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THE EURO
An Outsider’s View
Klas Eklund, SEB IFC, Berlin, April 27, 2000
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, R&D and
patents
• But also in other aspects of the “new
economy”
– Market size, education, flexibility, capital
markets efficiency
• Globalisation forces Europe to modernise
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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
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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
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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
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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 6
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 outsider’s
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...
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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!
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 9
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
2004?
decision and an entry (Warning!) make the issue less controversial
• Note: It will take some time between a
, introduction of notes and coins 2002 may
• Referendum late 2002, ERM 2003 and EMU
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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 11
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
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