Rosenberg: Important to safeguard long-term stability in EMU
Deputy Governor Irma Rosenberg took part in an EMU seminar organised by Jönköping University on Friday. One of the subjects she discussed was Swedish stabilisation policy in the event of membership of the Eurosystem.
"If Sweden joins the euro, the responsibility for our national stabilisation policy will lie with the government and parliament through fiscal policy. With a floating exchange rate, monetary policy plays a pivotal role in stabilisation policy. However, if we decide to participate fully in Stage Three of EMU, fiscal policy will have to bear the main responsibility at national level. At European level, on the other hand, it is the European Central Bank (ECB) that is responsible for stabilisation of the euro area," said Mrs Rosenberg.
"For approximately 70 of the past 100 years Sweden's exchange rate has been fixed against important currencies. This has functioned well in certain periods, and worse in others. In the discussions on EMU membership the main focus has been on memories of the fixed exchange rate agreements during the 1970s and 1980s. Economic policy during those years proved to be untenable in the long term; inflation was allowed to rise while it became increasingly difficult to keep down unemployment. Public expenditure increased constantly, even during years with a high level of resource utilisation. And despite tax rises, the central government debt continued to grow. The krona was devalued on several occasions to improve the cost situation. However, there was no real changeover in economic policy until the economy hit a severe crisis at the beginning of the 1990s. The experiences of these years can perhaps explain the concern some people may feel at the prospect of returning to a fixed exchange rate system with the euro countries, which is a consequence of adopting the euro. The crisis at the beginning of the 1990s resulted in a changeover in economic policy; low inflation became the main target, while central government finances were consolidated. This laid the foundation for a lasting recovery," said Mrs Rosenberg.
"Forms for a long-term sustainable policy have now been established. There is broad support for the price stability target and the conditions for maintaining order in central government finances over a business cycle have improved, thanks to the new regulations drawn up in the 1990s. Good budgetary discipline is important for an effective stabilisation policy, while economic policy must be sustainable in the long term. This is one of the reasons why I consider it important to refuse to meet the demands to lighten the regulations regarding the highest permissible deficit in the Stability and Growth Pact. The problem is that the large countries in the euro area have not maintained sufficiently high budgetary discipline during the years of favourable growth," continued Mrs Rosenberg.
"I took part in the commission of enquiry into stabilisation policy in the monetary union (STEMU), which last year presented a number of proposals aimed at improving the conditions for fiscal policy to shoulder the responsibility for stabilisation policy in the event of Sweden joining the euro. These proposals included clear targets and forms for decision-making. The Riksbank's submission response to the report proposed that some of the framework within which the Riksbank works could be transferred to fiscal policy: A clear target, clear and predictable decision-making processes and rules of conduct, as well as making decisions in an atmosphere of great openness to enable the policy to be understood and assessed. I do not consider there to be any great differences of principle between the commission's proposals and those contained in the Riksbank's response. It is basically a question of creating a clear framework for fiscal policy as a foundation for efficient management of potential shocks, but it could also provide support for a stable development in the long term by firmly establishing expectations among those who set prices and wages in the economy," said Mrs Rosenberg.
"If the result of September's referendum is a 'yes' vote, Sweden is expected to join ERM2. Swedish interest rates will to a greater extent be determined by the European interest rate situation the closer we come to Eurosystem membership. This means that the monetary policy scope for action will gradually narrow. Fiscal policy will take over the main role in stabilisation policy. If fiscal policy has then been given clear guidelines for conducting stabilisation policy, I see no reason why the Swedish economy should not be able to continue along the stability-oriented path pursued since the 1990s," concluded Mrs Rosenberg.
