If adequate measures have not been taken within ten months, the country will be required to deposit a no-interest fee with the EU Commission. If the deficit is still excessive after two years, the fee is transformed into a fine. At most the fine can amount to the equivalent of 0.5 per cent of GDP. If the deficit is due to exceptional circumstances, sanctions are not to be imposed. If GDP falls by 2 per cent, no sanctions are to be levied for an excessively large budget deficit. The Council can also decide not to impose sanctions if GDP falls by between 0.75 and 2 per cent and other “special circumstances” apply. While the point of a system for preventing the abuse of fiscal policy in EMU has always been clear, one cannot turn a blind eye to the risks inherent in rules such as those in the stability pact. It is thus a matter of striking a reasonable balance between different interests, which is why the discussion has been so protracted. The risks are mainly of two kinds: - One has to do with the need of adjustment mechanisms. With no possibility of using monetary and exchange rate policy at the national level, it may be important for the system to provide other “buffers”. Therefore the pact ought not to be so strict that it might in practice have a destabilising effect in a particular country with problems. - The other concerns credibility.
For Sweden the Riksbank hopes that the changeover can be arranged in an appreciably shorter time than the allotted six months. It should be underscored, finally, that EMU is likely to bring about notable changes in the financial landscape. Some products will simply disappear: currencies, as well as forward and option instruments derived from them. With a single monetary policy and no exchange risk, interest rate differentials between national treasury papers will arise only from credit risk. The market for Swedish treasury paper will be more or less integrated in a market for treasury paper in euro. Provided the debt situation in the countries concerned is under control and reasonably similar, national T-bonds will become close substitutes. That will also do away with a number of national forward and option products. Certainly there will be new financial products; there has been no lack of creativity in this field in the past decade. There will clearly be increased competition between financial institutions as well as between financial markets in different locations. There is nothing new about the globalisation and integration of the world’s financial markets but it is reasonable to suppose that EMU will accelerate the process. BIS Review 14/1997  -7-  Summary and conclusions Today it looks for the most part as though economic and monetary union will start as planned on 1st January 1999. For Sweden the question is whether we are to participate from the start, wait a while or try to remain outside for ever.