THE EURO An Outsider’s View

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

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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