THE EURO
An Outsider’s View
Klas Eklund, SEB
IFC, Berlin, April 27, 2000
1
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
2
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!
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More flexible labour market
Improved education
Product market deregulation
Lower taxes and public expenditure
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
4
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
5
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
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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!
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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
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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
10
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
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CONCLUSION
• Short-term risks abound
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Italian & Austrian politics
Danish referendum
Too slow reform process
ECB-bashing in vogue
• And yet…
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Growth
Sounder budgets and low inflation
More jobs
And pressure from globalisation
• Conclusion: Guarded optimism
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