Transcript Ingen bildrubrik

WHERE IS EMU AND
SWEDEN HEADING?
Klas Eklund
SEB
March 1999
INTERNATIONAL SCENARIO
The Asian deflationary process rolls on. Brazil in dire straits,
but global effects less than feared; much was priced in.
Different regions pull in different directions.
1. Emerging markets: Recession in Latin America. Russia
has not bottomed yet. But Asia is turning.
2. Negative growth in Japan. Strategic monetary choice
3. US is strong but will slow down; a soft landing
4. Europe is braking, but will recover
•
•
•
•
Global growth 1999 around 2%
Very low inflation. Low rates - but they are bottoming
Shaky stock markets, volatile currencies
But no global depression
RISKS
1. Hard landing in the US. Wall Street crash and ripple
effects
2. Failed monetisation in Japan. Yen causes new
currency turmoil
• More severe Brazilian effects
• What if China and Hong Kong devalue?
• Regional troubles in Mid East and South Asia
• Y2K
Krugman: “The world is a very scary place”
USA: DEFIES GRAVITY
15, 0
12, 5
10, 0
7, 5
5, 0
2, 5
0, 0
-2, 5
-5, 0
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
USA
USA
CPI all it ems
[c
Gros s
Domes t ic
IMBALANCES IN THE USA
1300
11
1200
10
1100
9
1000
8
900
7
800
6
700
5
600
4
500
3
400
2
300
1
200
0
100
-1
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
USA
USA
Pers onal s av
ing r
S&P 500 Compo
EMU: A GOOD START
• Convergence process worked well: A large number of
countries, on time, credibility
• Technically smooth transition to euro
• Great potential for structural changes and reform
–
–
–
–
Price transparency
Economies of scale
Less currency volatility
Pressure on taxes
• But great tests remain
– Monetary and fiscal policies
– Conflicts between ECB and national politicians
– Federalism?
• Will the SDP governments change the EMU’s role?
WHAT WILL THE ECB DO?
• Many technical problems in getting started: How to
measure monetary growth and inflation?
• How to interpret the targets?
• Core inflation rate is very low
• Rates may be lowered if economy slows further
–
–
–
–
But euro has weakened
Political pressures question ECB’s independence
German wage settlements are too high
American rates have climbed
• Conclusion: On hold for a while
DIFFERING VIEWS OF THE FUTURE
10
0
5
-5
0
-5
-10
-10
-15
-15
-20
-20
-25
-25
-30
-35
-30
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
EMU
EMU
Cons umer c onfid
Indus t rial c onfide
THE SWEDISH MODEL IN CRISIS
• “The middle way”: Big government, big business and big unions
• 1970s through 1990s a gradual crack-up of the old model
• The water-shed: 1989-92: Over-heating, tax reform, real interest
rate shock, banking crisis, currency crisis and then budget crisis
• Out of the crisis:
–
–
–
–
–
Resolution of banking crisis
Floating currency
EU membership
Independent central bank
Stricter budget process
• Now: low inflation, strong budget, but still growth and structural
problems
GROWTH AND INFLATION
12
12
11
11
10
10
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
-4
-4
-5
-5
86
87
88
89
90
91
92
93
94
95
96
97
98
Sweden
Sweden
Cons umer pric
Gros s
domes t
INFLATION AND UNEMPLOYMENT
12
11
10
9
8
7
6
5
4
3
2
1
0
-1
86
87
88
89
90
91
92
93
94
95
96
97
98
Sweden
Sweden
Cons umer pric
Unemploy men
THE SWEDISH ECONOMY TODAY
• Currency, banking and budget crises have made the
90s volatile, while Sweden has adapted to Europe
• After several weak years consumption is finally moving
• But exports are slowing due to international slowdown
• In total: Some slackening of GDP, but not severe
• Slow improvement of labour market…
…but structural reforms are badly needed
• Extremely low inflation, which gradually will pick up
• Riksbank can stay close to ECB levels. Will it go lower?
SWEDISH GDP GROWTH
5
4
3
2
1
0
-1
-2
-3
-4
-5
86
87
88
89
90
91
92
93
94
95
96
97
98
Sweden
Gros s
domes t
PURCHASING MANAGERS INDEX
70
65
60
55
50
45
40
95
96
Sweden
97
98
Purc has ing
ma
CONSUMER CONFIDENCE
15
10
5
0
-5
-10
-15
-20
-25
-30
-35
93
94
95
Sweden
96
97
98
Cons umer
c on
SWEDEN: KEY FORECASTS
GDP
1,8
Export
Private consumption
Savings ratio
Unemployment
Wage costs
4,5
Current account
Inflation (CPI)
1997
3,0
12,8
2,0
0,8
8,0
3,5
2,7
0,9
1998
2,4
6,9
2,7
1,5
6,5
4,0
2,3
0,4
1999
2,9
5,5
2,9
1,3
6,2
4,3
2,2
0,5
2000
5,4
2,4
1,3
5,9
1,9
1,5
SWEDEN: M0 and CPI
17.5
17.5
15.0
15.0
12.5
12.5
10.0
10.0
7.5
7.5
5.0
5.0
2.5
2.5
0.0
80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99
-2.5
0.0
-2.5
M0
Inflation
SWEDISH AND GERMAN
REPO RATES
11
10
9
8
7
6
5
4
3
2
Jul
Jul
Jul
Jul
Jul
Jul
94
95
96
97
98
99
Sweden Rik s bank
repo
Germany
Repo int eres t
RIKSBANK AND ECB
INFLATION TARGETS
3
2
1
Riksbank
inflation
target
ECB
inflation
target
THE POLITICAL SCENE
• The 90s have been turbulent and difficult for governments and especially for SD Party. The Swedish model has been
forced to adapt to Europe
• 1998: A polarizing election - and a huge loss for SDP
• A lot of soul-searching in several parties. The all-powerful
Prime Minister is openly criticized
• The parliamentary base of the Government is more fragile
now. SDP needs support from two parties or more.
• SDP co-operates with Left and Greens. Moves left in rhetoric
- but is gradually forced to the right by markets and
globalization. An untenable situation.
THE ELECTION 1998
1998: Per cent and seats
Left
SDP
131
Greens
Centre
Liberals
Moderates
Christ Dem
12.0
36.6
43
4.4
5.2
4.7
22.7
11.8
16
18
17
82
42
1994: Per cent and seats
Left
SDP
Greens
Centre
Liberals
Moderates
Christ Dem
6.2
45.3
5.0
7.5
7.2
22.2
4.1
22
161
18
27
26
80
14
STRAINS BETWEEN SDP - LEFT
• Globalisation will put pressure on taxes. Tax bases are
becoming more mobile. Hot topic: Exodus of companies
• The EMU issue is becoming more important by the day
• Rigid labour market will make lower unemployment
difficult to achieve
• Slippages in the budget? Expenditure ceilings in danger
• Internal strains inside the SDP and the Left
• Conclusion: It will be difficult to make the alliance stick but Mr Persson has still not decided when and how to
change horses
ECONOMIC POLICY UNCERTAINTY
•
•
•
•
Expenditure ceilings questioned
But the budget numbers are OK
Privatization will come
MoF under siege. Conflicting power centers are built up.
Negotiations on all fronts: Taxes, defense, pensions,
nuclear power, labour market & wages
• Long-term political uncertainty: What is Persson’s
strategy?
• How long will the alliance SDP-left last? When - and howwill SDP switch alliances?
• Markets are normally nervous in such an uncertain
situation. But the EMU process gives strength
THE TAX PROBLEM
• Globalization threatens tax revenue
– Flight of financial capital
– Increasing brain drain
– Even consumption is more mobile
• Corporate tax is OK, but taxes on mid-managers and experts
are becoming an acute problem
• But slashing taxes on mobile bases is at odds with SDP
ideology, redistribution aims and co-operation with left
• Compromise in the pipe-line? Exceptions for ex-pats, promises
of future cuts?
• Too little too late?
DIRECT INVESTMENTS
Bn SEK
150
150
100
100
Inflows
50
50
Net
0
0
-50
-50
-100
-100
Outflows
-150
-150
-200
-200
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
SWEDISH AND GERMAN BOND YIELDS
13
12
11
10
9
8
7
6
5
4
3
92 93 94 95 96 97 98 99
Sw e d e n 1 0 ye a r g o ve rnm
Ge rm a n y 1 0 ye a r g o ve rnm
EUR/SEK
10, 00
9, 75
9, 50
9, 25
9, 00
8, 75
8, 50
8, 25
8, 00
7, 75
7, 50
7, 25
Jul
Jul
Jul
Jul
Jul
Jul
93
94
95
96
97
98
99
s we19001/ emu19001
WHEN WILL SWEDEN JOIN THE EMU?
• No decision would mean breaking Maastricht treaty. But in
reality, it is a political decision, depends on public opinion which is turning
–
–
–
–
–
EMU has started
SDP governments in Europe
Turn-around of opinion in Denmark
Blair moves
EU chair in 2001
• Persson wants to move ahead
–
–
–
–
Extra SDP congress March 2000
Referendum or snap election autumn 2000,
ERM-entry late 2000
membership 1/1 2002?
THE SWEDISH ROAD TO EMU
1999
June 13: EU Parliament
election.
Riksbank analyses ”fair
value” of SEK
Late autumn: SDP party
leadership states its view
2000
March: SDP party
congress
September: Referendum
or snap election
After that: SEK enters
ERM2
2001
Jan 1: Sweden chairs
EU
Preparations for euro
Jan 1, 2002
Sweden enters EMU?
THE FORMAL ERM2 DECISION
• The government decides Swedish entry
• Formally, Riksbank decides Swedish position on SEK
level and band width
• But in practice the Swedish position must be joint
• Final decision taken by joint decision by
– Ministers of finance in Euro zone
– ECB council
– ERM2 participants (Denmark & Greece)
• Decision taken after consultation with EU
Commission and Economic & Financial Committee
• The Riksbank needs one year before EMU entry
WHICH ENTRY LEVEL?
• The Riksbank wants a firm SEK, the Government wants
competitiveness
• The ECB - and the Fins - want a strong SEK
• EUR/SEK 8.60 a possible level; gives TCW 115
• Note that when the SEK is tied to the euro, SEK will follow
EUR vs US
• Weak USD would mean much stronger SEK, tough structural
demands. Puts pressure on government to want a weaker
SEK
• The ECB will say EUR/SEK decisive, not USD
• Negotiations 8.50-9.00. Forecast: 8.60
• ERM central parity becomes conversion rate
SEK vs TCW
Central parity 8.60
Index
Index
137.0
137.0
135.0
135.0
133.0
133.0
131.0
131.0
EUR/USD
129.0
129.0
1,04
127.0
127.0
125.0
125.0
123.0
123.0
121.0
121.0
119.0
119.0
117.0
117.0
115.0
115.0
113.0
113.0
111.0
111.0
EUR/USD
109.0
109.0
1,44
107.0
107.0
105.0
105.0
93 94 95 96 97 98 99 00 01
SEK vs TCW
Central parity 9.00
Index
Index
137.0
137.0
135.0
135.0
133.0
133.0
EUR/USD
131.0
131.0
1,04
129.0
129.0
127.0
127.0
125.0
125.0
123.0
123.0
121.0
121.0
119.0
119.0
117.0
117.0
115.0
115.0
EUR/USD
113.0
113.0
1,44
111.0
111.0
109.0
109.0
107.0
107.0
105.0
105.0
93 94 95 96 97 98 99 00 01
SEK PROs AND CONs
+
• EMU-ERM2-discussion
• Commercial flows
• Global diversification of
bond portfolios
•
•
•
•
•
•
-
Budget negotiation worries
Structural policy deficiencies
Global financial turbulence
No more support from short rates
Swedish portfolio diversification
Rapprochement to euro makes
SEK less interesting
• What if EMU opinion turns?
SEK CONCLUSIONS
•
•
•
•
EMU dominates
Riksbank wants SEK to enter ERM
Stronger SEK dependent on EMU process
U-turn on EMU would give volatility and SEK
weakening because of foreign debt, economic
policy and capital flows
• Forecast: SEK TCW interval 124-128 during
spring, strengthening towards 119 if EMU-process
on track
KEY FINANCIAL FORECASTS
990217 jun-99 sep-99 mar-00 dec-00
Repo rate
10-year yield
TCW
3,15 2,90 2,90 2,90 3,25
4,26 4,25 4,45 4,75 4,85
123,4 125,2 121,7 118,1 115,4