consequences of being outside the euro area were considered by the riksbank in its submission on the report from the emu enquiry. the conclusion that the consequences would be considerable has been reinforced now that the monetary union has started with eleven countries. this would be even clearer if denmark and the united kingdom were to decide to join. it is also clear, from discussions in which i have taken part, that the advent of the euro has been accompanied by closer collaboration on the construction of economic policies in europe, as well as on europe ’ s actions on the global stage. in these respects sweden now carries less weight. a distinct message that we intend to remain outside the euro area for the foreseeable future would probably weaken our influence in the european union still more. our partners in europe would then be less interested in allowing for our positions on other matters as well. the monetary union is, after all, one of the community ’ s most central integration projects. on the other hand, the economic consequences of sweden still having a flexible exchange rate should not be exaggerated, at least in the short run. basically, the development of the exchange rate and interest rates depends on how we manage sweden ’ s economy relative to the euro area. if we succeed in making our economic policy credible, the costs of remaining outside for some years should not be unduly high. but our decision not to participate does mean that we need to be extra clear in demonstrating our determination to implement a sound economic policy, focused on sustained growth with low inflation and high employment. there are no easy short cuts, even in the short run. that sweden, as a euro outsider with a flexible exchange rate, will have to live with exchange rate fluctuations is evident from events last autumn. we know from international experience that – 3 – floating exchange rates do in fact float. not even good economic fundamentals suffice to ensure stability in financial markets. here we have a price for being outside the monetary union. the exchange rate the exchange rate is an important but elusive item in assessments of inflation. last autumn, the main assessment was that the krona would become successively stronger as the financial turbulence subsided and relatively more importance was attached to the favourable economic fundamentals, which include low inflation and a growing surplus on public finances. recently, moreover, it seems that such a process has begun. signals of a move by sweden towards the monetary union may perhaps have acted as a catalyst here. the new political signals about the handling of the em

##u issue have brought the question of the krona ’ s equilibrium level to the fore. participation in the euro area means that at some stage the krona ’ s exchange rate with the euro will have to be locked. in the discussion that will then be held with colleagues in europe, the actual decision will be a matter for the government. the riksbank, however, is responsible for choosing the conversion rate we find reasonable on sweden ’ s behalf. meanwhile, we must bear in mind that we are dealing with negotiations between sweden and the other eu member states, so it may be inadvisable to get tied down in matters of detail at an early stage. the riksbank has made it clear on numerous occasions that it considers the krona to be undervalued. much of the debate on this issue has stemmed from an article on the krona ’ s equilibrium exchange rate that was published early in 1996 in our quarterly review. the article was intended to serve as a basis for public debate ; in our opinion it provided the best foundation that was then available for discussing the krona ’ s long - term value. the krona ’ s equilibrium value is naturally something that the riksbank considers continuously and the analysis is constantly being developed. accounts of various aspects of the exchange rate have been presented in the inflation report. the material that will be produced in the event of sweden deciding to participate in erm2 / emu will have to incorporate the additional information since 1996. it should also be noted that the levels and intervals that were presented in the article refer to the krona ’ s trade - weighted exchange rate and are therefore not directly applicable to the question of a reasonable central rate for the krona against the euro. furthermore, the euro is a new currency. arriving at just the right future exchange rate for the krona against the euro is therefore not exactly easy. although the financial markets are naturally eager to know, at this stage it is too early to allow the discussion of the krona ’ s path to focus on specific intervals or levels. but the course is clear — in the event of a euro peg, the rate for the krona will be stronger than the current level. current monetary policy in conclusion i should like to say something about the monetary policy situation in sweden. international economic prospects gradually deteriorated during 1998. knock - on effects from the crisis that originated in asia were included from an early stage in the riksbank ’ s spectrum of risks. early in