A prolonged surplus on the current account will sooner or later strengthen the nominal exchange rate so that a balance is achieved. However, this can evidently take longer than expected. BIS Review 79/2001  3  Although the long-term value of the krona is determined by flows of goods and other items in the current account, its price is governed in the short term by supply and demand on the foreign exchange market, and here other factors can prevail. Developments on the financial markets have led to rapid and substantial portfolio transfers when, for instance, Swedish investors have bought shares abroad or foreign investors have sold Swedish shares. Changed expectations of earnings on various shares and changes in the willingness to take risks appear to have increasingly governed the developments on the foreign exchange markets in a way that is not captured by traditional exchange rate models. Portfolio transfers as a result of deregulation or changes in investment regulations may also have had significance. In the long term, however, it is difficult to believe that anything other than the development of the fundamental economy shall determine how the exchange rate develops. Regardless of which model we apply to explain the krona rate, it will show that the krona is undervalued and has been so for a long time. Despite the difficulties connected with forecasting exchange rates, we have to make assumptions regarding the development of the krona in our assessments of inflation.
Instead, it can issue warnings and recommendations to national authorities and to EU institutions. These warnings and recommendations can be either public or private. The effectiveness of its recommendations will depend on the attitude of the addressees to the “comply or explain” principle. This principle simply says that either you do as recommended or you explain why you have chosen not to comply. To work, it requires respect for the institution issuing the recommendations. BIS central bankers’ speeches  3  Figure 6 The structure of the ESRB  Secretariat (about 20 people)  ECB  General Board (65 members, 37 voting members)  Steering Committee (14 members)  Advisory Technical Committee (62 members)  Advisory Scientific Committee (16 members)  The ESRB is unique in that it brings together representatives from central banks and financial supervisory authorities from all 27 Member States, as well as representatives from the three European supervisory authorities and from the European Commission. However, this also makes the General Board a large body consisting of 65 members – 37 voting and 28 non-voting. Decisions are taken by simple majority, but a majority of two thirds is needed to adopt recommendations or to make a warning or recommendation public. The fact that ESRB decide by voting rather than by consensus is important, since blocking minorities can be avoided. The majority of voting rights are held by the national central banks (27 voting rights) while the national financial supervisory authorities have one non-voting representative per Member State in the General Board.