Sweden: Convergence reports (2002 - 2004 - 2006)
The European Commission is reporting on the progress made by Sweden, a Member State that has been granted a derogation, in performing its obligations with a view to achieving economic and monetary union (EMU).
Report from the Commission of 22 May 2002: Convergence report 2002 Sweden [COM(2002) 243 final - Not published in the Official Journal].
This convergence report from 2002 states that Sweden does not fulfil the necessary criteria for adopting the euro. (For the convergence reports from 2004 and 2006: see "Related Acts").
Under Article 122(2) of the Treaty establishing the European Communities (EC Treaty), the Commission and the European Central Bank (ECB) are required to draw up, at least once every two years or at the request of a Member State with a derogation, reports on the progress made by Member States in performing their obligations to achieve Economic and Monetary Union (EMU). These two reports summarise the detailed assessment of economic convergence, the convergence criteria and the compatibility of Swedish legislation with the Treaties.
Setting the convergence criteria for 2002
Under the provisions of the EC Treaty, the reference values for the convergence criteria are fixed for the period in question:
- Price movements: For the one-year period preceding the assessment, the average inflation rate in the three best-performing Member States (United Kingdom, France and Luxembourg) was 1.8%, giving with the addition of 1.5 percentage points a reference value of 3.3%.
- Public finances: The reference values established by the Treaties are 3% of gross domestic product (GDP) for the budget deficit and 60% of GDP for the government debt ratio;
- Exchange rate: The currency in question must have participated in the exchange-rate mechanism (ERM II) for two years without serious strain on the economy. In the absence of a central rate, the ECB report takes as the reference rate the average exchange rate for May 2000 (1 = SEK 8.241).
- Long-term interest rate: For the period of one year before the assessment, the average long-term interest rate in the three best-performing Member States in terms of price stability was 5%, giving with the addition of two percentage points a reference value of 7.0%.
Detailed study of the convergence criteria
Price movements. During the reference period (from May 2001 to April 2002 for this report), the average inflation rate, as measured by the harmonised consumer price index (HCPI) was 2.9% in Sweden, within the reference value of 3.3%. Sweden has consistently complied with the reference value for inflation since December 1996. It thus continues to fulfil the price stability criterion.
Over a long period, the increase in the HCPI has been compatible with price stability. The rise in consumer prices followed a downward trend for most of the 1990s. This came after monetary policy was refocused on price stability, which became the main monetary policy target of the Riksbank (Central bank of Sweden). The increase in the HCPI in the spring of 2001 was due to factors such as the food scares associated with the BSE and foot-and-mouth epidemics and higher oil prices. In March 2002 the unemployment rate was 5.2%. The rapid increase in unit wage costs of 4.4% in 2001 added to the risk of inflation. The Commission report expected a slowdown in inflation in 2002 compared with 2001. The Riksbank anticipated average inflation of 2.3% in 2002 and 2.2% in 2003.
Public finances. During the reference year 2001, general government recorded a budget surplus equivalent to 4.8% of GDP, well within the reference value of a deficit of 3%. The surplus was 1.1% higher than the previous year.
The government debt ratio rose by 0.6% to 55.9% of GDP, in line with the reference value of 60%. In spite of the budget surpluses, the increase in the government debt ratio was essentially due to the reduction in holdings of government debt by social security funds.
After peaking at 77.7% in 1994, government debt has declined markedly. The budget deficit, which stood at 11.9% of GDP in 1993, has fallen steadily and Sweden has recorded budget surpluses since 1998. This has been due in part to economic growth but also to structural improvements making for a balanced budget policy. The ratio of total government expenditure to GDP declined from 73% at the beginning of the 1990s to 57.5% in 2001.
For 2002 a surplus of 1.7% is expected and the government debt ratio should decline to 52.6%. The government has devised a long-term budget strategy aimed at maintaining a budget surplus of some 2% until 2015 in order to cope with the budgetary pressures caused by demographic developments. In its convergence programme, the debt ratio was forecast to fall to 45.2% of GDP by 2004. Sweden continues, therefore, to fulfil the budgetary criterion.
Exchange rate. The Swedish krona has not participated in EMR II. Compared with May 2000, it remained at a low level during the reference period. It fell against the euro by some 18% between May 2000 and September 2001. The Riksbank intervened on several occasions on foreign exchange markets in support of the krona in order to remove any risk of imported inflation attributable to events on exchange markets. Following an improvement in Sweden's economic prospects, the krona gained in value by some 8% against the euro. Since Sweden has not participated in ERM II, it does not fulfil the exchange-rate criterion.
Long-term interest rate During the reference period, the long-term interest rate in Sweden averaged 5.3%, below the reference value. Between 1994 and 1999 long-term interest rates headed downwards. Since then, they have begun to recover at the same rate as long-term interest rates in the euro area. Sweden has consistently fulfilled the criterion for convergence of long-term interest rates since December 1996.
Conclusion regarding the convergence criteria Sweden fulfils the government finance, inflation rates and long-term interest rate criteria. Only the exchange-rate criterion is not fulfilled. Sweden has a derogation but there is no provision to exempt it from participation in the third stage of EMU (as in the case of Denmark and the United Kingdom). Sweden is, therefore, required to adopt the euro, and this means that it must fulfil the exchange-rate criterion.
Compatibility of national legislation with the EC Treaty
Legal convergence In accordance with Articles 108 and 109 of the Treaty, the report examines the compatibility of Swedish national legislation, including the statutes of the Riksbank, with the EC Treaty and the Statute of the European System of Central Banks (ESCB). Compatibility with the requirements of the Treaty entails:
- independence of the national bank;
- primacy of the objective of price stability;
- legal integration of the Riksbank in the ESCB (statutes, tasks, instruments, organisation and financial provisions);
- prohibition of public-sector financing by the Riksbank;
- prohibition of privileged access by the public sector to financial institutions;
- free movement of capital within the Union and with countries outside the Union;
- compatibility of other legislative texts (issue of notes and coins, exchange-reserve management, exchange-rate policy, etc.).
Assessment of legal convergence in Sweden. The ECB's convergence report for 2000 identified the following points as requiring adaptation:
- the constitutional law;
- the law governing the Riksbank;
- the law governing exchange-rate policy.
No adjustment has thus far been made, however.
Independence of the Riksbank. The amendments that entered into force on 1 January 1999 resolved the main inconsistencies regarding the Riksbank's independence. It is only the issue of profit allocation and parliamentary influence over this issue that are still posing problems. The Swedish parliament is currently examining the issue so that a decision can be taken. The ECB has recalled the need for these internal rules to be clarified.
Integration of the Riksbank with the ESCB. Swedish law does not, for the moment, provide for full integration of the Riksbank with the ESCB. This means that national legislation is not compatible with Treaty requirements. The problem concerns a number of provisions in the Riksbank's statute and will require a further detailed updating of Swedish legislation before adoption of the single currency. The inconsistencies and imperfections concern in particular:
- the requirement on the Riksbank to inform the government in advance of any major decision;
- the Riksbank's powers in the field of monetary policy;
- the Riksbank's monopoly over the issue of bank notes;
- the imposition of minimum reserve requirements on financial institutions;
- exchange-rate policy;
- the rules governing access to public documents.
In line with its obligations as a Member State with a derogation, Sweden should, therefore, meet all of the requirements laid down in Article 109 of the Treaty.
Conclusion Swedish national legislation is not yet compatible with the requirements of the Treaty.
Background: Drawing up convergence reports every two years
The Member States which in 1998 were deemed not to have fulfilled the necessary conditions for adopting the single currency were termed "Member States with a derogation". At the time, this applied to two Member States: Greece and Sweden.
Under Article 122(2) of the EC Treaty, the Commission and the European Central Bank (ECB) are required to draw up, at least once every two years or at the request of a Member State with a derogation, reports on the progress made by Member States in performing their obligations with a view to achieving EMU.
Sweden was evaluated in 2002 [PDF ] by the Commission. The Commission concluded that Sweden did not fulfil the necessary criteria for adopting the single currency and has continued to be called a "Member State with a derogation". This convergence report dates from 22 May 2002 and subsequent reports were published in 2004 and 2006 (see "Related Acts").
Referendum on adopting the euro in Sweden
Sweden held a referendum for adopting the euro on 14 September 2003. The result was that 56.1% voted against adopting the euro. The "yes" ballot received 41.8%, with 2.1% blank papers and 0.5% declared null and void according to the final result published by the Electoral Commission.
For further information please visit the website of the European Commission, Directorate -General (DG) for Economic and Monetary Affairs on convergence reports.