THE EURO An Outsiders View

1
THE EUROAn Outsiders 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, RD 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 outsiders
  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