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Portugal Fires Warning Shot for Austerity in Europe

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With Portugal's main court rejecting cost-cutting measures which are central to financial aid, the country's already faltering austerity program has been thrown into further doubt, adding to pressure on the euro zone, analysts told CNBC.

"Fiscal austerity in Portugal is failing," Nick Spiro, head of Spiro Sovereign Strategy, told CNBC. "Portugal's 2011 bailout program went off track some time ago. If it were not for the troika's leniency and the dramatic rally in Portuguese debt, the program would have already failed by now."

Portugal's prime minister warned this weekend that more spending cuts are coming, in order to meet the conditions of the 78 billion euro ($101 billion) bailout it received in 2011. His comments came after the country's Constitutional Court ruled on Friday that wage and pension cuts to public sector workers were unlawful.

Speaking in a televised address on Sunday, Pedro Passos Coelho responded to the ruling saying that it posed "serious obstacles and risks" to the 2013 and 2014 budget and had "very serious consequences" for the country.

The European Commission responded late on Sunday by saying that Portugal must fulfill its bailout commitments to get an extension of maturity payments, which it requested along with Ireland.

(Read More: Are Markets Too Complacent Over Cyprus?)

"The court's ruling is the latest in a string of social, political and legal setbacks for the Passos Coelho government. Taken together, they undermine the credibility of Portugal's adjustment efforts and threaten the Treasury's plans to regain full access to the debt markets," Spiro told CNBC.

Another economist told CNBC that reforms in Portugal were "not solving the country's problems."

"The external trade deficit of Portugal has gone down, exports have gone up, but unemployment will remain at 17 percent for the next four years, so you still have an economy that is still deeply in recession," Luciano Jannelli, chief economist at MIG Bank, told CNBC on Monday. "Increasing taxes is extremely painful, and the government has said they will not do it, but it seems to me that this is the only thing that they can do," Jannelli told CNBC Europe's "Squawk Box."

Recent events in Europe such as the inconclusive elections in Italy and Cyprus' financial crisis have forced the European Central Bank (ECB) and European officials into new fire-fighting measures to protect the euro and to avert further fragmentation in the region.

U.S. Treasury Secretary Jack Lew is beginning a two-day visit to Europe on Monday and Portugal is expected to be on the agenda, along with Cyprus, Italy and other erstwhile bailed-out nations. There are now five recipients of European bailouts in the euro zone, and Slovenia could be the next to need financial aid.

(Read More: Lew's Europe Visit Comes at a Critical Time for Euro)

Spiro said that while the Portuguese government was "likely to soldier on for the time being" there was "no real domestic anchor for the bailout program," a characteristic that he saw as representative of the wider euro zone.

"The resistance to draconian fiscal retrenchment in southern Europe is manifest. Not only is the opposition to austerity social and political, it's [now] legal too," Spiro said.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Contact Europe: Economy