European Integration
Ambiguity in Portugal

Since Portugal's accession to the EC in 1986, its government has regarded the single market programme as a major political challenge, and the export sector has performed well during the subsequent investment boom. But in Discussion Paper No. 378, Research Fellow Jorge Braga de Macedo argues that traditional ambiguity towards external liberalization continues to impede Portugal's response to 1992.
Relaxation of entry requirements into banking since 1985 and privatization of the old banks, begun in 1989, have made it more difficult for the government to use the banks as implicit tax collectors. But the frozen state of banking and a disguised fiscal policy still constrain monetary and exchange rate policy. A problem of competitiveness may also arise, since Braga de Macedo's simulations suggest that the crawling peg no longer raises the relative price of tradables. EMS membership would bring considerable benefits of credibility, he notes: no risk premium and no inflationary expectations. But the continuing failure to restrain public finances reveals fundamental ambiguity in the fight against inflation. Until the fiscal problem is deal with, Braga de Macedo concludes, the necessary disinflation to allow active monetary policy and EMS entry will not be achieved.
This paper was produced for the CEPR project on `Economic Integration in the Enlarged European Community', described more fully in Bulletin No. 36

External Liberalization with Ambiguous Public Response: The Experience of Portugal
Jorge Braga de Macedo

Discussion Paper No. 378, February 1990 (IM)