##ksbank would no longer be in a position to secure low inflation. to me, however, it is by no means clear that the natural conclusion today is to begin arguing that sweden ought not to aim for euro area participation as soon as there is political support. compared with a couple of years ago, the economic situation is now more stable in almost every respect. it is not only that the economy has adjusted in various ways to lower inflation ; government finances have also improved and during the past year employment has risen rapidly. to this should be added the support from institutional changes in budget work and the legal status of the riksbank. the natural conclusion is completely different. in the years ahead it will be a matter of cultivating our achievements. this means not losing the grip on fiscal policy, even though in simple book - keeping terms there may be some room for expansion. the target of a 2 % surplus over the business cycle will not be credible ; neither will it provide any room to manoeuvre when activity slackens, if the surplus when activity is strong is not considerably larger. everything must be done, moreover, to make the labour market function properly. now that activity is rising and new jobs are being created, it is particularly important to make every effort to ensure that the vacancies are filled without delay. it is also crucially important that wage formation functions satisfactorily and that wage costs stay well in line with the growth of productivity. it is only by conducting policy along these lines that sweden ’ s options on the emu issue will remain open as the riksdag has ordained. fortunately enough, if we remain outside the monetary union it is also such a policy that we should implement in order to create good conditions for increased prosperity and attain the high goals the government and the riksbank have set up for employment.

the other countries ’ competitive position, but also dampen economic activity in sweden to the detriment of demand for the other countries ’ exports. assessments of the appropriate exchange rate cannot be based solely on a particular model. besides comparing various prices and costs, allowance must also be made for other indicators of the state of the economy and their future paths. in earlier negotiations, the rate - setting decisions have rested on the macroeconomic situation in the country in question and the rest of the world, various indexes of competitiveness and, not least, the exchange rate ’ s average level and its fluctuations in recent years. the agreed rate has often been the prevailing market rate or a rate close to this. how should economic policy be formulated? the room for discretion in monetary policy will be affected if sweden participates in erm ii. one extreme in that situation would be for policy to focus on a strict exchange rate target, so that the interest rate is set exclusively in relation to the exchange rate tendency. in practice, the riksbank would then fully follow the ecb ’ s footsteps. the other extreme, you might say, would be for monetary policy to continue to target inflation, still with the exchange rate as one of the set of indicators of inflationary pressure in the swedish economy. the construction of erm ii, with a broad band for exchange rate fluctuations, would then make it possible for the interest rate to deviate somewhat from the level in the euro area. the problems that may arise in such a situation depend on how economic policy in general works. provided sweden is more or less in phase with the cyclical pattern in the euro area, there need not be any serious conflicts. the monetary policy objectives are broadly the same. there are therefore grounds for supposing that monetary policy can be much the same as at present. the starting point here is a credible central rate that market players expect will be the rate at which the krona is ultimately converted into euro – two assumptions that are both very reasonable. a case in point is what happened in finland. monetary policy there continued to target inflation even after the markka had been included in erm ii ; following its entry, the markka stabilised and was close to its central rate. this brings me to the recent discussion in swedish media. briefly, it has been argued that sweden is in the process of moving out of phase with activity in the euro area, mainly because fiscal policy is unduly expansionary. at present we can