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Research guide to European Monetary Union Macroeconomic Consequences Emu will see Portugal lose full control over its monetary policy, with fiscal policy being closely tied to the Stability and Growth Pact. This will enhance the need to resort to the income and prices policy, with the government having already approved a Medium Term Social Pact, limiting wage increases. From 1999 onwards Emu will produce enhanced price stability for participants, since the greater part of foreign trade will be carried out in euros. Also on the supply side, the increased European competition generated by monetary integration will lead to a fall in price fluctuations. As far as demand is concerned, the trend is likely to see private demand grow, which will be offset by severe restrictions on public consumption. Direct impacts on public finances are likely to be seen at the level of interest expense and of seignorage income (monetary issue income). There will also be an indirect effect through accelerating growth. Interest expense is expected to fall sharply, given the considerable weight of indexed interest rate debt as a proportion of total debt burdens. There will also be a sharp cut in interest expense on new fixed-income issues, though at a more gradual rate. The Fixed-Income Markets Throughout 1997, the markets will mainly follow the performance of inflation and the public deficit of countries’ whose participation in the euro is still uncertain. The public debt criterion will be evaluated in a more benevolent fashion and long-term interest rates will follow the criterion throughout 1997, as has been the case since mid-1996. By Q4 1997 budget proposals for 1998 will be presented, which will explicitly include necessary measures for fulfiling pubic deficit reductions, as defined in the medium-term convergence plans. At the end of 1997 it will become clear which countries will be part of the initial Emu group, since it will be clear which will be able to meet the criteria. This however, will not lead to full interest rate convergence for two reasons. On the one hand, a political decision could prevent the participation of countries which meet the criteria. On the other, doubts will subsist on the conversion rate of national currencies into euros. In 1998, the only uncertainties will be political uncertainty as to who will participate from the start (which will only be eliminated at the Cardiff Summit in June 1998) and uncertainty as to the conversion rate. This will remain undefined until January 1 1999, to avoid speculative attacks. The introduction of the euro will have a profound effect on the bond markets, despite the fact that we consider that the euro will not give rise to a single European debt market. Market approximation will be more evident in the public debt segment (owing to the necessary process of economic convergence, to the restrictions to public accounts and to the absence of exchange-rate risk). However, the specific characteristics of each national market lead us to think that small local markets like the Portuguese one will be maintained. Elimination of exchange rate uncertainty and commitment to the implementation of macroeconomic policies will make yields converge, though differences will still exist due to issuer risk and liquidity factors. The Equity Market In addition to the everyday implications of a single currency, there will be other implications related to strategy and performance. Banking activity in Portugal is likely to be increasingly high-tech in nature and there will be a move towards globalization, leading to strategic alterations in the activity of domestic banks. This process is likely to lead to segmentation/specialisation between European banks and local banks and to the development of European markets and local markets. International banks may well concentrate on the public debt and large corporate equity markets where they operate at a competitive advantage. The local/regional banks and markets are likely to focus their business on retail trade and local companies (small and medium enterprises). On the other hand, consolidation in the banking sector will increase, giving rise to pan-European banking groups, with Portuguese banks the likely subject of takeover bids. The impact of Emu will be extremely positive for currency-sensitive stocks in Portugal, for example, pulp and paper, cork, timber and ship repair companies, and/or groups that are heavily diversified internationally. Highly-leveraged companies will be able to take most advantage from European convergence and of the introduction of the euro. Banco Santander de Negócios Portugal Av. Eng. Duarte Pacheco, Amoreiras, Torre 1-6.o |
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