rate and entry into erm2. in this respect there may be cause to say something about what has happened earlier. the question of erm participation and the possibility of combining it with the policy of inflation targeting that we have followed for some years has engaged the riksbank earlier, above all in the period 1995 - 97. at that time the riksbank was legally responsible for the choice of exchange rate regime and erm participation was considered simply as a way of preventing the flexible exchange rate regime from becoming a formal obstacle to sweden's possible full participation in the monetary union. when the government then judged that there was insufficient public support for sweden's adoption of the euro, the question of altering the exchange rate regime ceased to be relevant. when the independence of the riksbank was formalised in 1999, the legislation on exchange rate policy was amended. today the exchange rate regime is chosen by the government, while the riksbank decides on issues of its implementation. so it is the government that decides if and when the krona is to join erm2, whereupon the finance ministry and the riksbank discuss the sek / eur exchange rate that is compatible with a stable economic development. i want to make it clear that, contrary to the impression one is liable to get from reports in the media, this process is not to be seen as a struggle between the riksbank and the finance ministry. there are extremely good reasons for these two institutions to agree on a joint line of action. otherwise it is likely to be difficult to argue sweden's case effectively in the subsequent discussions with our european partners. decisions about erm2 participation and the exchange rate on entry are made jointly by the finance ministers of the euro countries, the ecb and the central bank governors and finance ministers of other erm2 participants ( at present denmark ). the first step is taken in practice in the framework of the eu's economic and financial committee. it is only if this committee fails to reach a consensus that the central bank governors and finance ministers concerned engage in direct negotiations. when the time comes - in the event of full participation in the monetary union - for the conversion rate with the euro to be locked irrevocably, this is decided unanimously by the euro - country members of the ecofin council together with sweden. on every previous occasion, these decisions have been based on the central rates in erm / erm2. the choice of a central rate and a

credible in the shorter run, too. that is a prerequisite for a stable development during the period in erm2. that in turn presupposes, for example, that the rate functions properly in relation to the prevailing level of economic activity, the current fiscal policy and so on. the underlying inflationary tendencies that are discernible in labour costs, for instance, also play a part. in these respects it is also possible to produce various numerical examples and simulations. alternative assumptions can be made, for example, about what would be a reasonable exchange rate in the long run and test them against different underlying cyclical developments. an important issue for the riksbank here is the effect on inflation. if it is found that inflation would be unduly high, for example, fiscal policy might have to be tighter. the interaction of the business cycle, for example, and the choice of fiscal policy and exchange rate can be studied in this way. the discussion would benefit from several independent analyses of this kind. economic policy in erm2 if sweden becomes a full participant in the monetary union, the conditions for swedish stabilisation policy will change. the task of conducting a stabilisation policy for swedish needs would then rest - to the extent that it is considered desirable - entirely on the swedish parliament or riksdag and the government. i want to underscore that this change already takes place essentially during the period in erm2. it should be noted that a good state of readiness is absolutely essential. at the riksbank we usually reckon that it takes between 1 and 2 years for changes in monetary policy to elicit their maximum effect on the rate of inflation. we do not know exactly what the corresponding time lag is for the real economic impact of fiscal policy. but there is much to suggest that fiscal policy as early as next year that is, the policy which is being decided this autumn - will be important in this context, at least if the timing that is now being discussed, with full participation in 2005 or 2006, is achieved. thus, more and more of stabilisation policy's burden is transferred to fiscal policy. but this does not mean that the riksbank should refrain from using the scope for monetary policy that may exist during the erm2 period. it is up to the riksbank to do what is possible to make sweden's accession to the monetary union smooth and stable. low and stable inflation in sweden is one important