the word is that there will be plenty of structural reforms included in the agreement, including pensions and the labour market, even if the specific areas listed by Mr Socrates have been saved (for example, he suggested there would be no change to the minimum retirement age - which would be surprising, if true).

The few details we do have, showing the budget deficit falling from 9.1% of GDP in 2010 to 3% in 2013, suggest it is tough enough to be getting along with, at least by the purely macroeconomic yardstick of how far the government is being squeezed.

If that timetable appears more generous than it might have been, that is largely because the starting deficit is larger than previously thought. Remember, until recently, we thought the budget deficit in 2010 would 'only' be 7% of GDP.

When you take the higher starting point into account, the pace of deficit reduction is not much slower than the government originally planned. And pretty ambitious, too, when you consider that the EU and the IMF expect the Portuguese economy to shrink by 2% in 2011 and in 2012.

As I noted a while ago, the countries in trouble in the eurozone have a debt problem and a competitiveness problem, and you can't solve one without trying to address the other. As I said then, if one were starting afresh with the single currency, you would want an effective way to manage sovereign debt restructuring. You might also want to think about economic policies which would make it easier for the less developed members of the eurozone to improve their competitiveness without having to suffer years of economic stagnation.

Of course, the eurozone was not starting from scratch in the spring of 2009. But in the past year the debt problem has at least been extensively discussed, even if it is far from being resolved. By contrast, the serious consideration of how countries like Portugal are going to achieve economic growth in the current environment has barely begun. As Greece, Portugal and others have been finding out, a lack of growth can undermine the credibility of a bail-out programme just as quickly as a lack of political resolve.