Crises? What Crises? Escudo from ECO to EMU

• Autor(a) principal: Braga de Macedo, Jorge
• Data de Publicação: 1997
• Tipo de documento: Artigo
• Idioma: eng
• Título da fonte: Repositório Científico de Acesso Aberto de Portugal (Repositórios Cientìficos)
• Texto Completo: http://hdl.handle.net/10362/89010

Portugal joined the European Community in 1985, when the national economy was subject to an inflationary environment and recurrent political and financial crises. In April 1992, only a few months before the pound and the lira floated, the escudo pegged to the ECU. The timing of entry is now bearing fruit as the escudo is likely to be part of the euro with less than seven years in the Exchange Rate Mechanism of the European Monetary System (ERM). This was achieved without speculative attacks even though the change in regime towards stability-oriented macroeconomic policies was completed when the ERM parity grid experienced successive crises, Bringing the "stability culture" to the southwestern periphery in the early I 990s was politically controversial because economy and society were so used- to currency devaluation. Before joining the ERM, the exchange rate regime featured the successive imposition and relaxation of capital controls_ Wage increases and interest rates diverged in 1990/91, before converging to the average of the European Union. The deficit rose in 1991 and in 1993/94, due to electoral and business cycles, while a "double dip" in relative labour productivity growth confused firms and trade unions used to the high positive rates of the late 1980s. Tension between the treasury and the central bank accompanied the move to full currency convertibility in December 1992. The source of tension shifted then to the competence for banking supervision and lasted until June 1994 The proper response of the escudo to successive realignments of the peseta also caused strain until it became clear that the chosen policy did not generate expectations of further depreciation Indeed the covered interest differential against the dollar and the DMark declined steadily from a 1991 peak and volatility in the daily escudo-DMark rate is now lower than when the central bank controlled the currency and attempted to shadow the DMark. The understanding by the Portuguese authorities of the ERM code of conduct as they prepared to join after the 1991 general elections made it possible to acquire financial reputation very quickly. The multilateral surveillance procedures it implies enhanced national credibility abroad even before the policy was accepted at home. As the prime minister brought continuity to the gradual regime change, it was possible for his successive finance ministers to alternate in implementing structural reforms with high external visibility and holding the line domestically. The reconquest of stability implied disposing of the teams who carried out the reforms in the vicinity of local elections in 1989 and 1993 to stress the predominance of domestic objectives. The socialist government has fully accepted the new economic regime and now claims the euro as one its great achievements! Given the fact that there were no reforms before the reshuffle preceding the 1997 local elections, the pressure to step up structural reforms should increase in the run up to EMU. Otherwise the benefits of joining the euro might be "held up" by the inability to use the stability culture as a source of enhanced competitiveness for Portuguese business worldwide.