Persson: Sweden and the euro

Deputy Governor Kristina Persson spoke on Monday at a seminar organised by the Center for Business and Policy Studies on the advantages and disadvantages of participating in monetary union.

”The Riksbank has declared itself in favour of Sweden joining monetary union on two occasions - in 1994 and 1997. The current Executive Board has not adopted a position, however, as it is the Government, and not the Riksbank, which is responsible for determining the country’s exchange rate regime. Furthermore, it is vital that the Riksbank be able to conduct its operations in a credible way irrespective of the outcome of the referendum. At the same time, the six members of the Executive Board are free to express their opinion, which is also what we have done. Let me now give my view of Swedish participation in monetary union,” said Ms Persson.

”A single currency would entail the obvious advantage of not having to exchange money in the euro area, thus eliminating a barrier to trade. This is especially important for businesses, as they would avoid the risk of exchange rate fluctuations against the euro and thereby also the costs associated with both handling different currencies and currency hedging. This would primarily benefit small and medium-sized businesses when trading with other euro area countries. Furthermore, it would be easier for consumers to compare prices between countries, which can be expected to lead to increased competition. Consequently, it is expected that an adoption of the euro would result in more extensive trade, which in turn should lead to higher economic growth. A single currency also means that the exchange-rate risk premium between the krona and the euro would disappear. In addition, as a result of participation in monetary union, Sweden would become part of a larger bond market. All in all, this could lead to some narrowing in the yield spread between Swedish and, for instance, German bonds. If Sweden were to pass up these advantages, it is likely that it would have a negative impact on investment and growth,” said Ms Persson.

”In addition to the economic aspects of participation, there are also political dimensions. Not participating fully in EMU means not being part of a cooperation in which important common issues are discussed and decided. The EU is presently in a formative stage during which it is possible to bring about change. A more integrated Europe would also involve greater opportunities for solving common problems with regard to achieving sustainable social, ecological and economic progress. It goes without saying that Sweden should participate and play an active role in this cooperation,” stressed Ms Persson.

”Participation in monetary union entails Member States relinquishing their powers to conduct domestic monetary and exchange rate policy. This would be particularly noticeable if developments in the Swedish economy were to differ significantly from average developments in the euro area. When domestic monetary policy is no longer available, such differences would have to be addressed in some other way, either by way of greater adaptability in the economy or through fiscal measures. At the same time, I believe that the risk of falling out of step with average developments in the euro area is not that great. The Swedish economy has proven to have considerable similarities with the economies of the euro area, and these could be expected to increase further as a result of the currency union. Moreover, I would like to say that the risk of sharp, unmotivated fluctuations in the exchange rate would decrease markedly due to participation in the union, as would the risk of disturbances caused by these fluctuations,” emphasised Ms Persson.

“The question of how the Riksbank's profits would be affected by a changeover to the euro has been the subject of some misunderstanding in the public debate. If Sweden were to join monetary union, the Riksbank would transfer a small proportion of its foreign reserves to the ECB’s foreign reserve assets, but the return generated on these would accrue to the Riksbank. In addition, the Riksbank could generate profits on banknote issuance in the euro area that exceed those generated on the issuance of krona banknotes, since Swedes’ use of cash is somewhat less than the euro area average. The use of the Riksbank’s profits, and thereby the possibility to transfer a surplus to the Swedish Treasury, would not be affected by the euro. This decision could continue to be made by the Riksdag, regardless of participation in monetary union,” said Ms Persson.

”There are both advantages and disadvantages of participating in monetary union. How these are weighed against each other will ultimately be a question of values and assessments. Personally, I am convinced that the positive factors together outweigh the disadvantage involved in not having a domestic monetary and exchange rate policy. There is a tendency in the public debate to overestimate the Riksbank’s role and what a domestic monetary policy is capable of achieving. It is not monetary policy that will determine the development of welfare and employment in Sweden in the future but investment in knowledge and technology, labour market efficiency and developments in the international domain,” concluded Ms Persson.