This implies that fiscal policy is given a clear mandate, with clear targets, strong institutional arrangements and a high degree of openness. Of course, using fiscal policy as an effective tool additionally implies a strong budgetary position over the cycle - which is also important given the present demographic trends which point to increased costs for supporting an ageing population. I believe this discussion could also be of some interest in relation to the present debate on the Stability and Growth Pact, as it stresses the importance of strengthening the institutional framework and the long term goals for national stabilisation policies in the monetary union, as opposed to a more passive policy simply letting automatic stabilisers take their course. And, like Sweden, the euro area needs a strong fiscal stance in order to cope with the future fiscal burden of ageing populations. Even more important than the alternatives for stabilising the economy are the structural reforms which are needed to increase potential growth and contribute to an economy more responsive to changing circumstances. If this is done successfully the problems of instability will probably not arise or will be of less significance. As we analyse Sweden's labour markets it is worrying that unit labour costs have increased slightly more rapidly in Sweden than in the Euro area recently. As the possibility to conduct an independent economic policy decreases, the need for functioning adjustment mechanisms increases which implies greater flexibility in factor and product markets in Sweden.
The US certainly has the advantage of having a young and growing population, but Europe has large numbers of unemployed or underemployed people who could become mobilized for increased growth of the  2  BIS Review 70/2002  economy, This need not imply that Europe must adopt US hiring and firing practices, there are other ways of achieving this, with economic incentives, labour market policies and education. Challenges for Sweden ahead of a possible EMU participation Wage formation is also an important challenge for Sweden prior to a possible EMU participation. The main issue after a possible participation in the euro zone will be the loss of the exchange rate and an independent monetary policy as stabilisation tools. If Sweden, within EMU, is out of step with the business cycle in the euro area, neither an exchange rate, nor Swedish interest rates are available to adjust for this. In reality, the exchange rate may in fact be a less efficient stabiliser than expected. It is quite apparent that macroeconomic fundamentals and Sweden's position in the business cycle have not been the only, sometimes not even the major, factors affecting exchange rate developments. If the weakening of the krona in 2001 did indeed cushion the blow from global recession, earlier periods of weakness have run counter to the overall improved relative growth performance. Personally, I believe that there might be a tendency in the Swedish debate to overstate the gains from having a flexible exchange rate in the longer run.