Lars Heikensten: The Riksbank and the euro
Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at the SEB's EMU seminar,
Cirkus, Stockholm, 4 September 2003.
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Let me begin by thanking the organisers for inviting me to speak at this event.
The past few months have certainly been hectic for those of us working at the Riksbank. We are
undoubtedly in the eye of the storm and feature almost daily in the EMU debate. Moreover, we are
affected more directly and tangibly by the result of the referendum than most people. I can take my
own diary as an example; if the result is a "yes" vote, I will be in Frankfurt for a day or two at least
every other week, while if the result is a "no", the visits will be reduced to a few hours four times a
year.
Given this, the temptation to jump into the debate head first has been strong at times. However, we
have decided not to participate in any campaigns. The Riksbank as an institution took a stand in
favour of EMU membership in the form of submission responses in both 1994 and 1997. However, the
Executive Board has now decided to refrain from taking a stand in connection with the referendum.
The personal views of the various members of the Executive Board have nevertheless been known for
some time. Five of us are in favour, one against. As the staff of the Riksbank has knowledge and
experience of significance in this field we have agreed to contribute factual information. We have also
agreed that any senior managers wishing to express their views on various issues relating to the EMU
discussion may do so, as long as this is done in a factual manner. Our ambition here is of course to
ensure that the general public retains confidence in the Riksbank regardless of the outcome of the
referendum.
Today I intend to briefly discuss three issues that have arisen in the discussions and of which the
Riksbank has knowledge and experience. The first concerns whether the differences between the
ECB and the Riksbank are as large as is sometimes claimed. The second issue is the need for a
national stabilisation policy. Finally, I shall discuss, on the basis of our own experiences, the conditions
for influence in economic policy forums if we choose to remain outside the Eurosystem.
Are there major differences between the Riksbank and the ECB?
In Sweden we lived for a long time - rather longer than the core EMU countries - under the impression
that better economic growth and lower unemployment could be achieved merely by allowing inflation
to be slightly higher. This led to repeated devaluations and to much poorer economic growth. Sweden
fell behind the other EU countries in terms of GDP per capita and purchasing power. There was a
break in this policy at the beginning of the 1990s, in connection with the crisis during that period.
Importing the stability-oriented policy that had long been conducted in the EMU's core countries
helped to create better conditions for future growth.
The policy model we now follow comes originally from Germany. During the entire post-war period
they have endeavoured, to a great extent successfully, to maintain price stability. The task of
achieving this has fallen to the German central bank - the Bundesbank - which has operated
independently, at arm's length from party politics.
The Bundesbank model is now copied by a number of industrial nations, which have given their central
banks a large degree of independence and the task of aiming for price stability. This policy is also
reflected in the Maastricht Treaty and in the Riksbank legislation. My colleagues in the major industrial
nations also try - as long as they are sure that inflation is not about to deviate from the desired level -
to take account of economic activity and unemployment. There are thus considerable similarities and
this applies not only in Europe, but also in a comparison with, for instance, the US, although the
stipulated targets vary, sometimes for historical reasons. In this sense we are all the children of the
Bundesbank!
Within the central bank world the methods of working have also become more similar in recent years.
Although not all industrial nations with a floating exchange rate say that they use inflation targeting,
they actually do so in some form. All of them apply a forward-looking perspective; they produce
forecasts and try to adapt interest rates in good time to ensure that inflation will be in line with a target
that is formulated with varying precision. The ECB now says that inflation should be below, but close
to, 2 per cent, which does not differ greatly from our symmetrical 2 per cent target, given the prevailing
error margins. In addition, we usually say that we focus on inflation 1-2 years ahead, while the ECB
says it applies a medium-term perspective. There is no great difference here, either.
When it comes to communication and accountability, the similarities also outweigh the differences
now. This is perhaps not so surprising. Greater independence leads to a natural increase in demands
for central banks to clearly explain and account for their actions. It is also natural that it should be
possible to assess these actions. To this end, those who appoint the Executive Board at the Riksbank
and at the ECB have the opportunity to attend important board meetings. Both institutions are also
accountable to their respective parliaments. However, there are also a number of differences. For
instance, our target is more precise and we regularly publish inflation reports containing forecasts that
show how our analysis work develops and changes over time. We also publish separate minutes of
our monetary policy discussions.
Neither monetary policy theory, nor its practical implication is written in stone. Changes occur over
time. In this spirit the ECB has been reviewing its monetary policy operations over the past year. The
enlargement eastwards will entail a new, formative stage. I would gladly work actively to achieve
increased clarity and transparency within the ECB if the result of the referendum is a "yes" vote.
Is a national stabilisation policy necessary?
The risk that Sweden could end up in a different situation from the rest of the euro area, and that this
would cause serious economic policy problems, has been strongly highlighted in the Swedish
discussions, much more so than in other countries where the monetary union has been discussed.
The reason for this is, of course, the severe crisis that occurred at the beginning of the 1990s, with the
collapse of the krona in 1992, which had such a tangible effect on the lives of many in Sweden.
In my opinion, there is a tendency to overestimate the risks that developments in Sweden will differ
substantially from the rest of the world and require unique stabilisation policy measures. When we
have differed from other countries previously - such as during the crisis years of the early 1990s - this
has usually been the result of conducting a different economic policy; of not having control over
inflation or focussing on stability, as the core EMU countries did. However, there now appears to be a
consensus that economic policy should be aimed at long-term stability and that this policy should
stand firm.
At the same time, I do not think that a relatively similar development in interest rates in Sweden and
the euro area in recent years is sufficient argument against the need for a national stabilisation policy.
While it is true that the instrumental rates have developed similarly to one another, which I believe will
also be the case if we remain outside the Eurosystem, the point of a national stabilisation policy is not
to fine-tune a relatively normal level of economic activity, as we have experienced in recent years, but
to manage situations where Sweden for some reason deviates from the course pursued by the rest of
Europe. Such a situation cannot be completely ruled out.
The task we face if the result of the referendum is a "yes" vote is to make use both of other countries'
experiences and our own from the past ten years and to translate these into an appropriate regulatory
framework for fiscal policy. The changes in budget policy, with a long-term expenditure ceiling and a
budget surplus target, form a natural starting point. It is quite simple. There should be sufficient
reserves for the central government to be able to bear a deficit for a period if the economy were to
deviate significantly. This requires first and foremost that the central government debt be further
amortised, which is a desirable goal in any case. If these reserves are available, one can be fairly sure
that they will be used in a crisis situation. The opposite situation is more difficult; when restraint is
required in situations where there is a risk that prices and wage formation could get out of control. It
would then be necessary to find institutional solutions to help the government and parliament to make
the necessary long-term decisions and to do so even in situations where they may be politically
difficult and even risky. Here I think it is possible to draw on some experiences of the Riksbank's
actions in recent years. Clear targets, transparent analyses and discussions, combined with regular
assessments, can put pressure on the political system to take action in time. If you remember, there
was doubt at the beginning that the Riksbank would be able to achieve its inflation target.
Some people say it is an impossible task. That Swedish politicians will never be able to manage fiscal
policy in a responsible manner. I find this rather difficult to understand, although we have negative
experiences from the 1970s and 1980s. It is enough to look at two of our three closest neighbours -
Denmark and Finland. Both have experienced equally severe fiscal policy problems as Sweden, but
they now have, as far as one can see, fully-functional fiscal policy regimes adapted to fixed exchange
rates. A different, improved budget policy system was also established in Sweden following the crisis
in the early 1990s, although this was aimed at long-term sustainability rather than stabilisation, which
is only natural with a floating exchange rate.
Is EMU membership important for Sweden to gain influence?
Finally, I intend to discuss what I personally consider to be the most important aspect of the EMU
issue - how Sweden's opportunity to take responsibility and exercise influence in an international
economic policy context will be affected by the result of the referendum. Here I am speaking not
primarily as Riksbank governor of six months but on the basis of my experiences over almost 20
years, as civil servant in the Ministry of Finance under three finance ministers and later as deputy
governor of the Riksbank, representing Sweden in numerous international forums.
My first reflection concerns Sweden's influence now, compared with before. As I see it, Sweden's
influence has declined considerably, which is not always made clear in the general debate.
The most important reason for this erosion of Sweden's position is that we, as I mentioned earlier,
have declined in economic strength in relation to almost all of the other industrial nations. In addition,
there is a more positive aspect here, namely that a number of former developing countries have made
considerable economic progress and are now important players in the international economic policy
game. The result is that we now sit at fewer decision-making tables than at any other point during the
post-war period and we carry less weight at those tables where we have retained a place. One
expression of this is that an ever-declining number of Swedes now hold central positions in economic
policy and financial contexts. We have come a long way from the time when the first two heads of the
IMF were Swedes. It is against this background - our weaker international position - that we should
evaluate the importance of becoming full members of the European cooperation.
Globalisation has strengthened the significance of the European Union. Of course, I can make direct
contacts and conduct a dialogue with my colleagues in, for instance, South Africa or Argentina, and
argue for a particular line in an international economic policy issue, which I actually often do. They
listen to my arguments, but when it really comes to the crunch on an important and sensitive issue,
they always wonder what Europe thinks. To an increasing extent - and here there is a tangible
difference compared with ten years ago - countries in other parts of the world are regarding Europe as
a whole unit. Thus, if we do not have a strong influence in Europe, we will not be heard very far.
The discussion of influence focuses too much, in my opinion, on the value of sitting on the ECB's
Governing Council and determining interest rates. Of course, as members we would do all we could to
ensure this functioned well, but there is no opportunity here to take into account specific Swedish
interests; the rates are set for to the good of Europe as a whole. More important from a Swedish
perspective would be the discussions on developments in and regulation of the financial system. As
banks and securities markets become increasingly integrated, new and interesting questions arise with
regard to the best means of exercising international supervision and oversight. Plans are also being
drafted for the European payment system. The ECB plays a central role in this work. Whether or not
we have a place at the decision-making table affects the conditions for the financial sector in Sweden,
a sector that currently employs around 80,000 people, which is almost twice as many as, for instance,
the forestry-based industries.
Even more important here is the broader economic policy decision-making, primarily through the
Ecofin Council, where the Ministers of Finance meet regularly. The trend is clear, although the
changes have so far been tentative and gradual. An increasing number of the important issues are
discussed and decided in practice in the small circle of countries participating in the Eurosystem, what
is known as the Euro group.
It is not difficult for me to point out issues from recent years where we could probably have exerted
greater influence if we had been members. During the early years, when the ECB was being built up,
we sat at the decision-making table. When it then became clear that we and the Brits intended to
remain on one side, our colleagues quite simply decided to postpone a number of important issues
where we had strong views, including the monetary policy framework with inflation targeting,
transparency, etc. This also applied to various payment system issues, where our position was weaker
on the outside.
We have thus already lost considerable influence, which is also confirmed in surveys. If we now say
"no" to membership, if not for good but at least for the foreseeable future, the situation will worsen
further. The fact that we were fully engaged in the work on preparing for the EMU in the mid-1990s
means that we have good personal contacts, which are valuable in particular during difficult crisis and
negotiating situations. A new generation of decision-makers, with whom we do not have the same
relationship, will gradually enter the system. The allowances made by many countries and colleagues
while expecting that we would soon join will no longer be made. The EU enlargement eastwards will
also increase the group of countries involved and we will become less interesting. In addition, we will
miss a formative stage in connection with the enlargement. Once it has been completed, the situation
will in many ways be more fixed.
Conclusion
I have discussed in my talk three questions that have arisen in the EMU debate. All three are
connected in some way to the operations of the Riksbank. A brief summary of my conclusions is:
 The European Central Bank is sometimes depicted as an institution completely different from
the Riksbank. I think this is wrong. Of course there are some differences in working methods,
although these have declined recently. However, the similarities in the policy pursued are
much greater than the differences. We are both children of the successful German central
bank, the Bundesbank. We have sprung from the same intellectual model, where the target
is price stability, the management are appointed by the political system and the actual work
is done at an arm's length from party politics.
 In my opinion, the value of conducting a national interest rate and exchange rate policy is
exaggerated in the EMU debate. On the other hand, it is conceivable that situations might
arise where strongly stabilising fiscal policy measures are necessary. It would then be
necessary to find institutional solutions to help the government and parliament to make the
necessary long-term decisions and to do so even in situations where they may be politically
difficult and even risky. Here I think it is possible to draw on some experiences of the
Riksbank's actions in recent years. Clear targets, transparent analyses and discussions,
combined with regular assessments, can put pressure on the political system to take action
in time.
 As representative of the Riksbank, I have been able to experience at first hand the closed
doors to the meeting rooms of Europe and the fact that we have lost influence. During the
early years, when the ECB was being built up, we sat at the decision-making table. When it
then became clear that we and the Brits intended to remain on one side, our colleagues
quite simply decided to postpone a number of important issues where we had strong views,
including the monetary policy framework with inflation targeting, transparency, etc. This also
applied to various payment system issues, where our position was weaker on the outside. If
we now say "no" to membership, if not for good but at least for the foreseeable future, the
situation will worsen further, as I have described already. I think this would be very
unfortunate.