, some of the strains that accompanied the difficult business environment of the past several years apparently still linger. although businesses are replacing obsolescent equipment at an accelerated pace, many managers continue to exhibit an unusual reluctance to anticipate and prepare for future orders by adding to their capital stock. despite a dramatic increase in cash flow, business fixed and inventory investment, taken together, have risen only moderately. indeed, internal corporate funds exceeded investment over the course of last year for the first time since 1975. similar cautious behavior has also been evident in the hiring decisions of u. s. firms, during the past several years. rather than seeking profit opportunities in expanding markets, business managers hunkered down and focused on repairing severely depleted profitability predominately by cutting costs and restricting their hiring. firms succeeded in that endeavor largely by taking advantage of the untapped potential for increased efficiencies that had built up during the rapid capital accumulation of the latter part of the 1990s. that process has not yet played out completely. many firms seem to be continuing to find new ways to exploit the technological opportunities embodied in the substantial investments in high - tech equipment that they had made over the past decade. when aggregate demand accelerated in the second half of 2003, the pace of job cuts slowed. but because of the newfound improvements in the efficiency of their operations, firms were able to meet increasing demand without adding many new workers. as the opportunities to enhance efficiency from the capital investments of the late 1990s inevitably become scarcer, productivity growth will doubtless slow from its recent phenomenal pace. and, if demand continues to firm, companies will ultimately find that they have no choice but to increase their workforces if they are to address growing backlogs of orders. in such an environment, the pace of hiring should pick up on a more sustained basis, bringing with it larger persistent increases in net employment than those prevailing until recently. still, the anxiety that many in our workforce feel will not subside quickly. in march of this year, about 85, 000 jobless individuals per week exhausted their unemployment insurance benefits - more than double the 35, 000 per week in september 2000. moreover, the average duration of unemployment increased from twelve weeks in september 2000 to twenty weeks in march of this year. these developments have led to a notable rise in insecurity among workers. most of the recent increases in productivity have been reflected in a sharp rise in the pretax profits of nonfinancial corporations from a

might add that the macroeconomic environment has been rather favourable in sweden too. the period from 1999 has underlined that confidence can be achieved outside emu. hicp inflation in sweden has actually been lower than in the euro area, our price developments have also been in line with our inflation target, as have inflation expectations. the interest rate differential between swedish and german bonds has been firmly in the low decimals and has even for a short period of time been negative. if overall macroeconomic conditions have been favourable, both in the euro area and in sweden, the real issues and problems are not in macroeconomic policy, but on the structural side, in product markets and in labour markets. in the euro area the recent fall in productivity in the business sector and increase in unit labour costs seem to reflect a high degree of labour hoarding, that is to say a refusal to cut staff when faced with lower demand, and thus poor reallocation of employment. there might be good reasons for this, such as high costs for finding and training the right personnel in a competence driven economy, but it nevertheless indicates that wage flexibility needs to increase. and despite this overstaffing, wage growth has not slowed down. similarly, studies from the oecd and recently published research highlight that the important differential in growth between the us and europe is the poor employment growth in europe. the us certainly has the advantage of having a young and growing population, but europe has large numbers of unemployed or underemployed people who could become mobilized for increased growth of the economy, this need not imply that europe must adopt us hiring and firing practices, there are other ways of achieving this, with economic incentives, labour market policies and education. challenges for sweden ahead of a possible emu participation wage formation is also an important challenge for sweden prior to a possible emu participation. the main issue after a possible participation in the euro zone will be the loss of the exchange rate and an independent monetary policy as stabilisation tools. if sweden, within emu, is out of step with the business cycle in the euro area, neither an exchange rate, nor swedish interest rates are available to adjust for this. in reality, the exchange rate may in fact be a less efficient stabiliser than expected. it is quite apparent that macroeconomic fundamentals and sweden's position in the business cycle have not been the only, sometimes not even the major, factors affecting exchange rate developments. if the weakening of the krona in