External Liberalization with Ambiguous Public Response: The Experience of Portugal

This paper reviews the traditional ambiguity of Portuguese policy towards external liberalization. Product and labour markets have become segmented as a result of the soft budget constraint faced by large corporations and job protection in the public sector. Relaxation of entry requirements into banking since 1985 has 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. Until a credible Multi-Annual Fiscal Adjustment Strategy is established, the disinflation necessary to allow active monetary policy and entry into the EMS will not be achieved.