From: delval@Csli.Stanford.EDU (Alvaro del Val)
Subject: Re: Spanish Economy hanging on French Vote
Organization: Stanford University CSLI
Date: Fri, 4 Sep 1992 16:26:01 GMT

In article <1992Sep3.221602.7170@morrow.stanford.edu> puerta@camis.stanford.edu writes:
>
>
>On the 20th of September, the French will hold  a referendum on the Maastrich  
>treaty that defines the monetary and political union of Europe. Polls are  
>indicating that the Yes/No choice are running even which is significant because  
>only 45 days ago the Yes vote was ahead 69 to 31%. A no vote will kill the  
>Maastrich Treaty.
>
>Although I find hard to visualize what a No vote would mean in the long term,  
>it is clear the in the short-term a No vote would be a disaster for Spain. I  
>can see the following scenarios:
>
>(1) The stock market in Madrid will sink. It is already as low as it was after  
>the worldwide 'crash' of October 1987. There is no confidence of foreign and  
>institutional investors on the Spanish Economy. Inflation is too high and the  
>Public deficit is out of control.  This weak confidence will turn into panic  
>with a No vote.
>

Agreed on this one (though perhaps "panic" is a little bit too strong).

>(2) The peseta will have to be devaluated. It is already too high, pushing  
>imports (which contribute to inflation), and making tourism and exports too  
>expensive. I believe that a No vote will push the Peseta at least 10% down.
>

Not quite so sure about this. Common economic wisdom appears to be
that devaluations have a very short term positive effect which is more
than counterbalanced by the inflationary pressures it produces. This
is specially true in the spanish economy, where wages are often
indexed to inflation. The loss of purchasing power due to the
devaluation would quickly fuel wage increases, adding to inflation.
(There is an interesting article in The Economist about why it is
reasonable for the US not to care about the precipitious fall of the
dollar, and equally reasonable for any European country to try to
prevent its currency from devaluation)

>(3) The 'economic adjustments' of Felipe Gonzalez will lose all credibility   
>because they are based on the so-called 'requirements for Monetary Union'  
>outlined in the Maastrich treaty. A No vote will compromise Gonzalez who will  
>have to throw away his adjustments and work out others with a general election  
>looming in the horizon. The economy, already expected to be in dire straits (1%  
>growth) for next year will be put on hold until a new economic policy is  
>defined.
>

I guess it depends on what you call credibility. Judging by the polls,
current economic policy doesn't have already much credibility with the
general public. (According to EL PAIS Internacional). In terms of
foreign investors' confidence, on the other hand, abandoning the goals
set out by Maastricht wouldn't probably help at all. I agree though
that the policy could lose some sense of direction. (A different
question, but one with an obvious bearing on credibility, is whether
the convergence plan is a realistic way to achieve those goals. It's
already clear that it was based on very optimistic projections.)

[investing advice deleted]
>
>--
>Angel Puerta
>puerta@camis.stanford.edu
>
>Disclaimer: I do not have any connection to these funds other than owning  
>shares of them. 
>

Alvaro