200.482: the day the escudo's rate against the euro was fixed for ever

At 11 o'clock on the morning of Thursday 31 December 1998, Central European Time, the central banks of the European Union held a teleconference. For half an hour they watched the currency markets and calculated the rates of their national currencies, making sure that the rates between the currencies about to join the euro matched the central rates announced months before.1 source1 source

At 11.30 the European Commission turned those rates into the day's official values of the ecu, the basket unit the euro was about to replace one for one, and sent them to the new European Central Bank in Frankfurt for a cross-check. Shortly after noon the ECB's Governing Council, chaired by its president, Wim Duisenberg, approved its opinion by teleconference. At 12.30 the Commission proposed the rates in a televised session.2 sources2 sources

At 1.40 p.m. the Council announced that it had adopted them. The regulation, signed in Brussels for the Council, listed eleven rates to six significant figures. The tenth line, written with a continental decimal comma, read: 1 euro = 200,482 Portuguese escudos.2 sources2 sources

Nobody in Lisbon could spend a euro that evening. No euro notes existed in circulation and none would for three years. What changed at midnight was that the escudo stopped being a currency with its own price. From then on it was a fixed fraction of the euro, and the same calculation would hold until the last escudo note was handed in.2 sources2 sources

The changeover happened in steps, and the dates are easy to blur. On 31 December 1998 the rate was fixed. On 1 January 1999 the euro became the currency of the eleven founding countries, Portugal among them, but for three years it existed only in accounts, electronic payments and the financial markets. On 1 January 2002 euro notes and coins went into circulation.3 sources3 sources

The escudo was born with the Republic. The monarchy fell on 5 October 1910, and on 22 May 1911 a decree of the Provisional Government replaced the old unit, the real, with the escudo. The minister behind the reform was José Relvas, the Ribatejo landowner who, with Eusébio Leão, had proclaimed the Republic from the balcony of Lisbon's City Hall.3 sources3 sources

The real was tiny, and Portuguese had long counted in mil-réis, thousands of réis. The new unit was worth exactly that: one escudo for 1,000 réis. Amounts were written with the cifrão, a dollar-like sign placed where English puts a decimal point, so that the 1998 rate appears in Portuguese law as 200$482.2 sources2 sources

The first one-escudo coin appeared only in 1914, a silver piece commemorating the revolution of 5 October 1910. It had the same weight, 25 grams, and diameter, 37 millimetres, as the monarchy's 1,000-réis coin, but less silver: its fineness fell from 916.6 to 835 thousandths.1 source1 source

The young currency then went to war. Portugal's part in the First World War was paid for partly by printing money. Banco de Portugal notes in circulation rose from 87,070 contos in 1914 to 1,603,162 contos in 1924, a conto being a thousand escudos. A pound sterling cost 5$521 in 1914, 7$82 in 1918 and 131$563 in 1924.1 source1 source

Under the military dictatorship that followed the coup of 1926, António de Oliveira Salazar became finance minister in 1928 and made balanced budgets and a stable exchange rate his priorities. In 1933 he founded the Estado Novo (New State), the authoritarian regime that lasted until 1974, under a constitution he had drafted.2 sources2 sources

In 1931 a reform put the escudo back on the gold standard, suspended since 1891, with a new gold parity. It also limited the Banco de Portugal's power to issue notes and redrew its ties with the government so that deficits could not be financed by printing money.1 source1 source

The return to gold was brief. When Britain abandoned gold on 21 September 1931, Portugal, which traded heavily with Britain and earned much of its foreign income in sterling, suspended convertibility too and kept the escudo pegged to the pound. From 1949 the escudo was tied to the US dollar.1 source1 source

The Second World War made Portugal rich in reserves. Neutral, crowded with refugees and selling goods such as wolfram, the ore used to harden steel, it ran large balance-of-payments surpluses. Much of what Germany paid for wolfram came in gold. The Banco de Portugal held 65 tonnes of gold in 1939 and 306 tonnes in 1945.2 sources2 sources

After the war the policy stayed the same: stable prices, a strong escudo and the steady accumulation of gold and foreign currency. In the 1960s, money sent home by emigrants kept the current account in surplus despite chronic trade deficits. By the revolution of April 1974, Portugal held about 866 tonnes of gold.2 sources2 sources

Prices were already rising before the Carnation Revolution: consumer inflation was 13.0% in 1973. Then came the end of the dictatorship, the independence of the colonies, the collapse of the Bretton Woods system of fixed exchange rates and the oil shock. Inflation reached 26.2% in 1974 and stayed above 15% every year until 1985.2 sources2 sources

The Banco de Portugal's own account blames demand that outran what the economy could produce, financed by borrowing abroad. Twice, in 1977–78 and in 1983, balance-of-payments crises sent Portugal to the International Monetary Fund. The remedies were higher interest rates, credit ceilings, capital controls and a cheaper escudo. In August 1977 the government introduced a crawling peg, a regime of small, regular monthly devaluations.2 sources2 sources

Devaluation worked by stealth. Real wages, pensions and savings fell sharply, and wealth moved from creditors to debtors, chief among them the state. The Banco de Portugal's governor said in 2019 that money illusion hid the costs and their unequal sharing. Inflation averaged 21.4% a year from 1978 to 1985 and reached 28.5% in 1984.2 sources2 sources

The 1983 programme balanced the current account, but in 1985, the year before Portugal joined the European Economic Community, inflation was still around 20%, the budget deficit exceeded 8% of GDP and income per head was about half the Community average.1 source1 source

Membership of the Community from January 1986 changed the policy. Bringing inflation down became the main goal, and a stable escudo the means. The monthly devaluations were made smaller and smaller, and in October 1990 the crawling peg was dropped in favour of an escudo measured against a basket of five European currencies.1 source1 source

On 6 April 1992, two months after the Maastricht Treaty was signed, the escudo joined the exchange rate mechanism (ERM) of the European Monetary System. Members kept their currencies within a band around agreed central rates against each other; the escudo was allowed to move 6% either way. Joining was also a condition for adopting the single currency from the start.2 sources2 sources

At first the escudo was the strongest currency in the grid. Then came the currency crisis of 1992, which drove the pound and the lira out of the mechanism. Portugal brought in exchange controls on 24 September 1992, and the Banco de Portugal spent heavily to defend the escudo. It was devalued three times in the next two and a half years, each time alongside the Spanish peseta.3 sources3 sources

After 1995 the escudo held. Markets came to believe Portugal would make it into the single currency, and that belief pulled interest rates down: between 1993 and 1998 the gap between Portuguese and German ten-year bond yields narrowed from about 5 percentage points to about 0.3.2 sources2 sources

The Maastricht Treaty set four entry tests: low inflation, sound public finances, a stable exchange rate and low long-term interest rates. In March 1998 the European Monetary Institute, the forerunner of the ECB, published its verdict on each candidate. Portugal passed on inflation, the exchange rate and interest rates, and its deficit was below 3% of GDP; its public debt was just above the 60% ceiling but falling.1 source1 source

On 3 May 1998 the Council, meeting as heads of state or government, decided that eleven countries, Portugal among them, fulfilled the conditions for the single currency on 1 January 1999. The same weekend, ministers and central bankers announced that the existing ERM central rates between those currencies would become the final ones.3 sources3 sources

That is why the escudo's rate against the other ten currencies was settled months before New Year's Eve. What remained open was its value in ecus, and so in euros, which depended on the market rates of 31 December. Dividing the two fixed rates gives 102.505 escudos to the Deutsche Mark, the escudo's last central rate against the anchor currency of the system.2 sources2 sources

For three years the euro was a unit on bank statements while Portuguese still paid in escudos. In September 2001 euro notes and coins were delivered to the banks. Large companies and shops received them in December, and from 17 December the public could buy starter kits worth 10 euros, with every denomination of coin.2 sources2 sources

Some 537 million euro banknotes had been printed for Portugal by 1 January 2002, out of 14.89 billion for the twelve countries changing over. Portuguese law required prices to be shown in both currencies around the changeover, as in Austria and Greece. Escudo cash remained legal tender until 28 February 2002.3 sources3 sources

Many people felt the euro made things dearer. The Banco de Portugal estimated that the changeover added about 0.2 percentage points to consumer price inflation in the first quarter of 2002, and about 0.5 points to services, with larger rises for some frequently bought goods and services usually paid in cash. The standard VAT rate also rose from 17% to 19% that June, which muddied the picture.1 source1 source

The last escudos took twenty years to disappear. Coins could be exchanged at the Banco de Portugal until the end of 2002. For the last series of notes, the Discoveries series with portraits from João de Barros on the 500 to Henry the Navigator on the 10,000, the bank had until 28 February 2022. On 28 February 2002, 15.1 million of those notes were in public hands; by late 2021 about 11.4 million, worth around 95 million euros, had never come back.3 sources3 sources

The euro gave Portugal what the escudo rarely had: low inflation and cheap credit. Inflation stayed between about 2% and 4.5% a year until 2008. Borrowing boomed instead. From 1995 to 2007 the deficit on the current and capital account went from near balance to 8.6% of GDP, households saved less and the state spent windfall revenue rather than paying down debt.2 sources2 sources

When the financial crisis hit, the budget deficit rose above 11% of GDP in 2010. In spring 2011 Portugal could no longer borrow on the markets. On 6 April, after the finance minister, Teixeira dos Santos, admitted the country needed outside help, Prime Minister José Sócrates announced a request for assistance. The EU, the euro area countries and the IMF lent up to 78 billion euros, and Portugal left the programme in June 2014.3 sources3 sources

That was the trade sealed on 31 December 1998. The escudo had let governments cut wages and debts quietly, through inflation and devaluation. The euro took that tool away. In 2022, when inflation jumped to 7.8%, Portugal had no currency of its own to devalue, and monetary policy was set for the whole euro area.2 sources2 sources