Heikensten: Well-founded arguments decisive factor for influence over ECB

Governor Lars Heikensten held a speech on Thursday on the subject of current EMU issues at a seminar organised by the Swedish parliament's economists club.

Mr Heikensten began by commenting on the new voting modalities for the European Central Bank, ECB.

"The background to the decision taken by the EU heads of state and government last weekend is a wish to create manageable processes for monetary policy decisions at the ECB, which can also function when the number of EMU countries increases. Next year ten new countries are expected to become members of the EU and most of them will also want to participate in monetary union as soon as possible. The new voting modalities mean that member countries are divided into groups according to economic size. The voting rights will rotate between the countries in the different groups and this means that Sweden will in the long term be able to vote on around 60 per cent of the decision-making occasions. A large country such as Germany, on the other hand, which has almost nine times as many inhabitants, will be able to vote at 80 per cent of the meetings. From a Swedish perspective, this appears a rather favourable solution," said Mr Heikensten.

"The value of the right to vote is sometimes exaggerated in the debate. Firstly, it is important to remember that the central bank governors shall act in the interests of the monetary union as a whole when setting interest rates and not represent national interests. So far there have been no votes on monetary policy - decisions have been taken on a consensus basis. All of the central bank governors have the right to attend meetings under the new proposal and can take part in the discussion of future policy. Moreover, my experience from other, similar discussions in the central bank world is that good, well-founded arguments weigh heavily and in practice have more importance for the outcome than the opportunity to press a voting button. At the same time, I think it is unfortunate that so much of the European discussion has centred on the voting modalities. More attention should be paid to developing the drafting processes, making policy clearer and facilitating evaluation of the monetary policy conducted. In the long term I believe this is more important," continued Mr Heikensten.

Lars Heikensten also commented on the effects of EMU membership on the Riksbank's balance sheet, a question that has also been raised in the general debate.

"One question that has been asked is whether the Riksbank will lose sources of income if Sweden joins the euro. The answer is no - allow me to explain why. If Sweden were to adopt the euro, the Riksbank would become part of the Eurosystem. This would entail, for instance, a small part of our gold and foreign currency reserve being transferred to the ECB. This part would be managed and generate income, exactly as it does today. We would then receive a percentage of the income in proportion to our ownership share of the ECB, which is at present 2.65 per cent. There is no reason to believe that this would have any tangible effect on our profits," said Mr Heikensten.

"The major source of income for the Riksbank today is seigniorage, i.e. the interest income from the assets the Riksbank receives in exchange for banknotes and coins. If the Swedish krona is replaced by the single currency, the seigniorage will instead come from the amount of euros in circulation. Within the EMU the whole of the seigniorage falls to the ECB, which then shares it out between the member states in proportion to their ownership share. For a country whose inhabitants use relatively little cash, this can result in a better outcome than the present situation and vice versa. Sweden is somewhere in the middle and may stand to gain marginally from such a change," continued Mr Heikensten.

Finally, Lars Heikensten took up the issue of taking money out of the Riksbank's foreign currency reserve if Sweden joins the Eurosystem.

"In the general debate an idea has been put forward of removing money from the Riksbank's balance sheet to create a buffer for stabilisation policy purposes. Regardless of what the money is used for, it is misleading to target the currency reserve, it is more a question of how much equity the Riksbank needs to have. This is kept for use in case the banking system should experience difficulties; it is a buffer for emergency liquidity assistance. Whether it would need to be greater or smaller if we are part of the Eurosystem is not self-evident. In addition, the idea of taking money from the Riksbank's equity and transferring them to a stabilisation policy fund merely entails taking from one buffer to build up a different one," said Mr Heikensten. "Regardless of what level of equity is considered desirable, or whether we become part of the Eurosystem, it is important to establish a clear system with regard to what shall be considered to be distributable funds in future. This is to prevent uncertainty arising regarding the Riksbank's possibility to carry out its tasks independently," concluded Mr Heikensten.