Mr. Ingves discusses retail trade, EMU and the Euro with respect to Sweden
Text of a speech by Mr. Stefan Ingves, a Deputy Governor of the Bank of Sweden, held on
14/4/97.
First a word of thanks for the invitation to speak about EMU. Less than twelve
months have passed since the Riksbank last attended a meeting of the Swedish Retail Federation
with information about EMU. Perhaps some of you were present on that occasion. Whereas the
issue of EMU was still fairly new a year ago and not much discussed by most people, the
situation today is different. In the interval we have experienced a marked increase both in what
people know about EMU and in their interest in the matter. This naturally has to do with the
rapid approach of the starting date. Today the move to Stage Three lies fewer than 500 working
days ahead. Moreover, there is no mistaking the strength of the political determination in
Europe to start on time. This was evident not least at the recent Ecofin meeting in the
Netherlands when the EU finance ministers agreed on several important matters such as the
stability and growth pact and ERM2. Today I shall be outlining the process leading up to Stage
Three of EMU and the changes that we already know will occur. I will also say something
about EMU's consequences for retail trade.
Before considering practical aspects of EMU, permit me to begin with a look at
some general economic features.
Sweden should join from the start
The Riksbank is in favour of Sweden participating in the euro area right from the
start in 1999. The reasons for this have been spelled out in our submission on the Calmfors
report, for example. As regards the economic arguments, we do not believe that, by remaining
outside the euro area, Sweden would incur particularly large costs for stabilisation policy; in the
event of economic shocks, it is structural changes rather than monetary policy that should be
used in the first place to counter rising unemployment, for instance.
On the political side, we share the report's assessment that the political costs of
not participating would be substantial; as an outsider Sweden would not belong to the inner
circle of countries that will be deciding Europe's future. It should also be realised that countries
which belong to the euro area from the start will have more influence on how the European
Central Bank (ECB) develops in the crucial early years, when the forms for its work are being
established. Our possibility of influencing important decisions is also likely to be reduced in
other fields beside monetary policy. If Sweden were to refrain from joining the euro area at all,
there would be a risk of being marginalised as an outsider.
The preparations
What progress has been made in the move to EMU? The work of preparing for
Stage Three is now in full swing in every EU body and all the member states. A green paper on
the practical arrangements for a changeover to a single currency was presented by the
Commission in May 1995 and the European Council, meeting in Madrid in December, adopted
a changeover scenario which fixed the timetable for the main decisions. It was agreed that Stage
Three of EMU is to start on 1st January 1999 and that, in the light of which member states
fulfil the convergence criteria on the basis of statistics for 1997, as early as possible in 1998 the
Council is to confirm which countries will participate in the European currency area. On 1st
January 1999 exchange rates are to be locked and responsibility for monetary policy is to be
transferred to the ECB. The euro is to be introduced as an independent currency and all
monetary policy transactions are to be in euro. For a time the national currencies will continue
to circulate alongside the euro but legally they will be one and the same currency. If this seems
odd, remember that Sweden's currency, for example, can be expressed in kronor as well as öre.
Euro, however, will not be available for our wallets from 1st January 1999; euro banknotes and
coins are to come into circulation on 1 January 2002 at the latest. That will initiate a massive
exchange of existing national banknotes and coins. By 1st July 2002 at the latest the krona will
cease to be legal tender, though of course the Riksbank will continue to exchange kronor for
euro.
Which countries will be included?
The EU countries are now striving to fulfil the economic criteria for participation
in the euro area. This is being accompanied by strenuous political efforts to remove any
remaining obstacles. Today I can only say that it is not until the spring of 1998 that we will
actually know which countries will be establishing the union. The EMI and the Commission
will each be publishing a report and the Commission will issue recommendations on which
countries should participate. On the basis of these reports and recommendations, the opinions of
the European Parliament and the national parliaments are to be heard, which is expected to
occur in April. The decision about which countries will participate is to be taken around the turn
of April at a weekend meeting of the Ecofin Council and the Heads of State or of Government.
It is therefore unnecessary to speculate about this today. As far as Sweden is concerned, it looks
as though we will in fact fulfil the convergence criteria. Whether or not we participate will
therefore depend on the decision by the Riksdag (Sweden's parliament).
What is the Riksbank doing?
The Riksbank has to contribute to a situation whereby Sweden is able to
participate in practice if a majority in the Riksdag so decides. That is why preparations are
already necessary. A basic principle in this work is that it shall be voluntary - the requisite
adaptations are a matter for each organisation to decide. All those concerned must of course also
solve any problems they encounter as a consequence of EMU. For the Riksbank, a highly
important task in Sweden's preparations is information about and consultations with the
financial sector on matters to do with the changeover. To this end we have formed a
consultative group (SIFS) and five sub-groups to work on the practical preparations together
with the financial sector. This collaboration has led us to conclude that the financial sector can
cope with a changeover to euro on 1st January 1999. We also consider that in some respects
joining later would make the preparations more difficult. The worst alternative would be a long
period of uncertainty about our participation, what we usually call a "soft no". Costly double
systems would then be required in several areas. We have also observed concern in the financial
sector that staying outside the euro area would entail increased costs, competitive disadvantages
and risk various forms of discrimination.
"Wait-and-see" may be less attractive
A common opinion at present seems to be that a soft no is not unlikely and would
not involve appreciably higher economic costs than participation from the start. Deferring
participation for some years would not exclude us from the euro area for good. In our
cooperation with the financial sector, however, we have seen that uncertainty about
participation is causing many financial agents to make preparations for handling euro as well as
kronor. The nub of the matter is that euro services will be called for whether or not we join the
area. The use of euro will be directed by the market. Naturally the euro would not replace the
krona as Sweden's currency if we remained outside but we could probably expect a demand for
euro from some agents. According to the Stockholm Stock Exchange, trading in the shares of
major companies will gradually switch to euro because handling two currencies would be too
costly. In time the money and bond market may be affected in that renewals and new issues are
denominated in euro and account for a growing proportion of bond trading. According to the
Securities Dealers Association, for instance, large companies and financial markets will also
become less interested in kronor. It is too early to say how this transition from kronor to euro
will occur in detail. Neither can we foresee how quickly it will proceed or how far. Probably it
will be gradual and ultimately also affect private individuals. If the euro turns out to be stable
and strong, households will also prefer to have pension savings, for example, in euro securities.
Thus, this scenario points to a development where financial markets, companies and even
individuals are active in euro, while the public sector continues to use kronor as declared, for
instance, in the report from the Ministry of Finance on practical preparations for the euro. Such
a situation would no doubt lead in time to the public authorities also encountering a demand for
euro services, perhaps ultimately leading to the euro being accepted to a greater extent than
desired at present. If so, the "wait-and-see" alternative would finally amount in practice to the
adoption of the euro. We can only speculate about the practical consequences of a gradual
transition but it would probably entail increased costs as well as greater uncertainty for firms as
well as society. If we intend to join the euro area in a not too distant future after 1999, the
recommendation therefore seems to be: participate from the start and avoid unnecessary and
costly solutions for firms as well society.
Still a large need of information
When talking about the monetary union we should be clear that in Sweden the
debate about Europe and EMU is relatively new. Elsewhere in Europe the issue of integration
has been discussed much more and for far longer. The debate in Sweden has been rather low
key and not particularly widespread. So it is hardly surprising that people here are hesitant and
want more information. That the discussion has now got going is all to the good. I was therefore
pleasantly surprised by the submissions to the Ministry of Finance on the EMU report. Of 56
submissions, only 4 were negative about EMU. The proportion in favour of Sweden
participating from the start in 1999 was as high as 46 per cent, while 13 per cent wanted to wait
and see and 33 per cent did not voice an opinion about participation. Many of the interested
parties are for EMU: the Federation of Swedish Industries, the Retail Federation, the Bankers'
Association, the Confederation of Professional Associations and the Employers' Confederation,
to mention just a few. In general it seems that the discussion of EMU has spread from the
financial sector to companies, authorities and large organisations but has not yet reached the
man in the street. The time ought now have come for us all to consider the matter.
How does EMU affect retail trade?
The details of how EMU will affect retailing in Europe are not yet clear. We do
not even know which countries will make up the euro area from the start. Still, I shall try to
present some general features. EMU is intended to strengthen and deepen European integration
and promote the mobility of capital, goods and services. In time, therefore, a single currency is
likely to make retailing more efficient and cheaper. Inside the area, prices will be more
transparent and there will be no exchange risk. Decreased costs for currency exchange and
hedging suggest that in time retailing will benefit from EMU, an opinion I share with the
Wholesale & Retail Research Institute. In the short run, however, the union involves retail trade
in a great deal of work. Shops will be in the firing line when the euro notes and coins are
introduced. Cashiers will have to handle kronor and euro side by side for a time and customers
will no doubt have many questions about prices and conversion rates. Besides calling for
resources as well as training, this will require a good deal of adjustment in retail trade. I shall
now consider some of the foreseeable changes and also take this opportunity of commenting on
the requirements formulated by the Research Institute for a changeover to euro.
Banknotes and coins
The Madrid meeting in 1995 agreed that euro notes and coins are to be
introduced at the latest by 1st January 2002. Many people have reacted to an introduction at the
turn of a year, which is when retailing tends to be most hectic. The agreement, however,
stipulates 1st January 2002 as the latest date, so perhaps a start might be made in the autumn of
2001. The alternative of spring 2002 has also be mentioned. This matter is still being discussed;
the Riksbank shares the trade's opinion that the turn of a year should be avoided and is therefore
working for another date. The timing of the practical changeover arrangements is to be decided
by each country; for Sweden the Riksbank hopes that it can be managed in a much shorter
period than the maximum of six months. The public will be informed in good time about how
the changeover is to be carried out. Information about security details and appearance will also
be made available. We now know that there will be seven banknotes and eight coins, which is
somewhat more than Sweden's denominations at present. One face of the coins will carry a
national motif that each country decides. The notes may also display a national symbol.
Nickel in the coins?
The question of nickel in the coins has also been discussed, for instance among
finance ministers and central bank governors. Swedish retailers have demanded that coins
denominated in euro and cent are not to contain nickel; the Riksbank and the Ministry of
Finance have both worked hard to achieve this but are fighting rather a lone battle. Today it
does look as though four to six out of eight coins will be nickel-free, which must be regarded as
a major success for the Swedish position. A decision, however, is not due until the summer.
Double currencies
For a period of up to six months there will be two currencies to handle and
retailers have demanded that the period be limited to three months. We can understand their
argument in principle. Much will be required of traders. Instead of the present five
denominations of notes there will be twelve and instead of four coins there will likewise be
twelve. The value of cash holdings in retail trade (cash liquidity) will be greater than usual, with
an increased risk of counterfeit notes and robbery, for example. Retailers will also have to
consider temporary storage space for cash-boxes and additional transport requirements. The
Riksbank is likewise working to make the period with double currencies as short as possible.
There are, however, other aspects to consider. Incorporating euro in the system will take time.
Just the work of distributing the new banknotes will be time-consuming. We shall be looking
into what is feasible in practice. Time will also be needed to adapt the automatic teller systems
(Bankomat and Minuten) to the new currency. Another matter to be investigated is whether the
distribution of euro to banks, post offices and possibly retailers can start before the date on
which the new currency becomes legal tender. Moreover, some consumer interests, for instance,
have said than many consumers would prefer a relatively long changeover period in which to
get used to the new currency. The question of the period with double currencies therefore calls
for further discussion in order to arrive at a solution that everyone can accept. Retailers have
also put forward the view that it should be possible to provide change only in euro from day
one. We believe this may be difficult both in practice and on the grounds of the accepted
changeover principle of "no compulsion - no prohibitions". It has been said that people in
general are to be free to decide whether to use euro from the start on 1st January 1999 or to
wait until the changeover is completed in 2002. During this period no one is to be compelled to
use euro, though this will be encouraged. Kronor and euro will both have the status of legal
tender, so we must be prepared to handle them both during this period. But the discussion of
this question should continue.
Responsibility for information
The retail trade report considers that society must be responsible for information
about the new currency system. At the same time the Ministry of Interior and others consider
that information at points of sale, for example, is primarily a business responsibility. This
makes me somewhat uneasy. I believe we must all be prepared to accept an additional
responsibility for information about these matters. Otherwise there is a risk of people feeling
they are getting insufficient guidance, with an increased risk of the changeover being arduous
for everyone. At the Riksbank we will try to do our bit. Brochures about the new means of
payments will be distributed, possibly accompanied by ready-reckoners for the conversion
rates. Our Payment System Department is working on this.
Price information
Retailers will be obliged to work for a period with some form of double pricing.
The practical arrangements for this are mainly a matter for the retail trade and consumer
interests.
Rounding
In Sweden we have grown used to having the total sum rounded to the nearest 50
öre. Retailers have expressed a wish that this should continue to be possible with the euro, in
which case an active introduction of the 1 and 2 cent coins would not be called for and we could
round to the nearest 5 cents (approximately 43 öre). We appreciate this view and have promoted
it at various levels but without gaining much support. So we do not yet know the outcome. It
must be realised, however, that if we join the euro area, even the smallest denominations will
be legal tender. So there is no way of entirely avoiding the small coins in Sweden.
Cash receipts
Today's cash registers are capable of recording total sums in two currencies. If
each item is to be registered in both currencies, however, it seems that all the existing cash
registers would have to be replaced. I agree intuitively with retailers that it would hardly be
reasonable to do this throughout Sweden in order to register two currencies for a period that is
likely to be shorter than six months. Perhaps we can make do with receipts that give the total in
euro as well as kronor together with the conversion rate. That would be much the same
information as the banks have agreed to provide on statements of account. Once again,
however, this is a matter where retailers and consumers must get together and discuss what is
reasonable. As I have said, EMU will affect each one of us. So let me conclude by mentioning
some other changes in fields where retailing is not directly involved.
Other changes: Securities
The countries in the euro area may, and should, denominate new sovereign
issues in euro. A country wishing to convert its outstanding debt into euro will be allowed to do
this, too. We can also pass national laws enabling, for instance, the Stockholm Stock Exchange,
OM and the Securities Register Centre (VPC) to switch to euro right from 1999. Many
institutions and agents are in favour of this. The above institutions as well as participants in the
Swedish securities market, banks, financial institutions and others unanimously recommend a
big-bang solution - a quick, concerted changeover from kronor to euro right from the beginning
of 1999. With a single monetary policy and no exchange risk, the only factor behind interest
rate differentials for sovereign securities will be the credit risk. The market for Swedish
government paper will be more or less integrated with the euro market for government
securities. Given a reasonably similar debt situation, government bonds issued by different
countries can then be handled in a similar way.
Banks.
During 1996 the banks have worked on strategies and routines for changing over
to euro. It has been agreed that during the changeover period banks, the postal giro, the
bankgiro and the private giro will handle kronor as well as euro. Cashiers will redenominate
payments in the currency used for the institution's system, regardless of which currency the
customer has used. Bank branches will provide two versions of their forms, one for kronor and
one for euro; new cheques and other forms will therefore be produced. Statements of account
will specify the rate at which the currency has been converted. The automatic teller systems
(Bankomat and Minuten) will also have to be adapted. Moreover, banks must be prepared for
people who want to make giro payments in euro right from the beginning of 1999. Some large
companies may also wish to pay out wages in euro before the new currency is available in the
form of banknotes and coins. As mentioned earlier, it is difficult to foresee the magnitude of
demand for euro services and how soon companies and individuals will switch from kronor to
euro.
Monetary and exchange rate policy.
A single currency implies a single monetary policy, which in EMU will be
decided by the ECB. The Riksbank and the other national central banks will have the task of
executing this policy. The changes for Swedish banks and other financial institutions will
probably not be all that great. The Riksbank is likely to remain the financial sector's
counterparty. The main differences from today for Swedish banks are a much larger market for
intra-day money and counterparties located all over Europe. The detailed conduct of monetary
policy is not yet clear. The final decisions are due when the ECB has been established in 1998.
Consequently it is the countries participating from the start that will be able to influence the
conduct of policy and the organisation of activities in the new European central bank.
Target
The conduct of a single monetary policy calls for a single system with which to
handle the associated payments. TARGET, the payment system that is now being built up, will
link up all the national systems. A payment from, say, Stockholm to Milan will normally be
executed in a matter of seconds, whereas at present it often takes a day or more. TARGET's
main purpose is to enable the ECB to conduct monetary policy but it also amounts to the
establishment of a new expressway for commercial transactions. The extent to which banks and
other companies use the system will probably depend on the price. What this will be is not yet
clear but costs are to be covered in full. All the national central banks in the EU area will be
entitled to join TARGET, whether or not they are participating in the euro area. There is a
significant risk, however, that countries outside the latter area will have more limited
possibilities of using TARGET, for instance due to restrictions on intra-day euro credit, which
is important for countering fluctuations in payment flows. One of the matters discussed is that
outsider banks should close the system at an earlier hour. The Riksbank has acted forcefully to
oppose this threat of discrimination. The decisions on this and certain other matters have been
deferred, however, and will now be taken by those countries that join the euro area from the
start. TARGET is to be tested this summer and is to be fully ready for use by 1st January 1999.
Summary and conclusions
Most of the evidence today suggests that the economic and monetary union will
move to Stage Three on 1st January 1999. For Sweden the question is whether we should join
the euro area from the start, wait a while or try to remain outside for good. I hope that we will
soon be having a more lively debate on this very important issue. The question of EMU has
now been largely examined and discussed by the financial sector, the authorities and big
businesses. The time has come to spread the debate and information to other groups in society.
In time the krona will lose ground
Even if Sweden decides to stay outside, the single currency will affect us. Our
analyses, together with other organisations, of what might happen in that event point to a
relatively sizeable use of euro, particularly in the securities market. In time, the use of euro may
spread like water rings to other parts of society. The extent to which the euro is used will among
other things depend on its strength relative to the krona but also on market assessments of the
probability of Sweden joining. A good guess seems to be that the shorter the interval before
participation, the quicker will be the changeover to euro.
The world will not be the same
The creation of a monetary union just outside Sweden's borders will change the
world as we know it. Individuals and firms will both be affected by the euro's introduction
whether we participate or not. In our efforts to keep the financial sector informed about EMU
we can see that good progress has been made with the preparations. Among those concerned we
also experience a strong desire to participate as early as possible so as not to get left behind.
Swedish banks and other companies want to have a chance of competing on equal terms and do
not wish to risk losing business opportunities. Finally I therefore wish to underscore that saying
no to the single currency is not the same as status quo. As I said, the euro's introduction will
affect us all, whether or not we participate. EMU will probably accelerate the globalisation,
concentration and integration of the world's financial markets. It is therefore of the utmost
importance that we all do what we can to find out more about these complex matters.