Sweden is not yet ready to join the euro because its currency is too unstable and the central bank not independent enough from the government, the European Commission has said.

"I regret that Sweden is not yet in a position to participate fully in EMU (economic and monetary union)," European Monetary Affairs Commissioner Pedro Solbes said in a statement.

The Commission said the kronor had been 'too unstable'

But the biennial convergence report prepared by the European Central Bank (ECB) on Sweden said it expected the country to prepare to join the 12-member euro zone.

The report noted that Sweden does not have the opt-outs from euro entry negotiated by the UK and Denmark and is therefore committed to adopt the euro.

Britain and Denmark are the only other members of the 15-state EU which are outside the euro.

Currency fluctuating

The report noted that the Swedish economy had performed well over the last few years, and that three of the euro entry convergence criteria had been fulfilled.

But it also said that Sweden's kronor, which is not part of the exchange rate mechanism (ERM), had fluctuated "quite markedly" against the euro.

"Therefore Sweden does not fulfil the exchange rate criterion of the (Maastricht) Treaty," the report said.

The legal framework between the central bank and government was "assessed not to be compatible" with the Maastricht Treaty, it added.

"In view of the right of the Swedish parliament to decide on the distribution of Sveriges Riksbank's profit, a statutory framework should be established containing clear provisions on the limitations applicable to decisions concerning profit distribution in order to safeguard the financial independence of Sveriges Riksbank," it said.

Sweden's central bank governor Urban Backstrom said on Tuesday he would quit at the end of 2002, two years before his term expires, to give his successor time to prepare for his country's possible adoption of the euro.

Membership requirement

Mr Solbes' spokesman told a press briefing that membership of the ERM would be a requirement for all future euro aspirants.

The Maastricht convergence criteria require a country to participate in the ERM, linking non-euro countries to the euro for a period of two years.

Swedish inflation is below the reference value set by the Maastricht Treaty, and its fiscal position also meets the entry requirements, the ECB said.