When this system broke down in 1973, a currency collaboration was started up between a number of European countries, known as the currency snake, by which the krona was pegged to a currency basket dominated by the German D-mark. In 1977 Sweden left the currency snake and the krona was pegged to a currency basket where the dollar had a double weight in relation to the trade exchange. In 1991 the krona was instead pegged to the European currency unit, the ecu. During the 1970s, Sweden was still applying credit and foreign exchange regulations. The credit regulation limited the banks’ lending and foreign exchange regulation limited the opportunities to move currency, securities and capital across borders. Both types of regulation entailed limiting the opportunities for efficient allocation of capital and they became increasingly difficult to maintain as time went by. The credit market was deregulated in 1985 and the final parts of the foreign exchange regulation were abolished in 1989. The idea behind an exchange rate regime with a fixed exchange rate is that inflation in Sweden will adapt to inflation in other countries. Economists usually call this international inflation functioning as a nominal anchor. However, it did not succeed, as Sweden did not manage to stay even with other countries regarding inflation and cost developments. The economic policy conducted and the way the economy functioned during the 1970s were not compatible with a fixed exchange rate.
I have since had reason to go through what happened when confidence was restored in the Swedish economy and economic policy. Despite the decision on budget consolidation essentially being taken by the Government and Parliament in autumn 1994, it took some time before various figures believed it would succeed. The first international recognition of our policy came from the European Commission in spring 1995. I accompanied Göran Persson to Brussels and gave an account of Sweden’s convergence programme to Giovanni Ravasio, who was one of the leading economists at the Commission. Each member state of the EU was to draw up a convergence programme that would show what policy they intended to conduct to achieve stable public finances, low inflation and low interest rates. The Swedish convergence programme was aimed at achieving balance in public finances in 1998, and had the broad support of all of the parties in Parliament with the exception of the Left Party. Ravasio was convinced that the programme was sustainable. 4  BIS Review 21/2006  It was possible to see in the financial markets that the interest rate differential between Swedish and German long-term bonds began to decline in spring 1995 when the Swedish convergence programme had been decided and even more so in autumn 1995, when it had been approved by the EU’s finance ministers. For the Riksbank it took until the beginning of 1996 before short-term interest rates began to be cut. The krona was still weak during 1995 and inflation was close to 3 per cent.