nils bernstein : a view from the outside - effects on the introduction of the euro statement by mr nils bernstein, governor of the national bank of denmark, at the conference " experience with and preparations for the euro " at the raiffeisen landesbank oberosterreich, linz, 10 - 12 may 2006. * * * it is a great pleasure and honour to have been invited to give a view from an out - country on the effect of the introduction of the euro. conferences like this offer an excellent opportunity for mutual exchange of experiences and discussion of issues related to monetary policy and financial sector developments. i will focus my statement on the effect of the euro for denmark on four topics : monetary policy, financial integration, trade integration and the requirements for fiscal policy and other economic policies. finally, i will summarise our experience with the euro as the nominal anchor for inflation expectations within the danish fixed - exchange - rate regime. first, let me describe the effects of the introduction of the euro on monetary policy in denmark. denmark maintains a fixed - exchange - rate policy vis - a - vis the euro area. since the start of the third stage of the economic and monetary union in the eu on 1 january 1999, the formal framework for the fixed - exchange - rate policy has been the european exchange - rate mechanism, erm ii. denmark participates in erm ii with a narrow fluctuation band of + / - 2. 25 per cent around the central rate. the central rate is a conversion of the central rate of the krone vis - a - vis the d - mark in the previous european exchange - rate mechanism ( erm i ), and the central parity of the danish krone vis - a - vis the anchor has now been unchanged for more than 19 years. 1 due to this long - standing experience with a firm fixed - exchange - rate policy, the introduction of the euro has not implied any major changes for the overall monetary - policy framework in denmark. during its more than seven years of existence, the euro has served as a stable nominal anchor for the inflation expectations in denmark. the fluctuations in the krone vis - a - vis the euro are now so moderate that most ordinary households and business enterprises no longer take them into consideration. on average, prices on retail goods have been broadly constant for a long period. during most of the erm i period the d - mark was the nominal anchor of the danish economy, and germany has been denmark's

to the number of open unemployed persons continuing to fall, but at an ever slower rate. compared with what we were expecting in june, the conditions in the labour market have become tighter. this means in turn that it is reasonable to assume that wages will rise more quickly ( slide 8 ). and the agreements signed so far support this picture. the new agreements will make an impact in 2008, and the labour shortages will also become more marked then. we are therefore counting on wages increasing more during next year than in 2007, by around 4. 5 per cent. labour costs per hour are also expected to increase. how this affects companies ’ costs for the goods they produce will in turn depend on how productivity develops. productivity growing more slowly and labour costs increasing if one looks back at the past decade, productivity in the swedish economy has improved significantly ( slide 9 ). this meant that production could increase more quickly than costs. it also contributed to employment showing fairly weak development over a long period, despite good growth. but more recently employment has increased, while productivity growth has been lower. we believe that the slower productivity growth is to some extent temporary. there can be several reasons for this. one reason is probably that new persons are being employed in the companies and that it quite simply takes time before they are fully productive. another could be that new groups are entering the labour market. for instance, the service sector normally increases fairly late in an economic cycle and then the productivity measured is slightly weaker. something that further fuelled the slowdown in productivity during the second quarter this year was the low holiday absence in june, which we assess to be a temporary effect. our forecast is that productivity will once again accelerate, but increase at a slower rate than it has in recent years. if one looks at the forecasts for the labour market and productivity together, one can also see that companies ’ costs in production are expected to increase more rapidly than in recent years. unit labour costs are rising according to our assessment, by 4. 8 per cent a year, but the rate of increase will then fall back as productivity begins to increase more rapidly once again. expectations confirm the picture of increased cost and inflationary pressures if i very briefly summarise the domestic situation, the wheels of the swedish economy are turning at a good pace. we have a high level of utilisation of economic resources and cost pressures are increasing. something that supports this picture is that both households and companies have adjusted their inflation expectations upwards, according to