SITTING in the sun-dappled square where Seixal's old town meets the River Tagus, Umberto Da Silva was clear about who would suffer as Portugal became the latest victim of Europe's snowballing sovereign debt crisis.

“It is the poor who will pay,” the retired factory worker bemoaned. “They are already cutting subsidies. But we will fight, just as we have always done.” The red flags, unashamedly decorated with the hammer and sickle, that fluttered on the nearby headquarters of the local Portuguese communist party were a clue to the immense political battle awaiting Prime Minister Jose Socrates as he tries to see off a Greek-style debt debacle.

The communists head a red-green coalition that governs this and a swath of large, battered industrial towns on the south bank of the Tagus, across from the capital Lisbon. “They are not real communists any more,” said Da Silva, who spent five years in the jails of former dictator Salazar. “But they are all we've got.”

It is in these smoke-stack towns, with their ailing shipyards, run-down iron-mills and empty factories, that the long-running drama of Portugal's troubled adjustment to the globalised economy has been most painfully played out. One in eight workers in the region cannot find jobs — a rate 25 per cent higher than the national average.

As Prime Minister Socrates recently announced further plans to bring forward austerity measures originally mooted for next year, these towns were busy preparing to turn traditional May Day demonstrations into the opening shots of a battle to stem the tide of cuts.

“We do not understand why we must answer to international bankers instead of the people we have elected,” said Rui Paixao, coordinator of the local Trade Unions Coalition in the nearby city of Setubal, as a Tannoy system blared out calls to join the demonstrations. “They are the ones who caused the global crisis, but now they demand we pay them high interest on our debt.”

Recently transport workers went on strike to complain about austerity measures. Unemployment benefits, pensions and family benefits were already being frozen or cut, according to Paixao.

The turmoil, and the pain to come, is making the Portuguese reassess the enthusiasm with which they embraced the euro — once taken as proof that they had joined the club of developed European nations. “Portugal is nearly bankrupt,” said 39-year-old construction worker Carlos Gouveia as he queued at the employment office in Setubal, looking for his first job in 18 months. “At least in Britain they have the pound.”

Economist Joao Assuncao, of the Catholic University of Portugal, said the euro had been good to Portugal but admitted it had been naive about the way it joined. “In retrospect we probably joined at too high an exchange rate, given our competitiveness,” he said.

While euro membership and EU funds brought fast growth to neighbouring Spain and Greece, Portugal experienced a lost decade of flat growth and increasing national debt. Traditional industries such as textiles and footwear could not compete with imports from China and Asia, while cheap eastern European labour took away new investment. The Czech Republic, Slovenia and Greece all strode past Portugal as it tumbled down Europe's per capita GDP ranking.

The dazzling buildings left behind by Lisbon's 1998 Expo or the Euro 2004 football tournaments, however, along with the cars and other goods bought on cheap euro credit persuaded many Portuguese that they were wealthy. Few thought that Germany or France, having welcomed them as customers for their goods, might require rigorous austerity when times got tough.

Governments, meanwhile, behaved as if they still had the escudo — a currency they regularly devalued when deficits soared or the economy became uncompetitive. “Our political leadership was used to having the option of devaluing,” explained Prof Assuncao.

“They did not fully understand the meaning of losing that option in terms of managing public finances.”

Some public-spending commitments, he added, became “time-bombs” that had proved difficult to defuse without a currency to devalue. A barrage of glum figures added to Prime Minister Socrates's woes. Unemployment rose to 10.5 per cent in March and an opinion poll put his Socialist Party significantly behind the opposition, centre-right Social Democrats for the first time since he became party leader six years ago.

Socrates, who heads a minority government elected last year, agreed that austerity measures should be jointly planned with the Social Democrats. The latter have said they want to get even tougher on spending.

For Gouveia and others queuing at Setubal's unemployment office, it was a sign that their prospects of finding work were worsening.

— The Guardian, London