ernst welteke : european monetary union - experience and outlook speech by mr ernst welteke, president of the deutsche bundesbank, at the svedbank, stockholm, 19 november 2002. * * * i ladies and gentlemen it is good to be here in stockholm. thanks to a good friend, my connections with sweden have grown deeper over the past few years. today, i have the pleasure of sharing with you my views on experience of the eurosystem during the almost four years of its existence. i am well aware of the ongoing debate on your membership in the european monetary union. therefore, our experience might be of particular interest to you. that relates to monetary and economic aspects as well as practical matters, such as the changeover of banknotes and coins. in addition, you have asked me to extend my view and also give an outlook for the near future. again, most of the major challenges for the monetary union stem from the process of enlargement. too often, enlargement is only referred to with respect to eastern and southern europe. to me, an equally interesting and important question is whether sweden and other countries in northern and western europe ( uk, denmark ) will join monetary union. i guess you may not have the answer to that yet. however, if i may, i would like to express a wish about that later on. ii the primary objective of the european monetary union ( emu ) is to maintain price stability. the governing council of the ecb has defined price stability as a year - on - year increase in the harmonised index of consumer prices ( hicp ) for the euro area of below 2 %. at the same time, the governing council also stated that price stability “ is to be maintained over the medium term ”. looking at the annual hicp rate in the euro area over the past few years in the light of those requirements tends to reveal a mixed picture. it was only in 1999 - the year which started with the eurosystem - that the annual rate of price increase, strongly influenced by developments in 1998, remained within the defined stability corridor at 1. 1 %. since then, the price norm has not been met. in 2000, the average annual rate of inflation was 2. 3 %. in 2001, with greece having joined the euro area, the figure was 2. 5 %. in the first nine months of this year, the rate was 2. 2 %. it is therefore no longer possible to speak

be forgotten that, in some cases, there are major regional disparities within eu countries and accession countries. in real economic terms, the accession of central and east european countries is already a fact of life. between 1993 and 2000 the share of accession countries ’ total exports going to the eu rose to two third. sixty per cent of imports come from the eu. the integration of central and east european countries has been made easier by progress in capital market liberalisation. positive macroeconomic data and the prospect of eu accession have been leading to large - scale direct investment. since 1999, direct investment has accounted for around 5 % of all accession countries ’ gdp. the heterogeneous nature of monetary union will increase along with enlargement - labour and goods markets therefore need flexible adjustment mechanisms. the single monetary policy is a catalyst for reforms in other policy areas. the nation states are in competition with one another to find the best solutions for economic, labour market and fiscal policies. successful policy solutions set a benchmark for the less successful countries. besides the economic criteria for a successful monetary union, the european system of central banks should be reformed to cope with enlargement. the present structures were designed for a 15 - member monetary union. reform should take account of the fact that, in a few years ’ time, the eu could comprise as many as 27 members. reform must therefore be designed to take account not just of the current round of enlargement, in which up to ten nations will join the eu. let me conclude by making some comments on your debate about possible emu membership. the ecb governing council is well aware of the ongoing public discussion in your country. sweden would be very welcome in the monetary union. more than that, for sweden - neighbouring finland and across the baltic sea from germany - emu membership should be a natural choice. in macroeconomic terms, membership would be of mutual benefit. the swedish business cycle moves in notably close harmony with the euro area. inflation, inflation expectations and long - term interest rates are closely correlated. at the core of the debate in your country lies the concern about the threat of an asymmetric shock. to my mind, the eurosystem has demonstrated its capacity to cope well with economic shocks. in addition, strong asymmetric shocks are increasingly rare in times of ongoing economic integration. the possibility of major asymmetric shocks declines with the rising importance of trade, foreign direct investment and capital market integration. swedish banks have already shown