| 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. |