Report from the Commission - Convergence Report 2002 - Sweden (prepared in accordance with Article 122(2) of the Treaty)
Date: 2002-05-22
Institutions: European Commission
Subjects: Economic and Monetary Union, Sweden, economic convergence, exchange rate, interest, price stability, public finance

COMMISSION OF THE EUROPEAN COMMUNITIES

Brussels, 22.5.2002
COM(2002) 243 final

REPORT FROM THE COMMISSION

CONVERGENCE REPORT 2002
SWEDEN

(prepared in accordance with Article 122(2) of the Treaty)

REPORT FROM THE COMMISSION

CONVERGENCE REPORT 2002
SWEDEN

TABLE OF CONTENTS

Tables
...................................................................................................................................... 4
Graphs ...................................................................................................................................... 5
INTRODUCTION AND MAIN FINDINGS .............................................................. 6
1.
Introduction.................................................................................................................. 6
1.1.
Main findings ............................................................................................................. 10
1.2.
ASSESSMENT OF SUSTAINABLE CONVERGENCE IN SWEDEN .................. 12
2.
Compatibility of national legislation with the Treaty and the Statute of the European
2.1.
System of Central Banks............................................................................................ 12
Situation in the 2000 convergence report................................................................... 12
2.1.1.
2.1.2. Assessment of compatibility in 2002 ......................................................................... 13
Price stability.............................................................................................................. 13
2.2.
Situation in 2000 convergence report ........................................................................ 13
2.2.1.
2.2.2. Assessment of convergence in 2002 .......................................................................... 13
Government budgetary position................................................................................. 17
2.3.
Situation in the 2000 convergence report................................................................... 17
2.3.1.
2.3.2. Assessment of public finances in 2002 ...................................................................... 17
Exchange rate stability ............................................................................................... 21
2.4.
Situation in the 2000 convergence report................................................................... 21
2.4.1.
2.4.2. Assessment of convergence in 2002 .......................................................................... 21
Long-term interest rate............................................................................................... 22
2.5.
Situation in the 2000 convergence report................................................................... 22
2.5.1.
2.5.2. Assessment of convergence in 2002 .......................................................................... 22
2.6.
Additional factors....................................................................................................... 23
2.6.1. Results of the integration of markets ......................................................................... 23
2.6.2. Balance of payments on current account ................................................................... 26
2.6.3. Unit labour costs and other price indices ................................................................... 26
ANNEX A: COMPATIBILITY OF NATIONAL LEGISLATION........................................ 27
ANNEX B: INFLATION CRITERION .................................................................................. 29
Reference value for inflation...................................................................................... 29
B.1.
Recent methodological developments in HICP ......................................................... 32
B.2.
B.3.
Additional tables on other price and cost indicators .................................................. 33
ANNEX C: GOVERNMENT BUDGETARY DATA ............................................................ 36
Developments in the national accounts system ESA 95 ............................................ 36
C.1.
C.2.
Additional tables on the public finances .................................................................... 38
ANNEX D: EXCHANGE RATE CRITERION ...................................................................... 41

2

Treaty provisions and ERM II.................................................................................... 41
D.1.
Application of the exchange rate criterion ................................................................. 41
D.2.
D.3.
Fulfilling the exchange rate criterion in the current examination.............................. 42
ANNEX E: LONG-TERM INTEREST RATE CRITERION ................................................. 43

3

TABLES

1

2

3

4

5

6

7

Sweden: average inflation rate (HICP) and the reference value

Sweden: other inflation and cost indicators

Sweden: government surplus/deficit , debt and investment expenditure

Sweden: composition of budgetary consolidation between 1997 and 2001

Sweden:  updated  convergence  programme  projections  for  GDP  growth,
government surplus/deficit and debt

Sweden: long-term interest rates

Sweden: product markets

B.1

Inflation convergence-HICP

B.2 Development  of  average  HICP  inflation  rates  in  EU  Member  States  and  the

reference value

B.3 Evolution of the inflation reference value and the three best performers

B.4 Price deflator of private final consumption expenditure in EU Member States

B.5 Labour costs in EU Member States

B.6

Import prices in EU Member States

C.1 Government surplus/deficit in EU Member States

C.2 Government debt in EU Member States

C.3 Updated  stability/convergence  programme  projections 

for  government

surplus/deficit in EU Member States

E.1 Long-term interest rates in EU Member States

4

GRAPHS

1

2

3

4

5

6

7

Sweden: annual inflation rate (HICP)

Sweden: comparison of average inflation rate (HICP) with reference value

Sweden: inflation and wage trends

Sweden: government surplus/deficit and debt

SEK/EUR exchange rate

Long-term interest rates - Sweden and Euro area

Sweden: comparison of average long-term interest rate with reference value

B.1 Evolution of average inflation and reference value since start of EMU

5

1.  INTRODUCTION AND MAIN FINDINGS

1.1. Introduction

The  move  into  the  third  stage  of  economic  and  monetary  union  (EMU)  and  the
introduction  of  the  single  currency,  the  euro,  on  1 January 1999  was  a  major  step
forward  in  European  economic  integration.  It  followed  several  years  of  successful
but often difficult adjustment efforts by the Member States during the second stage
of  EMU  to  achieve  the  high  degree  of  sustainable  convergence  required  for  EMU
participation  and  needed  for  the  stability  and  success  of  the  new  currency.  The
decision1  by  the  Council  (of  Heads  of  State  or  Government)  on  3 May 1998  in
Brussels on the 11 Member States ready to participate in the single currency from the
beginning had, in accordance with the Treaty (Article 121(4)), been prepared by the
Ecofin Council on a recommendation from the Commission. The decision was based
on  the  two  convergence  reports  made  by  the  Commission2  and  the  European
Monetary Institute (EMI).3 These reports, prepared in accordance with Article 121(1)
of the Treaty,  examined  in  considerable  detail  whether the  Member States  satisfied
the convergence criteria and met the legal requirements4.

Those  Member  States  which  were  assessed  in  1998  as  not  fulfilling  the  necessary
conditions for the adoption of the single currency were referred to as "Member States
with a derogation". Two Member States fell into this category, Greece and Sweden.
Article 122(2) of  the  Treaty  lays  down  provisions  and  procedures  for  re-examining
the situation of Member States with a derogation (see Box: Article 122(2)). At least
once  every  two  years,  or  at  the  request  of  a  Member  State  with  a  derogation,  the
Commission  and  the  European  Central  Bank  (ECB)  are  required  to  prepare  new
convergence reports on such Member States.

Greece submitted a request on 9 March 2000 for its convergence situation to  be re-
examined.  The  Ecofin  Council  adopted  the  decision5  that  Greece  fulfilled  the
necessary  conditions  for  adoption  of  the  single  currency  on  19  June  2000  in  Santa
Maria  da  Feira.  The  decision  was  taken,  having  regard  to  the  discussion  of  the
Council, meeting in the composition of  Heads  of State or  Government, and had, in
accordance  with  the  Treaty  (Article 122(2)),  been  prepared  on  a  proposal  from  the
Commission. The  decision  was  based  on  the  two  convergence  reports  made  by  the
Commission6  and  the  ECB7.Greece  adopted  the  single  currency  with  effect  from  1
January 2001.

Sweden  was  again  assessed  by  the  Commission8  in  2000  as  not  fulfilling  the
necessary  conditions  for  the  adoption  of  the  single  currency  and  –continued  to  be
referred to as a "Member State with a derogation". Two years have elapsed since the

1

2

3

4

5

6

7
8 

OJ L 139, 11.5.1998, pp. 30-35.
Report on progress towards convergence and recommendation with a view to the transition to the third
stage of economic and monetary union, COM(1998)1999 final, 25 March 1998.
Convergence Report, European Monetary Institute, March 1998.
Denmark and the United Kingdom were not the subject of a formal assessment because of their opt-out
arrangements.
OJ L 167, 7.7.2000, pp. 19-21.
Convergence report 2000, COM(2000) 277 final, 3 May 2000.
Convergence Report, European Central Bank, May 2000.
See footnote 6.

6

                                                
last reports were made by the Commission and ECB (3 May 2000) and so Sweden is
due for re-examination, in accordance with Article 122(2).

BOX: Article 122(2) of the Treaty

At least once every two years, or at the request of a Member State with a derogation,
the  Commission  and  the  ECB  shall  report  to  the  Council  in  accordance  with  the
procedure  laid  down  in  Article 121(1).  After  consulting  the  European  Parliament
and after discussion in the Council, meeting in the composition of the Heads of State
or Government, the Council shall, acting by a qualified majority on a proposal from
the Commission, decide which Member States with a derogation fulfil the necessary
conditions  on  the  basis  of  the  criteria  set  out  in  Article 121(1),  and  abrogate  the
derogations of the Member States concerned.

Two  other  Member  States  do  not  participate  in  the  euro.  Denmark  and  the  United
Kingdom  negotiated  opt-out  arrangements  before  the  adoption  of  the  Maastricht
Treaty  (Protocols No 26  and  No 25,  respectively).  Until  these  Member  States
indicate that they wish to participate in the third stage and join the single currency,
they are not the subject of an assessment by the Council as to whether they fulfil the
necessary  conditions.  Although  the  1998  convergence  report  gave  a  considerable
amount  of  information  about  the  convergence  situation  in  these  two  countries,  the
Commission made no judgement on whether they fulfilled the criteria and achieved a
high degree of sustainable convergence. The 2000 convergence report  was limited to
Greece  and  Sweden  and  did  not  deal  with  Denmark  and  the  United Kingdom.  The
present  report  by  the  Commission  is  limited  to  Sweden  and  does  not  deal  with
Denmark and the United Kingdom.

The  reports  to  be  prepared  by  the  Commission  and  the  ECB  are,  like  the  earlier
reports,  governed  by  Article 121(1)  (see  Box).  This  requires  that  the  reports  shall
examine the compatibility  of  national legislation  with the  Treaty  and the  Statute  of
the  European  System  of  Central  Banks  (ESCB)  and  shall  also  examine  the
achievement  of  a  high  degree  of  sustainable  convergence  by  reference  to  the
fulfilment  of  the  four  convergence  criteria  dealing  with  price  stability,  the
government  budgetary  position,  exchange  rate  stability  and  the  long-term  interest
rate as well as in the light of some additional factors.9

The  four  convergence  criteria  and  the  relevant  periods  over  which  they  are  to  be
respected  are  developed  further  in  a  Protocol  annexed  to  the  Treaty  (see  Box:
Protocol (No 21) on the convergence criteria).

9

Among the factors of which the reports also have to take account is "the development of the ECU". On
1 January 1999, every reference to the ECU was replaced by a reference to the euro at a rate of one euro
to one ECU. Since there are no country-specific elements of this factor, it is not examined further in this
report.

7

                                                
BOX: Article 121(1) of the Treaty

1. The Commission and the EMI shall report to the Council on the progress made in
the fulfilment by the Member States of their obligations regarding the achievement of
economic  and  monetary  union.  These  reports  shall  include  an  examination  of  the
compatibility  between  each  Member  State's  national  legislation,  including  the
statutes of its national central bank, and Articles 108 and 109 of this Treaty and the
Statute of the ESCB. The reports shall also examine the achievement of a high degree
of  sustainable  convergence  by  reference  to  the  fulfilment  by  each  Member  State  of
the following criteria:

–  the achievement of a high degree of price stability; this will be  apparent from a
rate  of  inflation  which  is  close  to  that  of,  at  most,  the  three  best  performing
Member States in terms of price stability;

–  the sustainability of the government financial position; this will be apparent from
having  achieved  a  government  budgetary  position  without  a  deficit  that  is
excessive as determined in accordance with Article 104(6);

–  the  observance  of  the  normal  fluctuation  margins  provided  for  by  the  exchange
rate mechanism of the European Monetary System, for at least two years, without
devaluing against the currency of any other Member State;

–  the  durability  of  convergence  achieved  by  the  Member  State  and  of  its
participation in the exchange rate mechanism of the European  Monetary System
being reflected in the long term interest rate levels.

The  four criteria mentioned  in this  paragraph  and  the  relevant  periods  over  which
they are to be respected are developed further in a Protocol annexed to this Treaty.
The  reports  of  the  Commission  and  the  EMI  shall  also  take  account  of  the
development of the ECU, the results of the integration of markets, the situation and
development of the balances of payments on current account and an examination of
the development of unit labour costs and other price indices.

One of the principles which has been followed in the preparation of this report is that
a  Member  State  with  a  derogation  not  yet  participating  in  the  euro  area  is  to  be
assessed  as  far  as  practicable  in  the  same  way  as  the  first  wave  of  euro  area
participants  as  well  as  subsequent  participants.  This  is  the  principle  of  equal
treatment  which  implies  that,  wherever  possible,  the  Treaty  provisions  on  the
convergence  criteria  should  be  interpreted  and  applied  in  the  same  way  as  in  1998
and in 2000. However, the assessment of some of the convergence criteria has to take
into  account  the  introduction  of  the  euro.  This  is  particularly  the  case  for  the
exchange rate criterion, where, with the establishing of the euro in place of the ECU
and the replacement of the original exchange rate mechanism by the new ERM II at
the beginning of 1999, there is a changed frame of reference. Similarly, the existence
of  a  single  monetary  policy  in  the  euro  area  may  have  implications  for  the
assessment of inflation developments.

8

BOX: Protocol (No 21) on the convergence criteria referred to in Article 121 of

the Treaty establishing the European Community

THE HIGH CONTRACTING PARTIES,

DESIRING to lay down the details of the convergence criteria which shall guide the
Community  in  taking  decisions  on  the  passage  to  the  third  stage  of  economic  and
monetary union, referred to in Article 121(1) of this Treaty.

HAVE AGREED upon the following provisions, which shall be annexed to the Treaty
establishing the European Community.

Article 1

The criterion on price stability referred to in the first indent of Article 121(1) of this
Treaty shall mean that a Member State has a price performance that is sustainable
and  an  average  rate  of  inflation,  observed  over  a  period  of  one  year  before  the
examination,  that  does  not  exceed  by  more  than  1½ percentage  points  that  of,  at
most, the three best performing Member States in  terms  of  price  stability.  Inflation
shall  be  measured  by  means  of  the  consumer  price  index  on  a  comparable  basis,
taking into account differences in national definitions.

Article 2

The criterion on the government budgetary position referred to in the second indent
of  Article 121(1)  of  this  Treaty  shall  mean  that  at  the  time  of  the  examination  the
Member  State  is  not  the  subject  of  a  Council  decision  under  Article 104(6)  of  this
Treaty that an excessive deficit exists.

Article 3

The  criterion  on  participation  in  the  exchange-rate  mechanism  of  the  European
Monetary System referred to in the third indent of Article 121(1) of this Treaty shall
mean that a Member State has respected the normal fluctuation margins provided for
by  the  exchange-rate  mechanism  of  the  European  Monetary  System  without  severe
tensions  for  at  least  the  last  two  years  before  the  examination.  In  particular,  the
Member  State  shall  not  have  devalued  its  currency's  bilateral  central  rate  against
any other Member State's currency on its own initiative for the same period.

Article 4

The criterion on the convergence of interest rates referred to in the fourth indent of
Article 121(1)  of  this  Treaty  shall  mean  that,  observed  over  a  period  of  one  year
before  the  examination,  a  Member  State  has  had  an  average  nominal  long-term
interest rate that does not exceed by more than 2 percentage points that of, at most,
the  three  best  performing  Member  States  in  terms  of  price  stability.  Interest  rates
shall  be  measured  on  the  basis  of  long-term  government  bonds  or  comparable
securities, taking into account differences in national definitions.

9

Article 5

The statistical data to be used for the application of this Protocol shall be provided
by the Commission.

Article 6

The Council shall, acting unanimously on a proposal from the Commission and after
consulting the European  Parliament, the  EMI  or  the ECB as the  case  may  be,  and
the Committee referred to in Article 114, adopt appropriate provisions to lay down
the details of the convergence criteria referred to in Article 121 of this Treaty, which
shall then replace this Protocol.

The  introductory  section  of  this  chapter  is  followed  by  a  summary  of  the  main
findings about  convergence  in Sweden. The  report then continues with the  detailed
examination  of  the  fulfilment  of  each  of  the  convergence  criteria  and  other
requirements in the order that they appear in Article 121(1). A set of annexes dealing
with the way the criteria are applied and other background information not specific to
Sweden but relevant to the assessment completes the report.

1.2. Main findings

In the 2000 convergence report the Commission assessment was that Sweden already
fulfilled  three  of  the  convergence  criteria  (on  price  stability,  the  government
budgetary position and the convergence of interest rates) but that it did not fulfil the
exchange  rate  criterion.  The  assessment  on  legal  convergence  made  in  the  2000
convergence report concluded that legislation in Sweden was not compatible with the
Treaty and the ESCB Statute.

The  relevant  legislation  in  Sweden  has  remained  unchanged  since  the  last
convergence  report  in  May  2000.  Developments  in  2001  and  2002  have  made
evident  the  absence  of  detailed  legislation  on  profit  allocation  and  extraordinary
payments of the Riksbank to the Treasury, safeguarding that the Riksbank retains the
financial  means  necessary  for  implementing  all  ESCB-related  tasks.  In  the  view  of
the  assessment  in  the  2000  convergence  report  and  the  new  developments,  the
legislation in  this field in  Sweden  is  assessed  not  to  be  compatible  with  the  Treaty
and the ESCB Statute.

The average inflation rate in Sweden during the 12 months to April 2002 was 2.9%,
below the reference value of 3.3%. The Swedish 12-month average inflation rate has
been below the reference value throughout the period from December 1996. Sweden
continues to fulfil the criterion on price stability.

The  Council  decision  of  10 July 1995  on  the  existence  of  an  excessive  deficit  in
Sweden was abrogated in 1998 (Council decision of 1 May 1998).  The  government
finances were turned around from a deficit of 1.6% of GDP in 1997 to a surplus of
1.9% in 1998 and have been in surplus each year since then. In 2001, a government
surplus  of  4.8%  of  GDP  was  achieved.  The  government  debt  ratio  peaked  in  1994
and it fell below the 60% of GDP reference value in 2000. It was 55.9% of GDP in
2001. Sweden continues to fulfil the criterion on the government budgetary position.

10

The Swedish krona has not participated in the ERM II during the review period and it
has fluctuated quite markedly against the euro and the Danish krone. Hence, as was
the case at the time of the 2000 assessment of convergence, Sweden does not fulfil
the exchange rate criterion.

The  average  yield  on  ten-year  Swedish  benchmark  bonds  during  the  12 months  to
April  2002  was  5.3%,  below  the  reference  value  of  7.0%.  The  Swedish  long-term
interest  rate  has  been  below  the  reference  value  throughout  the  period  from
December  1996.  Sweden  continues  to  fulfil  the  criterion  on  long-term  interest  rate
convergence.

In  the  light  of  this  assessment  the  Commission  concludes  that  there  should  be  no
change in the status of Sweden as a Member State with a derogation.

11

2.  ASSESSMENT OF SUSTAINABLE CONVERGENCE IN SWEDEN

2.1. Compatibility of national legislation with the Treaty and the Statute of the European

System of Central Banks10

2.1.1.  Situation in the 2000 convergence report

The  2000  convergence  report  concluded  that  legislation  in  Sweden  was  not
compatible  with  the  requirements  of  the  EC  Treaty  and  the  ESCB  Statute.  In
particular,  the  Commission  noted  that  an  incompatibility  existed  as  regards  the  full
integration  of  the  central  bank  in  the  ESCB.  Indeed,  while  according  to  the
Constitution  Act  and  the  Riksbank  Act,  as  amended  in  1998,  the  competence  for
monetary policy is attributed to the Riksbank11, there is however no reference to the
competence of the ESCB in this field. Further, the right of  the  Riksbank  to impose
minimum reserves for monetary purposes is also defined without such a reference12.

Furthermore a few imperfections were identified in the 2000 convergence report.

Firstly,  an  imperfection  in  the  definition  of  the  objectives  of  the  Riksbank  was
identified. The Riksbank Act13 included price stability as an objective, but omitted a
reference  to  supporting  the  general  economic  policies  in  the  Community,  an
objective  which  according  to  Article  105.1  of  the  EC  Treaty  and  Article  2  of  the
ESCB  Statute,  the  ESCB  shall  pursue,  without  prejudice  to  the  objective  of  price
stability.14

Secondly,  it  was  identified  in  the  report  that  according  to  the  Constitution  Act  and
the Riksbank Act, the Riksbank had an exclusive right to issue banknotes15 without
recognising the ESCB's competence in this field16.

Thirdly, the fact that the prohibition of public authorities to give and of the members
of the Riksbank's decision-making bodies to seek or take instructions in the Riksbank
Act itself only covered monetary policy issues17 and did not include all ESCB-related
tasks  as  provided  for  in  Article  108  of  the  EC  Treaty,  was  identified  as  a  further
imperfection.18

10 

11 
12 
13 
14 

15 
16 
17 
18 

See Annex A for brief description of the Treaty requirements in this area, in particular for central bank
independence.
Constitution Act, Chapter 9, Article 12 and Riksbank Act, Chapter 1, Article 2
Riksbank Act, Chapter 6, Article 6
Riksbank Act, Chapter 1, Article 2
In the Riksbank Act, Chapter 1, Article 2, the objectives of the Riksbank are defined as follows: "The
objective  of  the  Riksbank's  operations  shall  be  to  maintain  price  stability.  In  addition,  the  Riksbank
shall promote a safe and efficient payment system."
Constitution Act  Chapter 9, Article 13 and Riksbank Act, Chapter 5, Article 1
EC Treaty Article 106.1 and ESCB Statute Article 16
Riksbank Act, Chapter 3, Article 2
The  application  of  this  rule  to  all  ESCB-related  tasks  is  only  mentioned  in  the  Explanatory
Memorandum to the Riksbank Act.

12

                                                
2.1.2.  Assessment of compatibility in 2002

The assessment of incompatibility still stands in relation to the provisions mentioned
above, as the  relevant legislation in Sweden has remained  unchanged  since the last
convergence report in May 2000.

However, an additional issue has been identified. Developments in Sweden in 2001
and 2002 have made evident the absence of detailed legislation  on profit allocation
and  extraordinary  payments  of  the  Riksbank  to  the  Treasury,  in  particular  the
absence  of  legislation  ensuring  that  the  Riksbank  retains  the  financial  means
necessary  for  the  implementation  of  all  ESCB-related  tasks.  On  both  occasions  the
General  Council  of  the  Riksbank,  a  body  not  involved  in  ESCB-related  tasks,
submitted  for  adoption  by  the  Riksdag,  the  Swedish  Parliament,  a  proposal  for  the
Riksbank  to  make  extraordinary  payments  to  the  Swedish  state,  amounting  to  20
billion  kronor,  in  addition  to  the  allocation  of  profit  of  the  previous  financial  year.
The  absence  of  legislation  in  this  procedure  safeguarding  that  the  Riksbank  retains
the  financial  means  necessary  for  implementing  all  ESCB-related  tasks  is
incompatible with the principle of financial independence.

In view of the assessment in the 2000 convergence report and the new developments,
the  relevant  legislation  in  Sweden  is  assessed  not  to  be  compatible  with  the  EC
Treaty and the ESCB Statute.

2.2. Price stability19

2.2.1.  Situation in 2000 convergence report

Sweden  fulfilled  the  criterion  on  price  stability  when  assessed  in  the  2000
convergence  report.  The  average  inflation  rate  in  Sweden  during  the  12 months  to
March  2000  was  well  below  the  reference  value.  The  Swedish  12-month  average
inflation  rate  had  been  below  the  reference  value  throughout  the  period  from
December 1996.

2.2.2.  Assessment of convergence in 2002

–  Recent trends

The  annual  inflation  rate  in  Sweden  (as
measured  by  the  change  in  the  monthly
HICP  index  from  12 months  earlier  (see
Graph 1))  remained  around  1.5%  from  the
beginning  of  2000  until  March  2001.
However, in April 2001, the annual inflation
rate  rose  to 3% and has  remained  relatively
high since then. It was 2.2% in April 2002.

5

4

3

2

1

0

-1

Graph 1  Sweden - annual inflation rate (HICP)  
(percentage change of monthly index on a year earlier,M/(M-12)) 

%

S

Euro area

–  Respect of the reference value

05 09

01
98

01
99

05 09 01
00

05 09 01
01

05 09

01
02

 Source  : Eurostat.

19

See Annex B for the calculation of the reference value, a discussion of other inflation standards, and a
short description of improvements in the harmonised indices of consumer prices (HICP).

13

                                                
The  12-month  average  inflation  rate  which  is  used  for  the  convergence  assessment
has fluctuated in Sweden but has continued to be below the reference value. Sweden
was  one  of  the  three  best-performing  Member  States  in  terms  of  price  stability
between March 1999 and September 2001. While inflation rose in Spring 2001 and
has  remained  relatively  high  since  then,  which  has  resulted  in  an  increase  in  the
12-month average inflation rate, Sweden continues to be below the reference value.
(see Graph 2).

Graph 2  Sweden - comparison of 12-month average inflation 
rate (HICP) with reference value (%)

4

3

In  April 2002  the  three  best-performing
Member States in terms of price stability
were  the  United  Kingdom,  France  and
Luxembourg  and  the  simple  arithmetic
average
average  of 
inflation  rates  in  these  three  countries
was 1.8%. The reference value was 3.3%.
The  12-month  average  inflation  rate  in
Sweden  in  April 2002  was  2.9%,  below
the reference value (see Table 1 and Graph 2).

the  12-month 

1

0

2

%

Reference value

S

Average of the three best performers

12
98

03
99

06

09

12
99

03
00

06

09

12
00

03
01

06

09

12
01

03
02

Note:  The grey band represents 1.5 percentage points interval between the average 
            rate in the three best performers in terms of price stability (bottom of the  band)
            and the reference value (top of the band).

Source:  Eurostat , Commission services .

–  Performance relative to other inflation standards

other 

The 
good
relatively 
inflation  performance  in
Sweden  is  also  apparent
when  comparison  is  made
with 
possible
standards for inflation (see
Annex  Table B.1).  Using
the  three  best  performers
in  the  euro  area  gives  a
slightly  higher  reference
value in April of 3.6%.

However,  in  April  2002
Sweden's  annual  inflation
rate  was  2.2%,  above  the
2%  upper 
the
ECB's  definition  of  price
stability,  as  was  the  12-
month  average 
inflation
rate.

limit  of 

Table 1

Sweden : 12-month average inflation rate (HICP)
and the reference value a)
( % change )

1997

1998

1999

2000

2001

S
Euro area
EU
Reference value b)

1.8
1.6
1.7
2.7

1.0
1.1
1.3
2.2

0.6
1.1
1.2
2.1

1.3
2.3
2.1
2.8

2.7
2.5
2.3
3.3

April
2002
2.9
2.5
2.3
3.3

a)  Measured by the arithmetic average of the latest 12 monthly
     indices relative to the arithmetic average of the 12 monthly
     indices of the previous period.

b)  Unweighted arithmetic average of the three best performers
     in terms of inflation plus 1.5 percentage points ; same method
     as used in the 2000 convergence report , see tables in Annex B.

Source: Eurostat, Commission services.

14

8

6

4

2

10

reduction 

 Graph 3
                      Sweden - inflation and wage trends
        ( 3-year moving average of annual percentage change)

the
A  successful 
in 
inflation  rate  was  achieved 
in
Sweden  during  the  first  half  of  the
1990s, and between 1995 and 2000
inflation  was  maintained  at  a  low
level.  The favourable  evolution  of
the  private  consumption  deflator
also  aided  this  achievement.  The
disinflation  process  was  helped  by
the  slow  increase  in  unit  labour
costs,  particularly  until  1995  (see
Graph 3). Since then, compensation
per  employee20  has  increased  at  a
moderate  pace  and,  since  2000,
productivity  growth  has  slowed,
resulting  in  slightly  higher  unit
labour  costs  (see  also  Table 2).  The  economic  downturn  in  2001  coincided  with
continued  strong  employment  growth  and  a  slight  increase  in  compensation  per
employee,  which  resulted  in  poor  productivity  growth  and  high  unit  labour  costs.
Import  prices  accelerated  somewhat  in  2000  and  2001,  coinciding  with  the
depreciation  of  the  currency.  These  factors  have  contributed  to  some  upward
pressure on inflation recently.

  (*) Spring 2002 economic forecasts.
  Source  : Commission services.

Private consumption deflator
Unit labour costs

 Compensation per employee

0
1989-
1991

2001-
2003(*)

1997-
1999

1993-
1995

1991-
1993

1999-
2001

1995-
1997

Inflation is expected by the Commission services to be lower in 2002 compared with
2001,  partly  because  some  temporary  factors  pushing  inflation  up  in  2001  should
subdue.

Since  1992  Sweden  has  had  an  explicit  inflation  target  for  monetary  policy  and  a
flexible  exchange  rate  regime.  Commitment  to  price  stability  as  the  objective  of
monetary  policy  was  further  underlined  by  the  new  legislation  on  the  status  of  the
Riksbank that came into force in 1999. The Riksbank's inflation target is 2% with a
tolerance  interval  of  ±1 percentage  point.  Since  October 1999  the  Riksbank  has
specified  that  it  bases  its  current  monetary  policy  on  the  assessment  of  underlying
inflation as measured by UND1X21. The Swedish target indicators are also different
from the HICP, being either the CPI or, as at present, the UND1X.

The  underlying  inflation  rate  (UND1X)  has,  for  most  of  the  time,  remained  within
the  Riksbank's  tolerance  interval  for  the  inflation  target.  However,  underlying
inflation rose in April 2001 and has remained relatively high since. In April 2002, the
UND1X stood at 2.8% year-on-year.

20 

21

The figures for nominal compensation per employee for 1999 and 2000 in Sweden are distorted due to
the fact that ESA 1995 treated payroll taxes for employees as a tax on production. If treated as a wage
tax, labour costs would have increased by 3.4% in 1999 and 3.8% in 2000.

UND1X is defined as the CPI excluding interest expenditure and direct effects of altered indirect taxes
and subsidies.

15

                                                
 Sweden  has  respected  the  reference  value  for  inflation  throughout  the  period  from
December 1996. Sweden therefore continues to fulfil the criterion on price stability.

 Table 2

Sweden : other inflation and cost indicators
(annual % change)

1997

1998

1999

2000

2001

2002*

Private consumption deflator
2.3
S
2.1
Euro area
2.2
EU

1.0
1.6
1.7

1.0
1.2
1.3

 Labour costs:
 Nominal compensation per employee

S
Euro area
EU
  Labour productivity

3.8
2.3
2.7

3.3
1.5
2.2

3.2
1.6
1.6

2.3
S
1.1
Euro area
EU
1.2
Nominal unit labour costs
0.6
0.9
S
0.3
0.7
Euro area
EU
0.9
1.1
Import prices **
0.8
S
2.6
Euro area
0.9
EU

-0.5
-1.3
-2.1

1.3
2.3
2.8

2.3
0.9
1.0

-1.0
1.3
1.8

1.0
0.0
-0.4

1.0
2.2
1.9

7.3
2.5
3.0

1.5
1.4
1.5

5.8
1.1
1.4

4.6
8.4
7.2

1.6
2.3
2.1

3.8
2.7
3.2

-0.6
0.3
0.5

4.4
2.4
2.7

4.2
1.1
1.1

1.9
2.1
2.1

3.9
2.9
3.3

2.1
1.1
1.2

1.8
1.8
2.0

1.7
0.7
0.8

*   Spring 2002 economic forecasts.
** Deflator of imports of goods and services .

   Source: Commission services.

16

2.3. Government budgetary position

2.3.1.  Situation in the 2000 convergence report

In the 1998 convergence report the Commission considered that the excessive deficit
situation in Sweden had been corrected. In the light of this assessment and in parallel
with  the  adoption  of  the  report,  the  Commission  made  a  recommendation  to  the
Council that the decision on the existence of an excessive deficit in Sweden (Council
decision  of  10 July 1995)  should  be  abrogated.  Acting  on  this  recommendation  the
Council adopted on 1 May 1998 a decision abrogating the decision on the existence
of an excessive deficit in Sweden.22

In the 2000 convergence report the Commission considered that Sweden continued to
fulfil the criterion on the government budgetary position.

2.3.2.  Assessment of public finances in 200223

in 

Swedish  public  finances
have  been 
in  surplus
each year since 1998 and
in  2001  a  surplus  of
4.8%  of  GDP  was
recorded. A surplus of  1. 7%
of GDP  is  forecast  by  the
Commission  services  for
2002  (see  Table 3  and
rising
Graph 4).  After 
the  early
strongly 
the  government
1990s 
debt  ratio 
in  Sweden
reached  a  peak  in  1994
and  has  since  been  on  a
declining 
trend.  There
was  a  sharp  fall  in  the
ratio  between  1998  and
2000,  from  70.5%  of
GDP  to  55.3%  of  GDP.
In  2001,  the  debt  ratio
was almost unchanged at
55.9%  of  GDP24.  A
further decline in 2002 is

 Table 3

Sweden : government surplus/deficit , debt
and  investment expenditure
(as % of GDP)

1997

1998

1999

2000

2001

2002*

General government net lending (+) / net borrowing (-)

S
Euro area
EU

-1.6
-2.6
-2.5

1.9
-2.2
-1.6

1.5
-1.3
-0.7

General government gross debt

S
Euro area
EU

73.1
75.3
71.0

70.5
73.7
68.9

65.0
72.6
67.3

3.7
0.2
1.1

55.3
70.2
64.2

General government investment expenditure **

S
Euro area
EU

2.7
2.4
2.2

2.7
2.5
2.2

2.7
2.5
2.3

2.5
2.5
2.2

4.8
-1.3
-0.6

55.9
69.1
62.8

2.6
2.5
2.3

1.7
-1.4
-1.1

52.6
68.6
61.9

2.6
2.4
2.3

*   Spring 2002 economic forecasts.
** General government gross fixed capital formation.

   Source: Commission services.

22

23

24 

OJ L 139, 11.5.1998, p. 19.
For the purposes of the present report and for the assessment of the government budgetary position, the
definition  of  ‘deficit’  is  in  accordance  with  the  excessive  deficit  procedure,  as  was  the  case  in  the
Commission’s  convergence  report  2000.  The  issue  of  the  reclassification  of  settlements  under  swap
arrangements  concerning  interest  payments  and  forward  rate  arrangements  in  the  ESA  95  system  of
accounts is dealt with in Annex C.
The general government debt ratio was 55.9% of GDP in 2001, virtually unchanged from 2000, despite
the large surplus in 2001 noted above. This can be attributed to a substantial – and larger-than-expected
- reduction in the public pension funds’ (AP fonder) holdings of government debt, from 13% of GDP in
2000 to 4% of GDP in 2001.

17

                                                
forecast by the Commission services to 52.6% of GDP, (see Table 3 and Graph 4).

During the consolidation phase that was initiated in the early 1990s, almost all of the
improvement  in  the  public  finances  was  structural  in  nature  until  1998,  and  the
influence  of  the  cycle  was  relatively  limited.  Since  then,  the  cyclical  influence  has
been  greater.  Between  1997  and  2001,  the  cyclically  adjusted  government  balance
(as  measured  by  the  Commission)  improved  by  4.5  percentage  points  of  GDP  (see
Table 4).  About  two  thirds  of  the  improvement  was  due  to  declining  interest
payments  and  one  third  was  due  to  an  increase  in  the  primary  balance.  The
substantial  budgetary  consolidation  in  recent  years  has  thus  been  based  on
determined debt reduction and on lower expenditure, but has also relied on increases
in tax pressure, although to a lesser extent in the latter years.  In particular, tax cuts
have  been  introduced  each  year  between  2000  and  2002.  The  cyclically-adjusted
surplus suggests that the Swedish public finances are in a robust position.

 Table 4

Sweden : composition of budgetary consolidation
between 1997 and 2001
(Cyclically adjusted, as %  of trend GDP )

of  which :

of  which :

Change in
Overall
Balance

Change in
interest
payments

Change in
primary
 balance

Change in
revenue

Change in
primary
expenditure

(1)=(3)-(2)

S

Euro area

EU

4.5
0.6
1.2

(2)

-2.9
-1.1
-1.2

(3)=(4)-(5)

1.6
-0.5
0.0

(4)

0.9
-0.7
-0.3

(5)

-0.7
-0.2
-0.3

 Source: Commission services.

18

Graph 4 
Sweden - government surplus/deficit and debt

Actual and cyclically adjusted surplus/deficit
 ( % of GDP)

Surplus

Deficit

1997

1998

1999

2000

2001

2002 (*)

Actual surplus/deficit
Cyclically adjusted surplus/deficit
Reference value

   Government  debt 
( % of GDP)

6
5
4
3
2
1
0
-1
-2
-3
-4

90

80

70

60

50

1997

1998

1999

2000

2001

2002 (*)

(*) Spring 2002 economic forecasts.
Source : Commission services

19

from 

 Table 5

authorities 

The  2001  updated  convergence  programme  for  Sweden  was  adopted  by  the
government  in  November 2001  and  assessed  by  the  Ecofin  Council  in  January
200225. It covers the years to 2004 and foresees government surpluses of about 2% of
GDP  in  each  year,  thus  respecting  Stability  and  Growth  Pact  requirements  (see
Table 5).  The  budgetary  strategy  continues  to  be  based  on  strict  control  of
government spending with a further decline in the expenditure-to-GDP ratio. At the
same time cuts in taxes are being introduced – extended to 2002 in the latest budget -
reversing the trend in the years up to 1998. Budgetary discipline is reinforced by the
continuation of nominal ceilings for central government expenditure adopted by the
Swedish Parliament  for three  years
ahead, and by a legal obligation on
local 
2000
onwards  to  balance  their  budgets.
Furthermore, 
recently
introduced  pension  reform  - which
involves  a  higher  degree  of
individual funding - will enable the
pension  system  to  cope  better,  in
the  medium  term,  with  business
cycle  fluctuations  and,  in  the  long
term,  with 
the
population.  With  the  government
balance  remaining  in  surplus,  the
convergence
2001 
programme  projects 
further
decline  in  the  debt  ratio  to  45.2%
by 2004.

Sweden: updated convergence programme
projections for
GDP growth, government
surplus/deficit and debt

2001
GDP-growth , annual % change
1.7
S

General government net lending (+)/borrowing (-) ,
 as % of GDP

Source:  2001 updated convergence programme of
Sweden; see also Annex table C.3.

S
2.2
General government debt , as % of GDP

the  ageing  of 

updated 

the 

2002

2003

2004

49.7

47.3

45.2

52.3

2.6

4.6

2.3

2.1

2.4

2.3

a 

S

In the Spring  Fiscal  Policy  Bill presented by  the Swedish government on 15 April,
the  surplus  in  government  finances  is  expected  to  be  1.8%  of  GDP  in  2002  and  to
remain close to 2% of GDP in the years to 2004. The debt-to-GDP ratio is projected
to decline to 48.3% of GDP by 2004.

From  the  information  presented  in  this  section,  it  can  be  seen  that  the  budgetary
position  of  Sweden,  which  is  not  at  present  the  subject  of  an  excessive  deficit
decision,  has  remained  strong  in  2001  and  is  likely  to  remain  robust  in  2002.
Therefore Sweden continues to fulfil the budgetary criterion.

25

OJ C 33, 6.2.2002, p. 4.

20

                                                
2.4. Exchange rate stability

2.4.1.  Situation in the 2000 convergence report

In the 2000 convergence report Sweden was assessed not to fulfil the exchange rate
criterion. The Swedish krona had not participated in the ERM II, and in the two years
under review (up to March 2000) the krona had fluctuated against the euro reflecting,
among other factors, the absence of an exchange rate target.

2.4.2.  Assessment of convergence in 2002

Sweden  has  continued  not  to  participate  in  the  ERMII  during  the  current  review
period  (up  to  April 2002).  The  monetary  framework  of  explicit  inflation  targeting
implies that the Swedish krona is left floating freely in the exchange rate market. The
absence  of  an  explicit  exchange  rate  commitment  means  that  the  stability  of  the
exchange rate of the krona cannot be assessed on the basis of deviations from such a
commitment.

From the beginning of 1999 through to April 2000, the krona was on an appreciating
trend,  rising  by  15%  from  9.47  SEK  to  8.06  SEK  against  the  euro.  Thereafter  the
krona  depreciated  considerably  as  the  crisis  in  the  telecom  sector  hit  Sweden
particularly  hard.  In  September  2001,  it  reached  its  lowest  level  ever  in  trade-
weighted terms and fell to almost 10 SEK/euro. Since then the krona has appreciated,
possibly attributable to the prospects of a referendum on EMU in 2003, and is now
close to 9.20 SEK/euro (see Graph 5).

Graph 5. SEK/EUR exchange rate

10.0

9.5

9.0

8.5

8.0

Jan-
99

May-
99

Jan-
00
Source  : Commission services.

Sep-
99

May-
00

Sep-
00

Jan-
01

May-
01

Sep-
01

Jan-
02

The volatility of the krona exchange rate diminished in the second half of the 1990s
as  credible  and  sustainable  fiscal  and  monetary  policy  provided  the  preconditions
necessary for a stable exchange rate in the medium run. However, during the review
period,  volatility  increased  again  as  e.g.  the  global  slowdown  and  financial  market
uncertainty  had  a  relatively  large  impact  on  the  Swedish  economy.  Both  the
depreciation and later the  appreciation of the krona exchange  rate over  the last two
years  have  been  pronounced,  also  reflecting  the  absence  of  an  exchange  rate
commitment.

21

The Swedish krona has not participated in the ERM II during the review period and it
has fluctuated quite markedly against the euro and the Danish krone. Hence, as was
the case at the time of the 2000 assessment of convergence, Sweden does not fulfil
the exchange rate criterion.

2.5. Long-term interest rate26

2.5.1.  Situation in the 2000 convergence report

Sweden  fulfilled  the  criterion  on  the  convergence  of  interest  rates  in  the
2000 convergence  report. The average long-term interest rate  in Sweden during the
12 months to March 2000 was well below the reference value.

2.5.2.  Assessment of convergence in 2002

Sweden’s  good  inflation  record  and  impressive  consolidation  of  public  finances
during  the  second  half  of  the  1990s  were  reflected  in  declining  long-term  interest
rates. During the period under review, Swedish long-term interest rates (the yield on
the 10-year benchmark bond) have followed the trend in international bond markets:
they decreased until March 2001 and have thereafter edged  upwards (see Graph 6),
to  stand  at  around  5.7%.  Over  the  last  year,  the  spread  over  euro  area  long-term
yields has fluctuated between 5 and 50 basis points. The main contributing factors to
the variation in the spread may have been the cyclical position of Sweden relative to
the euro area economy and inflation differentials.

Graph 6 Long-term interest rates
Sweden and euro area (monthly averages)

6.5

5.5

4.5

3.5

Jan-
99

Apr-
99

Jul-
99

O ct-
99

Jan-
00

Apr-
00

Jul-
00

O ct-
00

Jan-
01

S

euro area

Jul-
01

Apr-
01

O ct-
01
Source: Commission services

Apr-
02

Jan-
02

Sweden has continued to have a twelve-month average long-term interest rate below
the  reference  value.  In  fact,  Sweden  has  had  long-term  interest  rates  below  the
reference value ever since December 1996, the first date for  which this comparison
can be provided.

26

See Annex E for information on the calculation of the reference value and on the data employed.

22

                                                
Graph 7 Sweden - comparison of average
long-term interest rate with reference value

8

7

6

5

4

Jan-
99

Apr-
99

Jul-
99

O ct-
99

Jan-
00

Apr-
00

Jul-
00

O ct-
00

Jan-
01

Apr-
01

Jul-
01

O ct-
01

Jan-
02

Apr-
02

Note: The grey band re prese nts a 2 percentage  points interval be twe en the  average 
inte rest rate in the three best performers in terms of price stability (bottom of the band)
and the  re fe rence value  (top of the  band)

Source: ECB, Commission services

Table 6

Sweden: long-term interest rates
(12-month averages)

1999

2000

2001

2002 a)

S

Reference value b)

5.0

6.8

5.4

7.4

5.1

7.0

5.3

7.0

a) Average of May 2001 – April 2002
b) Average of interest rates of the three best performing Member States in
terms of price stability plus 2 percentage points; see Annex table E1

Source: ECB, Commission services

The  average  yield  on  ten-year  Swedish  benchmark  bonds  during  the  12  months  to
April 2002 was 5.3%. The reference value, derived from the average interest rates in
the  United  Kingdom,  France  and  Luxembourg,  the  three  best  performing  EU
Member  States  in  terms  of  price  stability,  was  7.0%.  Hence,  Sweden  continues  to
fulfil the criterion on long-term interest rate convergence.

2.6. Additional factors

2.6.1.  Results of the integration of markets

–  Development of product markets

Sweden is increasingly integrated into the EU economy. Sweden’s intra-EU trade to
GDP ratio for the period 1999-2001 of 20.2% was 0.6 percentage points higher than
in  1997-99.  This  ratio  is  similar  to  that  of  Denmark  and  Finland,  although

23

considerably below the average for the other smaller EU Member States. The intra-
EU FDI to GDP ratio for the period 1997-99 was above the average for the smaller
Member  States.  Sweden’s  share  in  EU  cross-border  mergers  and  acquisitions
(M&As) is well above what one would expect for a country of its size.

In  recent  years,  a  number  of  structural  policy  reforms  have  been  introduced  which
have promoted the integration of Sweden into EU product markets:

(cid:1)  Sweden  has  an  excellent  record  in  transposing  and  applying  Single  Market

legislation.

(cid:1)  Measures have been taken to open up public procurement including the promotion

of on-line procurement.

(cid:1)  Liberalisation  of  the  network  industries  has  continued  and  is  among  the  most
advanced  in  the  EU.  Telecoms  prices  are  amongst  the  lowest  in  the  EU.
Nevertheless,  consolidation  of  firms  in  some  of  these  industries  has  created  a
highly concentrated supply structure.

(cid:1)  Sweden  is  one  of  the  most  advanced  EU  Member  States  in  terms  of  the
knowledge-based  society.  R&D  expenditure  and  patent  applications  are  the
highest in the EU and internet and computer use are well above the EU average.

In  spite  of  the  significant  progress  made  in  opening  up  the  product  markets  to
competition,  both  from  within  and  from  outside  the  country,  Sweden’s  price  level
remained high at around 28% above the EU average in 2000. This high relative price
level may be attributed in part to the high levels of indirect taxation in Sweden, but
more  importantly  to  a  lack  of  competition  in  certain  sectors  such  as  the  retail  and
distribution of pharmaceuticals and food retailing. In addition the relatively large size
of  the  public  sector  in  Sweden  means  that  open  public  procurement  rules  and
competition in public services provision are particularly important.

24

Table 7  Sweden : product markets

PRODUCT MARKETS IN SWEDEN

SWEDEN

EU

1998

1999

2000

2001

1998

1999

2000

2001

Labour productivity1

Relative price levels2

93.9

93.0

93.0

91.1

122.0

125.0

128.0

Intra-EU trade to GDP ratio (%)3

Intra-EU FDI inflows (% of GDP)4

20.1

7.5

19.9

20.2

21.0

19.7

5.9(3.0)

7.6(2.8)

6.3(2.9)

Cross-border M&A share5

Single Market Directives6

Value of tenders in the O.J.7

Sectoral and ad hoc State aids8

Prices in telecommunications9

Local

National

Call to USA

Market share fixed telecom. (%)10

Local

Long Distance

International

Electricity prices11

Households

Industry users

Market share electricity (%)12

Education expenditure7

New S&T graduates13

R&D expenditure7

Internet access at home14

Patent applications15

1.2

3.7

0.30

0.30

1.11

82.0

82.0

59.0

6.52

3.88

8.4

11.6

1.5

2.5

0.7

0.29

0.58

4.90

7.01

3.68

8.0

7.9

3.75

39.6

2.1

2.7

0.6

0.29

0.45

4.90

93.0

76.0

62.0

6.24

3.52

53.0

7.7

9.7

3.80

51.0

100

100

28.5

4.7

100

3.9

1.8

1.0

0.41

2.16

5.07

100

100

28.7

6.1

100

3.6

1.8

0.9

0.41

1.69

4.09

100

100

31.0

100

3.0

2.4

0.41

1.34

3.39

100

100

30.5

2.0

0.41

1.15

2.65

0.9

0.30

0.30

1.11

6.83

3.75

10.57

10.48

10.40

10.33

6.44

6.32

6.44

6.33

8.3

5.0

5.0

5.1

53.8

60.7

1.87

8.3

1.92

12.0

1.90

28.4

37.7

307.0

308.5

346.4

129.9

140.9

152.7

All  figures  for  2001  are  estimates.  1  Per  person  in  PPS,  EU=100;  2  EU=100,  private  final  consumption;  3  (Intra-EU  exports  +
intra-EU imports)/(2*GDP). EU average for small Member States (B, DK, EL, IRL, L, NL, A, P, FIN and S);4 Intra-EU FDI inflows
as a % of GDP; 5 % of EU total (GDP share). EU average for small Member States; 6 % not yet implemented; 7 % of GDP; 8 % of
GDP  (avg.  96-98&97-99);  9  Price  in  euro  of  10  minute  call  at  11  am  on  a  weekday,  VAT  included;  10  Market  share  of  the
incumbent;  11  Prices  in  euro  per  Kwh;  12  Market  share  of  the  largest  generator;  13  Per  1000  inhabitants  aged  20-29;  14  %  of
households; 15 Per million inhabitants, EPO.

25

–  Developments in financial markets

The  Swedish  bond  market  is  characterised  by  high  liquidity  and  the  active
participation of both domestic and foreign financial intermediaries. The largest issuer
in  the  Swedish  krona  (SEK)  fixed  income  market  is  the  central  government.
Although declining since 1999, the stock of (central) government debt still accounts
for approximately for half of the outstanding volume27. The mortgage institutions are
the other major issuer in the market.  Foreign currency instruments, including swaps,
account  for  more  than  one  third  of  total  central  government  debt28,  with  the
benchmark  distribution  for  foreign  currency  debt  in  2002  biased  towards  the  euro
(59%)  and  the  USD  (20%).  Of  the  remaining  SEK-denominated  debt,  8%  is  in  the
form  of  index-linked  bonds.  The  corporate  bond  market  has  grown  significantly  in
recent  years,  but  fulfils  still  only  a  minor  part  of  companies  financing  needs.
Government  issues  also  dominate  the  SEK  money  market,  which  has  a  volume  of
approximately one third of the bond market. The Swedish equity market is integrated
with several neighbouring markets. Equity trading via the Norex alliance (comprising
the Stockholm, Copenhagen, Reykjavik and Oslo stock exchanges) now accounts for
about 70% of the total Nordic equity market.

A number of legislative initiatives were taken in 2001 to improve conditions in the
securities  markets.  The  Financial  Supervisory  Authority  (FSA)  is  developing  a
refined internal risk assessment system, while the co-operation agreement signed in
2000 with its counterparts in Denmark,  Finland  and Norway  was broadened during
2001.

The financial  structure has  been  characterised by  a  continued  transformation  of  the
banking sector, legislative and taxation reform and technological  development. The
transformation of the banking system continued in 2001 with new players receiving
permits to establish banking business. Also, large retail-chains have started offering
banking  services  to  their  customers.  Swedish  banks  continue  to  focus  strongly  on
“home banking”, with the use of the Internet as a central feature.

2.6.2.  Balance of payments on current account

In the 1970s and 1980s Sweden emerged as a significant international net debtor as a
combination  of  low  private  and  public  saving  and  recurring  competitiveness
problems  created  substantial  current  account  deficits.  Sweden’s  position  changed
after  the  deep  recession  at  the  beginning  of  the  1990s.  The  large  depreciation  in
November 1992  and  continued  depressed  private  domestic  demand,  in  combination
with consolidation of public finances, generated large current account surpluses. The
current  account  remained  substantial  at  3¼%  of  GDP  in  2001  despite  the  global
slowdown.  Sustained  external  surpluses  in  combination  with  favourable  growth
prospects suggest that the competitiveness of the Swedish economy is strong.

2.6.3.  Unit labour costs and other price indices

The  examination  of  the  development  of  unit  labour  costs  and  other  price  indices,
required by Article 121(1), is included in the section on price stability (see 2.2.2.).

27 about 53,5% of GDP at the end of 2001
28 End-February 2002

26

                                                
ANNEX A: COMPATIBILITY OF NATIONAL LEGISLATION

According to the second sentence of Article 121 of the Treaty, the report drawn up
under  this  article  "shall  include  an  examination  of  the  compatibility  between  each
Member  State's  national  legislation,  including  the  statutes  of  its  national  central
bank, and Articles 108 and 109 of this Treaty and the Statute of the ESCB".

According to Article 109 of the Treaty, each Member State shall ensure, at the latest
at  the  date  of  the  establishment  of  the  ESCB,  that  its  national  legislation  including
the statute of its national central bank is compatible with this Treaty and the Statute
of the ESCB.

Following the approach chosen in the convergence report of 2000, the examination is
divided into three areas:

–  objectives of national central banks;

–  independence;

–  integration in the ESCB and other legislation.

Objectives of national central banks

The objective  of  a  national  central  bank  must  be  compatible  with  the  objectives  of
the ECB as formulated in Article 105(1) of the Treaty (and Article 2 of the Statute of
the ESCB):

"The  primary  objective  of  the  ESCB  shall  be  to  maintain  price  stability.  Without
prejudice  to  the  objective  of  price  stability,  the  ESCB  shall  support  the  general
economic policies in the Community with a view to contributing to the achievement
of the objectives of the Community as laid down in Article 2."

References  in  national  law  to  the  policy  of  the  government  or  to  specific
macroeconomic objectives are not incompatible provided that the primacy of the first
and second objectives of Article 105 of the Treaty is respected.

Independence

Article 108 of the Treaty ensures that the ESCB will operate free from instructions
from third parties:

"When exercising  the  powers  and  carrying  out  the  tasks  and  duties  conferred  upon
them  by  this  Treaty  and  the  Statute  of  the  ESCB,  neither  the  ECB  nor  national
central bank, nor any member of the their decision-making bodies shall seek or take
instructions  from  Community  institutions  or  bodies,  from  any  government  of  a
Member State or from any other body. The Community institutions and bodies and
the governments of the Member States undertake to respect this principle and not to
seek to influence the  members  of the decision  making bodies of the ECB or  of  the
national central banks in the performance of their tasks."

27

The various aspects of independence are described in more detail in the convergence
report of 1998.

Integration of national central banks in the ESCB and other legislation

According to Article 9.2 of the  Statute  of  the  ESCB, the ECB  shall ensure that  the
tasks  conferred  upon  the  ESCB  are  implemented  either  by  its  own  activities  or
through  the  national  central  banks.  Furthermore,  according  to  Article  14.3,  the
national central  banks  are an integral part of  the ESCB  and  shall act in accordance
with the guidelines and instructions of the ECB. Therefore, provisions in the statutes
of the central banks, which stand in the way of the national central banks assuming
their role, need to be adapted under Article 109.

The examination in this report recalls the result of the examination in 2000, describes
legislative action since the earlier examination, summarises the essential elements of
central bank legislation in force and concludes with an assessment of compatibility.
The  statement  on  compatibility  concludes  that  a  country's  legislation  either  is  or  is
not compatible with the Treaty and the ESCB Statute. Legislation is not compatible
where incompatibilities exist which infringe upon principles  of  the Treaty.  In some
cases, imperfections have been identified which are either of a technical nature or are
ambiguities  rather  than  obvious  inconsistencies.  The  judgement  on  compatibility  is
not affected by the reference to such imperfections.

28

ANNEX B: INFLATION CRITERION

This Annex presents the evolution of the reference value for  assessing the  inflation
criterion  and  describes  recent  methodological  developments  in  the  harmonised
indices of consumer price.

B.1.

Reference value for inflation

Article 121(1) and Article 1 of Protocol N° 21 are the relevant Treaty provisions for
assessing  the  inflation  criterion  (see  pages  7  and  8).  Article 1  of  Protocol No 21
specifies that “Inflation shall be measured by means of the consumer price index on
a comparable basis, taking into account differences in national definitions”. To meet
this  requirement,  Harmonised  Indices  of  Consumer  Prices  (HICP)  have  been
produced in each Member State since January 1997 using a harmonised methodology
developed by Eurostat in collaboration with national statistical offices.

The assessment of the price convergence criterion as laid down in Protocol No 21 of
the Treaty requires an operational definition of the reference value against which the
price  performance  of  Member  States  with  a  derogation  will  be  assessed.  In  the
Commission’s  Convergence  Reports  of  March 1998  and  May  2000,  the  reference
value was calculated as the arithmetic average of the inflation rates of the three best
performing Member States plus 1.5 percentage points.

Since the start of the third stage of EMU, price stability in the participating Member
States  is  pursued  at  euro  area  level  by  means  of  the  monetary  policy  of  the
Eurosystem.  Moreover,  the  ECB  has  provided  its  interpretation  of  price  stability:
“price stability shall be defined as a year-on-year increase in the Harmonised Index
of  Consumer  Prices  (HICP)  for  the  euro  area  of  below  2%”.29  The  implications

Table B.1

B
DK
D
EL
E
F
IRL
I
L
NL
A
P
FIN
S
UK
Euro area
EU-15
reference 
value b)

Development of  12-month average inflation rates
and the reference value 

0104

0105

0106

0107

0108

0109

0110

0111

0112

0201

0202

0203

0204

2.9
2.6
2.3
3.2
3.5
1.8
5.0
2.5
3.7
3.5
2.1
3.8
3.0
1.6
0.9
2.5
2.2

2.9

3.0
2.6
2.5
3.3
3.5
1.9
4.9
2.6
3.8
3.8
2.2
4.0
3.0
1.7
1.0
2.6
2.3

3.0

3.0
2.5
2.5
3.5
3.6
1.9
4.8
2.6
3.6
4.0
2.2
4.2
3.0
1.9
1.0
2.6
2.4

3.1

3.1
2.5
2.6
3.6
3.5
2.0
4.7
2.6
3.5
4.2
2.3
4.2
3.0
2.0
1.1
2.7
2.4

3.2

3.0
2.5
2.7
3.7
3.3
2.0
4.5
2.5
3.4
4.4
2.3
4.3
3.0
2.1
1.2
2.7
2.4

3.3

2.8
2.4
2.6
3.8
3.2
1.9
4.4
2.5
3.2
4.6
2.3
4.3
2.9
2.3
1.2
2.6
2.4

3.3

2.7
2.4
2.6
3.8
3.1
1.9
4.2
2.4
2.9
4.8
2.3
4.4
2.8
2.4
1.2
2.6
2.4

3.3

2.5
2.3
2.5
3.7
2.9
1.8
4.0
2.4
2.7
4.9
2.3
4.4
2.7
2.5
1.2
2.5
2.3

3.3

2.4
2.3
2.4
3.7
2.8
1.8
4.0
2.3
2.4
5.1
2.3
4.4
2.7
2.7
1.2
2.5
2.3

3.3

2.4
2.3
2.4
3.8
2.8
1.9
4.1
2.3
2.3
5.1
2.3
4.3
2.7
2.8
1.3
2.5
2.3

3.3

2.4
2.3
2.3
3.8
2.9
1.9
4.2
2.4
2.3
5.1
2.3
4.2
2.6
2.9
1.3
2.5
2.4

3.3

2.5
2.3
2.3
3.9
2.9
2.0
4.3
2.5
2.2
5.0
2.2
4.1
2.6
3.0
1.4
2.6
2.4

3.4

2.4
2.3
2.2
3.9
2.9
2.0
4.3
2.4
2.1
4.9
2.2
4.0
2.6
2.9
1.4
2.5
2.3

3.3

a) Measured by the percentage change in the arithmetic average of the latest 12 monthly indices relative to the arithmetic average of the 12 monthly indices of the previous period.
b) Average of the three best performers plus 1.5 percentage points; same method as used in the 1998 and 2000 convergence reports.
Source: Eurostat , Commission services.

arising  from  the  third  stage  of  EMU  for  the  operational  definition  of  the  price
convergence criterion were discussed in the 2000 Convergence Report.

29

The ECB has made it clear that negative inflation rates, should they occur, would not be consistent with
price stability. Price stability in the euro area is to be maintained over the medium term.

29

                                                
in 

rates 

inflation 

the  1998 

Table B.1 shows how the 12-month
average 
have
evolved in the Member States since
the  beginning  of  2001,  and  the
derivation  of  the  reference  value,
calculated  using  the  same  method
and  2000
as 
Convergence  Reports.  Table B.2
shows  for  the  period  since  the
beginning  of  the  third  stage  of
EMU  in  January  1999  the  three
best  performers  (in  the  EU)  in
terms  of  price  stability,  the  12-
month  average  inflation  rate  in
these three best performers and the
corresponding 
value.
Finally,  Graph  B1  and  table  B3
the
compare 
reference  value  and  the  12-month
average  inflation  in  Sweden  with
other  possible  standards  for  price
stability.

the  evolution  of 

reference 

As shown in those tables, the three
best-performing  Member  States  in
the  EU  in  April  2002  were  the
United  Kingdom  (1.4%),  France
(2.0%)  and  Luxembourg  (2.1%).
The unweighted arithmetic average
of  the  12-month  average  inflation
rates  in  these  three  countries  was
1.8%.  The 
reference
value,  calculated  according  to  the
operational  definition  used  in  the
March 1998 
2000
convergence 
therefore 3.3%.

and  May 
reports,  was

resulting 

On  the  basis  of  a  definition
non-euro
excludes 
which 
Member States from the group
of 
the
reference  countries, 
inflation
12-month  average 
rate 
best-
performing  euro  area  Member
States in April 2002 was 2.1%,
giving  a  reference  value  of
3.6%.

three 

the 

of 

  Table B.2
  Evolution of the inflation reference value
 and the three best performers

Three best
EU performers
D, F, L
D, F, S
D, F, S
S, D, A
S, D, A
S, F, A
S, F, A
S, A, F
S, A, F
A, S, F
A, S, F
A, S, F
A, S, F
S, A, F
S, F, A
S, F, A
S, UK, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, S, F
UK, F, S
UK, F, S
UK, F, S
UK, F, A
UK, F, DK
UK, F, DK
UK, F, A
UK, F, A
UK, F, L
UK, F, L

Jan-99
Feb-99
Mar-99
Apr-99
May-99
Jun-99
Jul-99
Aug-99
Sep-99
Oct-99
Nov-99
Dec-99
Jan-00
Feb-00
Mar-00
Apr-00
May-00
Jun-00
Jul-00
Aug-00
Sep-00
Oct-00
Nov-00
Dec-00
Jan-01
Feb-01
Mar-01
Apr-01
May-01
Jun-01
Jul-01
Aug-01
Sep-01
Oct-01
Nov-01
Dec-01
Jan-02
Feb-02
Mar-02
Apr-02

Average
of 3 best
0.6
0.6
0.6
0.5
0.4
0.4
0.3
0.3
0.4
0.4
0.4
0.6
0.6
0.8
0.9
1.0
1.0
1.1
1.1
1.2
1.2
1.2
1.3
1.3
1.3
1.3
1.3
1.4
1.5
1.6
1.7
1.8
1.8
1.8
1.8
1.8
1.8
1.8
1.9
1.8

Reference
value
2.1
2.1
2.1
2.0
1.9
1.9
1.8
1.8
1.9
1.9
1.9
2.1
2.1
2.3
2.4
2.5
2.5
2.6
2.6
2.7
2.7
2.7
2.8
2.8
2.8
2.8
2.8
2.9
3.0
3.1
3.2
3.3
3.3
3.3
3.3
3.3
3.3
3.3
3.4
3.3

a) Measured by the percentage change in the arithmetic average of the 
latest 12 monthly indices relative to the arithmetic average of the 12 
monthly indices of the previous period.
b) Unweighted arithmetic average of the three best performing Member 
States in terms of inflation plus 1.5 percentage points.
Source: Eurostat , Commission services. 

Graph B.1 Evolution of average inflation and reference value since start of EMU

4

3

2

1

0

Jan-99

Jan-00

Jan-01

Jan-02

Source:  Eurostat, Commission services

Reference value

S

Euro area average

30

the 

Given 
relatively
moderate  inflation  in  the
EU  and  a  12-month
average  inflation  rate  of
2.5%  in  April  2002  in
the euro area, none of the
best-performing
three 
EU  Member  States 
is
to  have  a
considered 
non-representative
inflation performance.

Table B.3

 Inflation convergence -HICP 
(April 2002) a)

NL
IRL
P
EL

S
E
FIN

I
B

DK
D
A
L

F

UK

4.9
4.3
4.0
3.9

2.9
2.9
2.6

2.4
2.4

2.3
2.2
2.2
2.1

2.0

1.4

3.6
3.3

2.5

2.3

2.1
2.0

1.8

reference value 3 best Euro area MS
reference value 3 best EU MS

Euro area average

EU average

average value of 3 best Euro area MS
Upper limit of ECB definition of price stability

average value of 3 best EU MS

a) Percentage change in the arithmetic average of the latest 12 months harmonised indices of consumer prices
(HICP) relative to the arithmetic average of the previous 12 months.

Source : Eurostat , Commission services. 

31

B.2.

Recent methodological developments in HICP

The HICPs provide comparable measures of consumer price inflation in the Member
States. The HICPs are used for the assessment of convergence in inflation across the
EU  and  they  form  the  main  measure  of  price  stability  in  the  euro  area.  Since  the
Commission  undertook its previous convergence  assessment  in  May 2000,  Eurostat
and  the  statistical  offices  of  the  Member  States  have  continued  to  refine  the
measurement of inflation provided by the HICPs.

HICPs  are  intended  to  cover  all  forms  of  household  expenditure  (“household  final
monetary  consumption  expenditure”).  At  the  launch  of  the  HICP  in  1997,  certain
technically difficult areas were excluded because Member States did not yet agree on
comparable  methodologies.  The  initial  product  coverage  included  approximately
95% of all household final monetary consumption expenditure (this concept does not
include  imputed  rents  of  owner-occupied  housing).  The  product  coverage  of  the
HICPs has been extended  since to include  additional  goods  and  services,  and  there
have been further harmonisation to full population and geographic coverage.30  These
extensions were  implemented  with  the  January  2000  and  January  2001  indices  and
were discussed in the 2000 Convergence Report.

Further harmonisation rules were implemented starting with the January 2001 index.
These  concerned  the  treatment  of  price  reductions  (e.g.  seasonal  sales)  in  national
HICPs,  the  time  of  entering  prices  into  the  index,  additional  harmonisation  on  the
coverage of services prices (e.g. proportional charges for financial and legal services)
and  the  treatment  of  revisions  in  the  HICP.31  On  account  of  the  small  weights,  the
changes for services prices is expected to have only a minimal effect on the overall
index.  However,  the  changes  concerning  the  treatment  of  sales  and  revisions  are
likely to have a stronger impact and can vary across Member States (e.g. depending
on the nature and timing of price reductions introduced by a Member State and the
collection period within the month).

Given that the data used for the price convergence criterion is the 12-month average
inflation  rate  ,  the  practical  implications  of  the  changes  in  methodology  for  the
assessment of inflation convergence in this examination are small.

30

31 

The  extension  takes  place  under  the  legal  umbrella  of  Council  Regulations  (EC) Nos 1687/98  and
1688/98.
These  further  harmonisation  rules  resulted  from  implementing  Commission  Regulation  (EC)  N°
2601/2000, Commission Regulation (EC) N° 2602/2000, Commission Regulation (EC) N° 1920/2000
and Commission Regulation (EC) N° 1921/2001.

32

                                                
B.3.

Additional tables on other price and cost indicators

Table B.4

Price deflator of private final
consumption expenditure in EU Member States
(national currency, annual percentage change)

1997

1998

1999

2000

2001

2002*

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU

Euro area
EU

1.8
2.0
5.6
2.6
1.4
2.7
2.2
1.4
2.0
1.5
3.0
1.3
2.1
2.2
2.3
2.3
2.2

1.2
1.0

1.2
1.1
4.5
2.2
0.7
3.5
2.1
1.3
1.7
0.5
2.9
1.7
1.6
1.3
1.0
2.7
1.7

1.0
0.4
2.1
2.4
0.4
3.4
2.1
1.4
1.9
0.7
2.3
1.0
1.2
2.6
1.0
1.5
1.3

Standard deviation

1.2
1.1

0.9
0.9

2.2
1.4
3.1
3.2
1.5
4.6
2.8
2.8
2.8
1.5
2.8
3.8
2.2
3.0
1.0
0.6
1.9

1.0
1.1

2.3
1.8
3.0
3.2
1.2
4.5
2.9
2.8
4.5
2.3
4.4
2.7
2.3
2.1
1.6
1.5
2.1

1.1
1.1

1.7
1.7
3.3
2.9
1.4
4.4
2.3
1.9
3.3
2.2
3.1
1.9
2.1
2.4
1.9
2.0
2.1

0.9
0.8

*  Spring 2002 economic forecasts.

Source: Commission services.

33

Table B.5

1993
-96 a)
3.0
3.0
10.6
4.8
2.6
3.7
4.5
3.4
2.2
3.5
6.8
2.6
3.5
2.9
4.7
3.5
3.5

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU

Labour costs in EU Member States
(percentage change, total economy)

2002*

2001

Nominal compensation
per employee
1997
-00 a)
2.8
1.1
7.6
2.8
2.2
5.7
2.0
3.3
3.4
2.2
4.5
3.0
2.1
3.5
3.9
4.7
2.6

2.6
1.6
6.2
4.3
2.0
9.2
2.8
5.3
4.6
2.8
5.8
4.5
2.7
4.2
3.8
5.2
3.2

3.2
2.4
6.6
3.5
2.5
8.1
2.7
3.7
5.2
2.4
4.4
3.5
2.9
3.6
3.9
4.3
3.3

Labour productivity

Nominal unit labour costs

1993
-96 a)
1.3
1.3
0.4
1.7
1.4
3.3
2.3
1.3
1.3
2.1
4.3
3.8
1.7
2.4
3.1
2.7
1.9

1997
-00 a)
1.9
1.1
3.0
0.7
1.5
4.0
1.1
2.4
1.1
1.8
1.8
2.8
1.3
1.4
2.3
1.5
1.4

2001

2002*

-0.1
0.4
4.2
0.3
0.1
3.7
0.2
-0.6
-1.0
0.8
0.1
-0.5
0.3
0.4
-0.6
1.4
0.5

1.0
1.2
3.4
0.9
1.1
2.4
0.6
0.9
0.9
1.6
1.2
1.7
1.1
1.6
2.1
1.8
1.3

1993
-96 a)
1.7
1.6
10.2
3.0
1.1
0.3
2.2
2.0
0.9
1.4
2.4
-1.1
1.7
0.5
1.5
0.8
1.6

1997
-00 a)
0.8
0.0
4.4
2.1
0.7
1.6
0.9
0.8
2.3
0.4
2.6
0.2
0.8
2.1
1.6
3.1
1.3

2001

2002*

2.7
1.2
1.9
4.0
1.9
5.3
2.6
5.9
5.6
2.0
5.6
5.0
2.4
3.8
4.4
3.7
2.7

2.2
1.2
3.1
2.5
1.4
5.5
2.1
2.9
4.3
0.8
3.2
1.8
1.8
2.0
1.8
2.5
2.0

a) Average annual percentage change.
*  Spring 2002 economic forecasts.

Source: Commission services.

34

Table B.6

Import prices in EU Member States
(percentage change in the deflator of imports of goods and services,
in national currency)

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU

1997
5.5
3.1
2.8
3.5
1.5
0.7
1.4
4.2
2.2
1.8
2.7
0.5
2.6
2.2
0.8
-7.1
0.9

1998
-2.3
-1.7
3.8
-0.3
-2.5
2.5
-1.3
1.9
-1.5
0.0
-1.2
-3.0
-1.3
-2.5
-0.5
-6.2
-2.1

1999
0.7
-1.2
1.9
0.5
-0.6
2.7
0.4
3.7
0.6
0.1
-0.6
-1.9
0.0
-0.2
1.0
-2.5
-0.4

2000

11.8
7.7
10.5
9.8
5.1
7.4
12.0
7.4
8.7
3.1
8.6
6.9
8.4
9.9
4.6
0.6
7.2

2001
2.6
1.0
3.1
0.4
0.4
2.7
1.6
-1.1
0.6
2.2
2.0
-2.2
1.1
2.5
4.2
0.0
1.1

2002*
0.9
0.1
1.7
0.2
0.6
1.8
1.2
-0.1
1.3
1.1
0.9
-0.1
0.7
0.1
1.7
1.4
0.8

 *  Spring 2002 economic forecasts.

 Source : Commission services.

35

ANNEX C: GOVERNMENT BUDGETARY DATA

C.1.

Developments in the national accounts system ESA 95

The  government  budgetary  data  used  in  the  excessive  deficit  procedure,  and  hence
for  the  assessment  of  convergence,  are  on  a  national  accounts  basis.  From  the
year 2000  a  new  system  of  accounts,  ESA 9532,  was  brought  into  use  for  these
purposes. Annex C in the Commission’s 2000 convergence report described the main
features  of  the  system,  ESA  95,  and  key  differences  from  the  earlier  system  of
accounts, ESA 79, which was used in the excessive deficit procedure until the end of
1999 and in the 1998 convergence report.

Since the Commission’s 2000 convergence report was adopted, some further changes
to ESA 95 have been introduced.

First,  in  November  2000,  a  Regulation33  was  adopted,  modifying  the  common
principles of ESA 95 as concerns the recording of taxes and social contributions. The
purpose  of  this  Regulation  is  to  ensure  comparability  and  transparency  among  the
Member  States  and,  in  particular,  that  the  impact  on  the  net  lending/borrowing  of
general government of taxes and social contributions recorded in the system do not
include amounts unlikely to be collected.

Second,  in  December  2001,  an  amended  Regulation  was  adopted  concerning  the
ESA 95 definition of flows between two counterparts under any kinds of swaps and
under  forward  rate  agreements.  These  flows  that  were  previously  considered  to  be
interest (non-financial transactions), are now considered to be financial transactions
and  are  therefore  excluded  from  the  calculation  of  general  government  balances34.
However,  this  amendment  does  not  apply  to  the  definition  of  general  government
balances to be used for the purpose of the Excessive Deficit Procedure (EDP), which
therefore continues to consider these flows as interest.

Therefore,  as  regards  Council  Regulation  3605/9335,  which  defines  the  EDP,  the
reclassification  in  ESA  95  referring  to  swaps  and  forward  rate  agreements  is  not
carried over and in February 2002 an amendment to the EDP regulation was adopted
for this purpose36.

32

33 

34 

35 

36 

The  ESA 95  accounting  methodology  and  the  transmission  programme  of  national  accounts  data  are
specified by Council Regulation (EC) No 2223/96 of 25 June 1996 on the European system of national
and regional accounts in the Community, OJ L 310, 30.11.1996, p.1.
Regulation (EC) No 2516/2000 of the European Parliament and of the Council of 7 November 2000, OJ
L  290,  17.11.2000,  pp.  1-2.  Commission  Regulation  (EC)  No  995/2001  of  22  May,  OJ  L  139,
23.5.2001, pp. 3-8, implements Regulation (EC) No 2516/2000 mentioned above.
Regulation  (EC)  No  2558/2001  of  the  European  Parliament  and  of  the  Council  of  3  December  2001
amending  Council  Regulation  (EC)  No  2223/96  as  regards  the  reclassification  of  settlements  under
swaps arrangements and under forward rate arrangements, OJ L 344, 28.12.2001, pp. 1-4.
Council Regulation (EC) No 3605/93 of 22 November 1993 on the application of the Protocol on the
excessive  deficit  procedure  annexed  to  the  Treaty  establishing  the  European  Community  OJ  L  332,
31.12.1993, as amended by Regulation (EC) No 475/2000, OJ L 58, 3.3.2000.
Commission  Regulation  (EC)  No  351/2002  of  25  February  2002,  OJ  L  55,  26.2.2002,  amending
Council Regulation (EC) No 3605/93 as regards references to ESA95.

36

                                                
For  the  purposes  of  the  present  report  and  for  the  assessment  of  the  government
budgetary position, the definition  of  ‘deficit’  is  in  accordance  with  the  one  used  in
the EDP.

37

C.2.

Additional tables on the public finances

Table C.1

Government surplus / deficit
 in EU Member States
     (General government net lending (+) / net borrowing (-) ,
 as % of GDP)

1997
-2.0
-2.7
-4.7
-3.2
-3.0
1.2
-2.7
2.8
-1.1
-2.0
-2.6
-1.5
-2.6
0.4
-1.6
-2.2
-2.5

2000
0.1
B
1.2
D
EL
-0.8
E
-0.3
F
-1.3
4.5
IRL
I
-0.5
5.8
L
2.2
NL
A
-1.5
P
-1.5
7.0
FIN
0.2
Euro area
2.5
DK
3.7
S
4.1
UK
EU
1.1
Note: Data according to the EDP definition.
*  Spring 2002 economic forecasts.

1998
-0.8
-2.2
-2.4
-2.6
-2.7
2.3
-2.8
3.2
-0.8
-2.4
-2.3
1.3
-2.2
1.1
1.9
0.4
-1.6

1999
-0.6
-1.6
-1.7
-1.1
-1.6
2.3
-1.8
3.8
0.4
-2.2
-2.2
1.9
-1.3
3.1
1.5
1.1
-0.7

2001
0.2
-2.7
0.1
0.0
-1.4
1.7
-1.4
5.0
0.2
0.1
-2.7
4.9
-1.3
3.1
4.8
0.9
-0.6

2002*
-0.2
-2.8
0.3
-0.2
-1.9
0.6
-1.3
2.0
0.0
-0.1
-2.6
3.3
-1.4
2.1
1.7
-0.2
-1.1

Source: Commission services.

38

Table C.2

Government debt in EU Member States
(General government consolidated gross debt , as % of GDP)

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU

1997
124.7
61.0
108.2
66.6
59.3
65.1
120.2
6.0
69.9
64.7
58.9
54.1
75.3
61.2
73.1
50.8
71.0

1998
119.3
60.9
105.0
64.6
59.5
55.1
116.4
6.3
66.8
63.9
54.8
48.8
73.7
56.2
70.5
47.6
68.9

1999
115.0
61.3
103.8
63.1
58.5
49.6
114.5
6.0
63.1
64.9
54.2
46.8
72.6
52.7
65.0
45.2
67.3

2000
109.3
60.3
102.8
60.4
57.4
39.0
110.6
5.6
56.0
63.6
53.4
44.0
70.2
46.8
55.3
42.4
64.2

*  Spring 2000 economic forecasts.

Source: Commission services.

2001
107.5
59.8
99.7
57.2
57.2
36.3
109.4
5.5
52.9
61.8
55.4
43.6
69.1
44.7
55.9
39.0
62.8

2002*
104.3
60.8
97.9
55.5
57.4
33.6
107.8
5.2
50.1
60.2
56.5
43.1
68.6
43.2
52.6
37.6
61.9

39

Table C.3

Updated stability/convergence programme projections
for government surplus/deficit in EU Member States
(General government net lending (+) / net borrowing (-) , as % of GDP)

Date
submitted
(a)
Dec.'01
Dec.'01
Dec.'01
Dec.'01
Dec.'01
Dec.'01
Nov.'01
Nov.'01
Oct ‘01
Nov.'01
Dec.'01
Nov.'01

Jan ‘02
Nov.'01
Dec.'01

2000
(b)

-0.1
1.2(-1.3)
-1.1
-0.3
-1.4
4.5
-1.5
6.2
2.2(1.5)
-1.1
-1.5
6.9
-0.8
2.5
4.1
2.0
-0.1

2001
(b)

0.0
2½
0.1
0.0
-1.4(-1.5)

1.4
-1.1
4.1
1.0
0.0
-2.2
4.7
-1.1
1.9
4.6
-0.2
-0.8

2002

2003

2004

2005

0.0
-2.0
0.8
0.0
-1.4(-1.5)

0.5
1.0
1.0
0.0
-1.3/-1.0

0.7
-0.5
2.8
1.0
0.0
-1.8
2.6
-0.9
1.9
2.1
-1.1
-0.9

-0.5
0.0
3.1
1.0
0.0
-1.0
2.1
-0.5
2.1
2.2
-1.3
-0.6

0.6
-0.0
1.2
0.1
-0.5/0.0
-0.6
0.0
3.4
1.0
0.2
0.0
2.6
0.0
2.1
2.3
-1.1
-0.1

0.7
-0.0
n.a
0.2
0.0/0.3
n.a
0.2
n.a
n.a
0.5
0.4
n.a
0.1
2.1
n.a
-1.0(c)
-0.1

B
D
EL
E
F (e)
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK (d)
EU

(a) Dates of adoption by Member State government of updated stability or convergence

 programme.

(b) Government balances in 2000 or 2001 are affected by receipts from the sale of UMTS

licences in several countries. Where information is available in the programmes, two
figures are shown: the first includes the proceeds from UMTS licences and
the second (in brackets) excludes these proceeds.

(c) Government deficit of 1.0% of GDP also projected for 2006-07.
(d)
(e)
         growth scenario.

Financial years.
In 2003 – 2005 the first figure refers to a low growth scenario, the latter to a high

 Source: Updated stability/convergence programmes.

40

ANNEX D: EXCHANGE RATE CRITERION

D.1.

Treaty provisions and ERM II

The relevant period for assessing exchange  rate stability in this report extends over
two years of Stage 3 of EMU. This implies that the application of the exchange rate
criterion  must  reflect  the  situation  after  the  introduction  of  the  euro  and  the
establishment of the ERM II. Accordingly, the assessment of exchange rate stability
in  this  examination  will  be  based  on  the  Treaty  provisions,  as  elaborated  by  the
relevant protocol, and by the Council Resolution establishing the ERM II with effect
from 1 January 1999.

The relevant Treaty provisions are:

(cid:1)  The third indent of Article 121(1), which refers to the exchange rate criterion as:

"the observance of the normal fluctuation margins provided for by the exchange-rate
mechanism  of  the  European  Monetary  System,  for  at  least  two  years,  without
devaluing against the currency of any other Member State”;

(cid:1)  Article 3 of Protocol No 21 which states that:

“The  criterion  on  participation  in  the  exchange-rate  mechanism  of  the  European
monetary system referred to in the third indent of Article 121(1) of this Treaty shall
mean that a Member State has respected the normal fluctuation margins provided for
by  the  exchange-rate mechanism of  the  European  Monetary  System  without  severe
tensions  for  at  least  the  last  two  years  before  the  examination.  In  particular,  the
Member State shall not have devalued its currency’s bilateral central rate against any
other Member State’s currency on its own initiative for the same period”.

(cid:1)  The  Council  Resolution  on  the  establishment  of  the  ERM II  (97/C 236/03  of

16 June 1997)37 which states that:

"With  the  start  of  the  third  stage  of  economic  and  monetary  union,  the  European
Monetary System will be replaced by the exchange rate mechanism as defined in this
Resolution….The  exchange-rate  mechanism  will  link  currencies  of  Member  States
outside the euro area to the euro".

D.2.

Application of the exchange rate criterion

In the convergence examination of April 2000, the application of the exchange rate
criterion  had  already  to  be  extended  to  the  first  15  months  of  Stage  3  of  EMU
bringing  ERM  II  into  focus.  Unlike  the  original  ERM,  the  ERM II  is  based  on  a
bilateral  exchange  rate  commitment  between  the  euro  and  the  other  participant
currencies. A "standard" fluctuation band of ±15% has been established and this, in

37

OJ C 236, 2.8.1997, p. 5.

41

                                                
principle, corresponds to the "normal fluctuation margins" referred to in the Treaty.
The  standard  fluctuation  band  of  ±15%  implies  the  possibility  of  a  30%
appreciation/depreciation of a currency against the euro  while remaining  within the
band,  making  it  a  very  accommodative  benchmark  for  assessing  exchange  rate
stability.

There  exists  the  possibility  of  establishing  narrower  fluctuation  bands  within  the
ERM II to reflect progress in economic convergence, but there is no requirement to
do  so.  The  assessment  of  exchange  rate  stability  can  be  made  in  the  context  of  a
fluctuation  band  of  ±2.25%  around  a  currency's  central  parity  against  the  euro.
Continuity between the approaches used in earlier assessments (when ERM still was
in place) and the current one is enhanced by the fact that the median currency in the
original ERM on the final day of Stage 2 was fixed irrevocably against the euro from
the  first  day  of  Stage 3.  The  "euro-based  approach"  would  also  imply  that  an
appreciation/depreciation of 4.5% would be tolerated, although, once again, a breach
of  the  band  would  not  necessarily  correspond  to  severe  tensions  but  would  be
assessed by reference to the same range of elements as in previous examinations.

D.3.

Fulfilling the exchange rate criterion in the current examination

The principle of equal treatment requires that the exchange  rate  criterion should be
applied  as  consistently  as  possible  over  time.  For  the  purposes  of  this  examination
the  criterion  will  be  applied  using  the  euro-based  approach.  In  summary,  the
conditions  to  be  respected  in  fulfilling  the  exchange  rate  criterion  would  be  as
follows:

(cid:1)  Participation in the ERM II at the time of the assessment is mandatory.

(cid:1)  Participation in the ERM II for at least two years is expected, although exchange
rate stability during  a period of non-participation  before entering  ERM II  can  be
taken into account.

(cid:1)  No downward realignment of the central parity in the ERM II within the two-year

examination period.

(cid:1)  Exchange  rate  to  have  been  maintained  within  a  fluctuation  band  of  ±2.25%
around the currency's central parity against the euro in the context of the ERM II.
However,  the  extent  to  which  a  breach  of  the  ±2.25%  fluctuation  band  would
correspond  to  severe  tensions  would  take  account  of  a  range  of  relevant
considerations.  A  distinction  is  to  be  made  between  exchange  rate  movements
above the 2.25% upper margin and movements below the 2.25% lower margin.

42

ANNEX E: LONG-TERM INTEREST RATE CRITERION

Table E.1

Long-term interest rates
in EU Member States
(12-month averages)

1999

2000

2001

April
 2002 a)
5.2
4.9
5.3
5.2
5.0
5.1
5.2
4.9
5.0
5.1
5.2
5.1
5.1
5.1
5.3
5.1
5.1

5.1
4.8
5.3
5.1
4.9
5.0
5.2
4.9
5.0
5.1
5.2
5.0
5.0
5.1
5.1
5.0
5.0

5.6
5.3
6.1
5.5
5.4
5.5
5.6
5.5
5.4
5.6
5.6
5.5
5.4
5.6
5.4
5.3
5.4

4.7
4.5
6.3
4.7
4.6
4.7
4.7
4.7
4.6
4.7
4.8
4.7
4.7
4.9
5.0
5.0
4.7

B
D
EL
E
F
IRL
I
L
NL
A
P
FIN
Euro area
DK
S
UK
EU
Average of
3 best
performers
Reference
value b)
a)   Average of  May 2001-April 2002.
b)  Average  of  interest  rates  of  the  3  best  performing
Member  States  (underlined)  in  terms  of  price  stability
plus 2%-points.
Source: Commission services.

5.0

7.0

7.4

5.4

6.8

4.8

5.0

7.0

The application of the interest rate criterion in this
report is  on the  same  basis  as  in  the  1998  and  the
2000 convergence reports.

For  the  operational  assessment  of  the  criterion  on
the  convergence  of  interest  rates  the  yield  on
benchmark  ten-year  bonds  has  been  used;  details
about the interest rates used for the Member States
are  given  in  the  box.  The  long-term  interest  rates
are  averaged  over  periods  of  twelve  months.  The
reference  value  is  calculated  from  the  simple
average  of  the  average  long-term  interest  rates  of
the  three  best  performing  Member  States  in  terms
of  price  stability  as  measured  by  harmonised
indices  of  consumer  prices  (see  Annex  B)  plus
2 percentage points.

in 

the  years 1999-2001  and 

Table E.1 reports the annual averages for long-term
interest  rates 
in
April 2002,  the  latest  date  for  which  monthly  data
are  available.  Average  long-term  interest  rates  for
the 12-month period from May 2001 to April 2002
are shown in the final column of the table. In April
2002, the reference value, derived from the average
interest  rates  in  the  United  Kingdom,  France  and
Luxembourg,  the  three  best  performing  Member
States in terms of price stability, was 7.0%.

43

BOX: Data for the interest rate convergence criterion
The fourth indent of Article 121(l) of the Treaty requires that the durability of nominal convergence
and exchange rate stability in Member States should be assessed by reference to long-term interest
rates. Article 4 of Protocol No 21 on the convergence criteria adds that these "Interest rates shall be
measured on the basis of long-term government bonds or comparable securities, taking into account
differences in national definitions".
Article 5 of Protocol No 21 requires that the Commission should provide the statistical data used for
the application of the convergence criteria. However, in the context of the interest rate criterion, the
European  Monetary  Institute  developed  the  criteria  for  harmonising  the  series  of  yields  on
benchmark  10-year  bonds  on  behalf  of  Eurostat  and  started  collecting  the  data  from  the  central
banks, a task which has then been transferred to the European Central Bank. The selection of bonds
for inclusion in  this  series  has  the  following  characteristics:  a residual  maturity  close to  10  years;
issued by central government; adequate liquidity, which is the main selection criterion; the  choice
between a single benchmark or the simple average of a sample is based on this requirement; yield
gross of tax; and fixed coupon.
For all the Member States, the representative interest rates used in this examination incorporate all
of  the  above  characteristics.  This  ensures  cross-country  comparability.  Since  December  1997,  11
Member  States  have  been  using  a  single  benchmark  bond  and  four  a  sample  of  bonds  (Germany,
Spain,  Portugal,  Sweden).  The  harmonised  series  for  Greece  starts  in  mid-1997,  as  a  10-year
benchmark bond has been available only since June 1997.

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