The euro as a single currency
The cooperation within the European Union (EU) includes adopting a single currency - the euro. So far the euro has been introduced in twelve member states that have fulfilled certain economic and legislative criteria for participating in the monetary union. Denmark and the UK have been granted derogations from participating in the monetary union until such time as the countries themselves request to join. The other EU countries, including Sweden, are assessed regularly to ascertain whether they fulfil the criteria for introducing the euro as their currency. Therefore, following enlargement of the EU, there are currently thirteen member states that use a national currency.
The requirements imposed on countries that wish to adopt the euro aim to enable the monetary union to function smoothly without any friction between individual member states. The EU Treaty lays down a number of so-called convergence criteria that stipulate that all countries should have achieved a low inflation rate and an exchange rate and level of interest rates that is consistent with this. The criteria also stipulate that the countries should have achieved discipline in their public finances without excessive deficits in their budgets.
To safeguard the value of the single currency, a single monetary policy is conducted that has price stability in the euro area as its overall objective. The monetary policy is formulated by the Governing Council of the European Central Bank (ECB) and is implemented by the national central banks of the countries that have joined the monetary union. The definition of the ECB’s price stability objective is that the inflation rate shall be below, but close to two per cent per year over the medium term. The monetary policy transactions are implemented in practice through a special payment system (TARGET), which can also be used to execute other large-value payments in euros. The euro floats against the other major international currencies, but EU member states that have not joined the monetary union can peg their currencies to the euro in the exchange rate mechanism ERM2 according to an agreement that establishes a central rate and fixed fluctuation bands around this rate. The ECB can, where required, conduct exchange-rate policy transactions using common foreign reserves that the national central banks have transferred from their own reserves.
In order to promote credibility for the central banks’ ability to realise their established goals, special legislation has been introduced to consolidate their position. For example, all central banks are required to be independent from national governments and EU institutions and are forbidden to receive any external instructions in the performance of their statutory tasks. They are also forbidden by law to contribute to the financing of public budgets. To enable insight into the ECB, the bank gives a regular account of its activities before the European Parliament and the ECOFIN Council and also gives other verbal and written reports on its policy.
The responsibility for fiscal policy remains with the national governments also in the countries that have introduced the single currency. However, in conjunction with the establishment of the monetary union, the EU tightened its supervision of the member states’ economic policies to ensure that these policies contribute to attaining the general goals of the economic policy in accordance with the EU Treaty. Consequently, the ECOFIN Council adopts general guidelines annually for the economic policies of the member states and the EU, including recommendations regarding the policy stance in each member state. The supervision of budget policies follows specially defined stipulations with the aim of ensuring long-term sustainability of the public finances. To maintain public sector debt at an appropriate level, the ECOFIN Council issues where necessary special recommendations regarding measures to keep the annual deficits below three per cent of GDP. In addition to this, member states have undertaken through the Stability and Growth Pact to have a budget that is balanced or in surplus in the medium term. This is intended also to lay the foundation for a sound balance between fiscal and monetary policy.