1. 1 THE EURO An Outsider’s View Klas Eklund, SEB IFC, Berlin, April 27, 2000

2. 2 EUROPE IS LAGGING Even in periods of good growth Europe is slower than the US Europe lags the USA in IT development –Internet penetration, E-commerce, R&D and patents But also in other aspects of the “new economy” –Market size, education, flexibility, capital markets efficiency Globalisation forces Europe to modernise

3. 3 THE SINGLE CURRENCY The euro is one important step in the right direction –Greater market size –Increased transparency –Stiffer competition Means higher productivity growth - especially with e-commerce Necessary but not sufficient! –More flexible labour market –Improved education –Product market deregulation –Lower taxes and public expenditure

4. 4 PERFORMANCE SO FAR Change-over went surprisingly smooth, technically and economically One union with low inflation and low rates The euro market is booming, capital productivity increasing But euro weakness due to poor growth in 1999 and uncertainties surrounding ECB –Too politicised? –View on the euro? –Sometimes unclear communication

5. 5 ECB: A MIXED PICTURE Low inflation achieved, inflation expectations low - without excessive contraction TARGET works well But two pillar strategy seems antiquated Lack of transparency and individual accountability –National vs European strategy –How to interpret the inflation target? –No forecasts Repo auctions overbid

6. 6 EMU IN THEORY: PROS AND CONS Pro: Peaceful, political integration Pro: Rule-based monetary & fiscal policy in Europe, low inflation and interest rates, more stable currency Pro: Transparency, stiffer competition, higher long-term growth Con: EMU is not an optimal currency area. How to find one-size-fits-all monetary policy? Difficulties in handling “asymmetrical shocks” Conclusion: Wait and push for structural reforms

7. 7 THE NON-OPTIMAL ARGUMENT EMU is too big –economic differences are too large –Business cycles are not co-ordinated –labour market is not flexible –no central fiscal policy But: –Differences are diminishing –Different Swedish cycle a result of outsider’s policies –Cycles are becoming more co-ordinated –labour markets are gradually reforming (probably easier inside EMU than outside) Existing currency areas are not optimal either...

8. 8 FOUR DIFFERENT NORDIC STATEGIES Denmark: EU and ERM member - but four opt-out clauses –EMU referendum Sep 28 Sweden: EU member. Outside ERM despite no opt-out –Referendum - after some more years Norway: No, no! Finland: Yes, yes!

9. 9 THE SWEDISH CASE Sweden EU member since 1995, signed Maastricht treaty, fulfils criteria (except ERM) No formal opt-out clause But unwillingness to join EMU - for political reasons The economy has turned up, but national sovereignty, Brussels bureaucracy, the weak euro and domestic unemployment create hesitancy

10. 10 EMU - YES BUT LATER Parliamentary Yes majority - but referendum necessary for political reasons No decision in 2001: Public support low, EU chairmanship and wage negotiations Greece 2001, Denmark 2001 (Warning!), introduction of notes and coins 2002 may make the issue less controversial Referendum late 2002, ERM 2003 and EMU 2004? Note: It will take some time between a decision and an entry

11. 11 WHAT SHOULD BE ON THE EUROPEAN AGENDA? Attain critical mass in IT And make economies more flexible –Single market, euro, labour market, taxes, expenditure cuts, education The first signs of action from national governments –Lisbon summit - not enough, German signals? UK targets Increased transparency of ECB –Successful implementation of monetary policy Only modern structure and credible monetary policy will strengthen the euro

12. 12 CONCLUSION Short-term risks abound –Italian & Austrian politics –Danish referendum –Too slow reform process –ECB-bashing in vogue And yet… –Growth –Sounder budgets and low inflation –More jobs –And pressure from globalisation Conclusion: Guarded optimism