Exchange rate certainty within Europe - even though it is nominal certainty rather than real exchange rate certainty - would potentially enhance the benefits to be derived from the European Single Market. The euro’s second very powerful advantage is the possibility it opens up for much broader and more liquid financial markets. It will mean a progressive narrowing of spreads between borrowers and lenders - and that will be good news too for financial intermediaries as a group, because it will lead to higher volumes of financial activity - though not every individual intermediary will benefit, of course, in the more competitive environment. The City of London is already making an important contribution to this process of financial euro-market integration. So there are potentially powerful advantages. What then are the risks - the possible arguments against our joining the euro? Essentially the potential downside can be summed up as the risk that the single - one-size-fits-all – short-term interest rate within the Eurozone - which is the inevitable consequence of a single currency - will not in the event prove to be appropriate to the domestic monetary policy needs of all the participating countries. Countries may have divergent cyclical positions. They may face divergent fiscal positions which would affect their appropriate fiscal/monetary policy mix in different directions - though this should be contained by the Growth and Stability pact.
Why did we overestimate inflation in our forecasts for those years? To what extent is the fact that inflation has undershot the target due to incorrectly formulated monetary policy, and what effects could this have on unemployment? BIS Review 52/2007  3  Why has inflation undershot the target? Between 1995 and 2006 CPI inflation was on average 1.3 per cent. Measured in terms of UND1X, which is what we normally base our monetary policy on, inflation amounted to an average of 1.7 per cent during the same period. 1 One reason why CPI inflation has been lower than UND1X inflation is that the repo rate has been regularly cut during this period. Regardless of what measure is used, the legal objective of price stability has been achieved. However, inflation has on average undershot the target the Riksbank itself has set. During 2004-2005 inflation deviated substantially from the Riksbank’s target. Some debaters have, as I mentioned at the beginning, claimed that this has to a large degree contributed to the high unemployment in recent years. Of course, it is true that incorrectly formulated monetary policy could lead to unnecessarily high unemployment. But to be able to assess monetary policy in this regard, it is important to first find out why inflation has undershot the target. It is also important to examine what consequences these factors may have had for unemployment, in addition to the effects related to the formulation of monetary policy.