Bergström: EMU debate contains some lame arguments

Deputy Governor Villy Bergström held a speech today at the invitation of all parties in the Ljusdal local government on the possible consequences of participation in Stage Three of EMU.

"Less than three months remain now until the referendum that will determine whether Sweden should apply to participate in the currency union and the debate has intensified recently. The Executive Board of the Riksbank does not take a stand on this issue and will not participate in opinion-moulding prior to the referendum. We consider our task to be to provide factual information on EMU. The Riksbank should be able to continue to conduct its operations in a credible manner regardless of the outcome of the referendum. However, it is possible for the members of the Executive Board to express a personal opinion on the EMU issue. When I weigh up the arguments for and against participation in the currency union, I still see the loss of a national interest rate and exchange rate policy and the arguments pointing to less insight and civic control over the European Central Bank as the primary arguments against Swedish membership," said Mr Bergström.

"However, it is not an easy question and there are arguments both for and against a single European currency. One advantage is that one avoids the cost and uncertainty entailed in managing different currencies. This benefits small and medium-sized companies in particular. In addition, it will be easier to compare prices between countries, which could lead to increased competition. Trade and investment would probably become more comprehensive with Eurosystem membership, which could lead to a higher rate of economic growth. The disadvantages are mainly connected with the Member States losing the opportunity to pursue a national monetary policy and thereby an important stabilisation policy tool. This would become particularly conspicuous if developments in the Swedish economy were to deviate significantly from the average in the euro area. In such a situation, fiscal policy would have to shoulder greater responsibility for stabilising the economy," said Mr Bergström.

"I have sometimes noticed arguments in the general debate that are not confirmed by economic research. There is little doubt that EMU has led to increased trade within the euro area, which should, for instance, lead to higher income for companies and households. This is seen as providing an opportunity for a higher level of employment, but there is no economic research proving this to be the case. Other parts of economic policy are equally important in attaining full employment. We can thus achieve full employment within and outside of the currency union by means of the right economic policy. The fact that the growth rates of several of the European countries outside of the euro area are higher than those in the participating countries is sometimes put forward as an argument in favour of Sweden remaining outside. I find it rather pointless to assess the currency union in this respect, as the time period has been too short," said Mr Bergström.

"It is also often claimed that a currency union leads to lower interest rates. Membership of the Eurosystem would entail the exchange rate risk premium between the krona and the euro disappearing and the interest rate would thereby be lower, all else being equal. But on the other hand the differential between, for instance, the German and Swedish long-term rates is not solely comprised of an exchange rate risk premium; it also depends on the comparative inflation and growth between the countries and on differences in credit ratings and market liquidity. Experiences from other countries do indicate a reduced interest rate differential on participation in the currency union, although the interest rate gain will probably be less than many people claim. In addition, it is important to distinguish between the interest rate differential and interest rate levels. Interest rate levels in Sweden might well be higher if we adopt the euro than they are now, for instance, if growth in the euro area improves. It is therefore difficult to imagine that participation in the currency union would in the long term lead to both a higher growth rate and a lower interest rate," pointed out Mr Bergström.

"Another argument that has been emphasised in the debate is that the gloomy developments in Germany are due to the D-mark being fixed at an overly strong rate against the euro. One indication against this argument is that the German export industry has developed relatively well in relation to domestic demand in recent years. My own assessment is that several factors have contributed to the economic downturn in Germany, including a lack of structural reforms and necessary deregulation, as well as the costs of reunification. On the other hand, it is clear that EMU makes it more difficult to achieve a recovery as the possibility to pursue an independent interest rate and exchange rate policy has been forfeited and the requirements of the Stability and Growth Pact limit the scope for pursing a more expansionary fiscal policy," said Mr Bergström.

"Well-founded, factual arguments in the EMU debate will give the general public good conditions for forming an opinion prior to voting in the September referendum," concluded Mr Bergström.