With this area as an important field for trade, Swedish firms have to meet the increased price competition which the monetary union entails without reaping the benefits which their euro area competitors reap from decreased exchange costs and access to a large, liquid market for capital. In order to reduce these disadvantages, firms can try to match their euro income with their expenditures in Sweden, for example for wages BIS Review 68/1998  -6-  costs and payments to suppliers. The exchange risk would then be passed on to domestic players - households and firms - and these in turn would want to pay their bills in euro. How probable is such a scenario? One question is how serious the competitive disadvantages will actually be for export companies. Another aspect that can be discussed is the extent to which households and Swedish-owned companies are prepared to accept an exchange risk. They will want to receive income in the same currency as their expenditures. Otherwise they take an exchange risk that makes the real income uncertain. Even when the monetary union has started, most of the expenditures of households and Swedish-owned companies will presumably be expressed in the national currency. Retailers set prices and accept payments in Swedish kronor. The status of the krona as legal tender means that they are under no obligation to accept payments in other currencies. Moreover, Swedish taxes and households’ fixed long-term loans are paid in kronor.
Today this is the case in just a few countries, of which Sweden is one. Monetary policy’s interaction with fiscal policy will be important, at both national and EMU level, for the perceived credibility and consistency of economic policy in general. A constructive dialogue is therefore needed between the ECB and the governments of the euro countries. The arrangements are not yet clear but an intense discussion of this and other matters is now under way in Europe. The Treaty provides a number of opportunities for contacts between the two spheres. Functional economic structures must also be in place so that the single monetary policy can establish low inflation without eliciting unnecessary economic tensions. A matter of particular importance in this context is the workings of the labour market. A labour market that functions properly reduces the risk of regional unemployment and thereby of political problems that could ultimately pose a threat to the monetary union. Temporary factors  BIS Review 68/1998  -5-  The discussion of the euro’s development has included the point that the introduction of the single currency will trigger widespread portfolio rearrangements, mainly by private investors but also in public reserves. The euro will alter the composition of exchange risks in investors’ portfolios and this could result in flows to restore the degree of diversification. Investors who achieved diversification previously with holdings in German marks and Italian lire, for example, will have to adjust their portfolios when both these currencies are replaced by euro.