The terms of the bailout provided 78 billion euros ($106 billion) worth of loans to the government of Portugal over a three-year period, at an interest rate of 3 percent - a much lower rate than bond markets were offering Portugal in early 2011.

Spooked by a perceived risk that Portugal might exit the eurozone and partially default on its euro-denominated bonds, bond markets charged a risk premium of 7 percent on Portugal's ten-year sovereign bonds compared to benchmark German bunds.

Now Portugal has re-entered the bond markets after a three-year hiatus, and the risk premium on its 10-year bonds has declined to about 2 percent over German bunds.

But the reduced premium is likely due primarily to the European Central Bank's implied blanket guarantee that it will back all eurozone sovereign bonds, and less an effect of the Portuguese government's imposition of a severe austerity program.

ECB safeguards

The implied guarantee was given by ECB President Mario Draghi when he said in July 2012 that the ECB would do "whatever it takes to preserve the euro", which bond markets understood to include direct purchases of sovereign bonds by the ECB if necessary to prevent sovereign defaults.

In exchange for the 78-billion-euro loan, Portugal agreed to implement a program of fiscal consolidation and 'restructuring' imposed by its bailout creditors. This entailed major decreases in Portuguese public spending, privatization of publicly owned assets (airlines, airports, seaports, parts of the health service, media outlets, etc.), and reductions in wages, benefits, and job security for much of the Portuguese population, coupled with tax increases.

Portugal has gone through several years of painful austerity, unpopular and controversial reforms, and economic contraction. Austerity and reforms were meant to reset Portugal's economy for greater competitiveness after a period of painful structural adjustments.

The government and its creditors say the restructuring program is succeeding, with the country showing signs of emerging from three consecutive years of recession this year - although growth projections remain anemic, at just over 1 percent this year and next, and unemployment is still high at 15.4 percent. But massive emigration - not job creation - may be the main reason the unemployment rate is down two points from 17.6 percent a year ago.

Widely differing views

Some economists and opposition politicians say the wave of cutbacks was unnecessary and counterproductive. Macroeconomists are divided into several competing schools. Eurozone austerity policy is dominated by neoliberal economists, who believe that government spending crowds out private spending and that maximally efficient markets are the key to growth and prosperity.

That's why they tend to oppose minimum wage laws or job protection laws and insist on low taxes and government budget cutbacks.

Keynesians by contrast, emphasize the importance of aggregate demand, and post-Keynesians also stress the importance of monetary factors. Post-Keynesians like Professor Mark Blyth say the economic crisis in southern Europe and Ireland was not caused by excessive government spending, but rather by governments' decision to bail out banks after a massive bubble in real estate mortgage lending had collapsed, putting the eurozone's entire banking system at risk of insolvency.

In order to prevent the collapse, and protect creditors and owners of banks, governments in effect took gigantic amounts of bad loans onto the public balance sheet. This caused aggregate public debt to swell dramatically after the onset of the 2008 financial crisis.

Even though this increase in public debt had nothing at all to do with public overspending -- and everything to do with bank bailouts - neoliberal economic policymakers claimed that government "overspending" was the cause of Europe's economic woes, and that austerity was the solution.

Debt load remains high

Nor did austerity actually slow the rate at which public debt accumulated in Portugal or other countries subject to the policy. The increase in unemployment and decrease in business activity in austerity-hit countries caused tax revenues to decline and social spending to increase, leading to an increase in aggregate public debt.

But Portugal's commitment to the bailout program has been exemplary in the eyes of its creditor institutions. Portuguese Prime Minister Pedro Passos Coelho became head of government as a consequence of a national election in June 2011, after the bailout program had already been agreed by the preceding government.

He showed strong commitment to a full implementation of the program, despite massive popular opposition to some of the measures entailed - such as cuts in wages, pension and health benefits. And he has harvested great praise from German Chancellor Merkel and others who defend "fiscal consolidation" and "restructuring" policies, regardless of the criticism of others.