DIRECTORATE-GENERAL FOR RESEARCH Directorate A: Medium and Long Term Research Division for Economic, Monetary and Budgetary Affairs BRIEFING ECON 511 EN rev.1 THE CONSEQUENCES OF EMU FOR THE EEA/EFTA COUNTRIES The opinions expressed are those of the authors and do not necessarily reflect the European Parliament's position Luxembourg, 18 February 2002 PE 304.442 rev. 1 This document is published in English. Summary This briefing examines the consequences for Norway, Iceland, Liechtenstein and Switzerland of the creation of the euro. It analyses each of these countries' economic and monetary policies, and also the possible links between the exchange rates of their currencies and that of the euro. Finally, it examines the possible effects of EMU and of the policies of the European Central Bank on the conduct of monetary, exchange rate, fiscal and other policies in third countries, and in those of the EFTA in particular. Publisher: European Parliament L-2929 Luxembourg Author Aida Liha, Cecilia Andreasson Editor: Ben Patterson Economic, Monetary and Budgetary Affairs Division Tel. : (00-352) 4300 24114 Fax : (00-352) 4300 27721 E-Mail : [email protected] Reproduction and translation of this publication is authorised, except for commercial purposes, provided that the source is acknowledged and that the publisher is informed in advance and supplied with a copy. EMU and the EFTA CONTENTS INTRODUCTION....................................................................................................................................................5 1. THE EURO AS AN INTERNATIONAL CURRENCY ...................................................................................................5 2. THE POSITION OF THE "OUTS " AND THEIR INFLUENCE ON THE EFTA COUNTRIES .............................................5 Denmark ...........................................................................................................................................................6 Sweden ..............................................................................................................................................................6 The United Kingdom ........................................................................................................................................7 3. THE EFTA..........................................................................................................................................................8 4. THE EEA..........................................................................................................................................................10 THE IMPLICATIONS OF EMU.........................................................................................................................11 1. THE "BENIGN NEGLECT " OPTION ......................................................................................................................11 2. GLOBALISATION ...............................................................................................................................................12 3. DEVELOPMENTS IN INTERNAL EURO AREA POLICIES .......................................................................................12 THE EFTA AND EEA ECONOMIES ................................................................................................................13 GENERAL ..............................................................................................................................................................13 1. NORWAY ..........................................................................................................................................................13 Introduction ....................................................................................................................................................13 Monetary policy..............................................................................................................................................14 The Government Petroleum Fund and the impact of petroleum revenues on stability ................................15 The stability of the crown/euro exchange rate ..............................................................................................15 2. ICELAND ...........................................................................................................................................................17 Introduction ....................................................................................................................................................17 Monetary policy..............................................................................................................................................18 The stability of the crown/euro exchange rate ..............................................................................................18 Exchange rate policy alternatives..................................................................................................................20 Other economic policy consequences ............................................................................................................20 3. SWITZERLAND AND LIECHTENSTEIN ................................................................................................................21 Introduction ....................................................................................................................................................21 Monetary policy..............................................................................................................................................22 The stability of the Swiss franc/euro exchange rate......................................................................................24 SWISS INTEREST RATES, WHICH HAVE BEEN LOWER THAN ANYWHERE ELSE IN EUROPE, MIGHT HAVE TO RISE TO THE LEVELS PREVAILING IN THE EURO AREA. ........................................26 SUMMARY AND CONCLUSIONS....................................................................................................................27 ECONOMIC AFFAIRS SERIES BRIEFINGS ..............................................................................................................29 ECONOMIC AFFAIRS SERIES WORKING PAPERS ..................................................................................................29 3 PE 304.442 rev.1. EMU and the EFTA Tables and Charts Table 1: Results of the Danish Referendum on € area membership, September 2000..............6 Table 2: The UK's five economic tests participation in the EMU .............................................8 Table 3: Economic indicators for the EFTA countries (2000) ..................................................9 Table 4: GNP per Capita of Major Regional Groupings ( 1999).............................................10 Table 5: US and Euro Area Trade as a Proportion of GDP.....................................................11 Chart 1 : Petroleum production on the Norwegian continental shelf.......................................13 Chart 2 : The Krone exchange rate against ECU/euro.............................................................14 Chart 3 : The Krone's effective exchange rate against euro ....................................................16 Chart 4 : Daily variation in the krone exchange rate against ECU/EURO..............................16 Chart 5 : The Icelandic Krona exchange rate against the ECU/Euro ......................................19 Chart 6 : Swiss franc exchange rate against euro ....................................................................24 Chart 7 : Dollar/euro exchange rate.........................................................................................25 4 PE 304.442 rev.1. EMU and the EFTA Introduction This briefing examines the consequences for Norway, Iceland, Liechtenstein and Switzerland of the creation of the euro. The first three, together with the fifteen members of the EU, constitute the European Economic Area (EEA). Switzerland, though it has rejected EEA membership, nevertheless belongs, with the other three countries, to the European Free Trade Area (EFTA); and also forms a single currency area with Liechtenstein. It is therefore sensible to consider the impact of the euro not just on the three EEA countries, but on all four members of the EFTA. The briefing analyses each of these countries' economic and monetary policies; but these are not necessarily presented and assessed in the same way, since the specific factors determining each vary considerably. 1. The euro as an international currency The euro is emerging as a major international currency, entailing implications for other countries as well as for the monetary policy of the euro zone itself. Before the D-Mark was the only internationally significant European currency; but its importance was still minor compared to the dollar, which has dominated since the end of World War II. The use of currency internationally depends on a number of factors. These include: • a large domestic market; • a high exposure to trade; • a large weighting in total global trade; • exporter and importer preferences favouring the currency as a unit of account; • the existence of a large and competitive financial market in which the currency denominated assets are actively traded; • economic and political stability of the currency area, thereby favouring it is a "safe haven" currency; and • competitive pricing of cross-border payment