Portugal hungry for place in first wave of monetary union

Date: 06/06/1996

By Fernando de Sousa

HIGHER growth and more jobs are seen by the Portuguese government as some of the prizes to be won by members of the single currency bloc after a long period of austerity demanded by efforts to meet the 'convergence criteria'.

Ministers and businessmen also frequently point out that the Portuguese economy is too dependent on that of its neighbours to be able to risk being left out of EMU.

One source said that in such a situation “the economy could become isolated and be penalised by the markets. This would bring further difficulties in view of a later accession.”

That is why Portugal is doing its best to be among the first group to qualify for the single currency. But Lisbon is equally anxious that Spain should also be part of the first wave.

This is seen as crucial for the two countries to maintain the pace of growing economic integration which began with their joint accession to the EC.

Spanish efforts to meet the Maastricht criteria are thus followed closely in Lisbon. Portuguese ministers are keenly awaiting the first results of the strategy adopted by the new Spanish government of José Maria Aznar. Their verdict on the performance of the former Socialist government of Felipe Gonzaléz was “so far, so good” and Lisbon expects Aznar to keep up the pace.

The dilemma for Portugal is clear cut. If it were to qualify for EMU on 1 January 1999 while Spain remained outside, that could cause problems for the Portuguese economy - raising the prospect that Madrid might opt for competitive devaluations of the peseta while Lisbon was locked into the fixed value of the Euro.

Portugal has already been forced to devalue its escudo, following the path trodden by the peseta, simply to maintain its competitiveness.

The last informal meeting of finance ministers in Verona helped to assuage some of these fears. The exchange stability of the proposed ERM Mark II, expected to govern the relationship between the 'out' currencies and the Euro, would limit the room for such devaluations by countries outside the single currency zone.

The effects of any Spanish devaluation would also be limited by the fact that trade exchanges between Portugal and Spain account for a lower proportion of Lisbon's total foreign trade than might be expected. Portugal has stronger links with the deutschemark zone countries - which account for about 35&percent; of its entire European trade - than with Spain, which accounts for just 17&percent;.

This share-out of Portuguese foreign trade helps explain why EMU is so important for Lisbon.

The same factors could also limit any negative effects of a situation whereby Portugal remained outside EMU, while Spain went in.