Pain of shadowing ERM makes Swedes wary of swift involvement in the euro

Date: 10/09/1998

By Tim Jones

WHATEVER Sweden's politicians say in the heat of electioneering, few people expect the country to stay outside the euro-fold for long.

Opinion polls may show a 51&percent;/32&percent; majority in favour of remaining on the sidelines for now, but big business is in favour of joining and the Social Democratic government has only chosen to sit out the beginning of monetary union to see how it goes.

If and when they decide to sign up to the new currency (market bets are on 2001-02), the Swedes should have little trouble making the grade. Government finances are edging into surplus, public debt is falling as a proportion of gross domestic product and inflation has decelerated to a mere 1.3&percent; in July.

The only problem is the absence of the krona from the EU's soon-to-be-revamped system for minimising currency fluctuations: the Exchange Rate Mechanism.

When the decision was taken to kick off monetary union with 11 member states in May, this was not a problem for Sweden but a blessing. The ruling Social Democratic Premier Göran Persson had long before decided that he would not test his party's loyalties by taking an early euro-zone plunge.

However, since Sweden had failed to negotiate an opt-out from EMU along with the British and the Danes, the government had to be excused for not complying with the entry rules. By failing to give the central bank total freedom and staying out of the ERM, this it most certainly did.

It was hardly likely to join the ERM after the country's appalling experience of fixed exchange rate regimes in the early Nineties. Then, seeking to 'shadow' the mechanism, the Swedish authorities pegged the krona to the ecu and tried to defend it to the economic death.

The lengths the Riksbank went to have become legendary. By the time it abandoned the peg in November 1992, the central bank had spent billions of ecu defending the krona and raised overnight interest rates to an unbelievable 500&percent;. And this took place in an economy which had already been in recession for more than two years.

The pain and the perception that EU governments and central banks failed to come to their aid has created ERM-phobia among Swedes.

“They won't jump into the ERM straight away,” says Thomas Ekeli, an economist at US investment bank Lehman Brothers. “The decision to join EMU will come first and then they will join the ERM, because they have to.”

The reluctance of Persson to act quickly has infuriated opposition leader and former EU envoy to Bosnia, Carl Bildt. In the run-up to the election, the leader of the Moderates has called for a pro-euro pact among the seven parliamentary parties to help stem speculative attacks against the krona in the wake of crises in Russia and Norway.

Two weeks ago, the krona fell to its lowest level in nearly three years at 4.68 per deutschemark as international investors, bored with just selling Norwegian currency and assets on the back of a plummeting oil price, turned their sights on the whole Nordic region.

Unluckily for the Swedes, a swift look back at the history of international economic shocks suggests that they get hammered harder than most because of their perceived dependence on earning export cash from volatile commodity sales.

Finance Minister Erik Åsbrink is certainly not enjoying the ride this time around. “A weak krona could, if it persists, create some inflationary pressure,” he warned recently. “There is room for it to strengthen.”

Finnish industry, a large section of which competes in the same markets as Sweden for forestry products, metals and engineering goods, could certainly agree with that. Helsinki is anxious to minimise volatility of the krona against the euro and would welcome ERM II entry for Sweden as soon as possible.

At least in public, the Riksbank is not interested in such a move yet. The central bank is content to meet the government's inflation target of 0-2&percent; per annum and, by so doing, stabilise the exchange rate once inflation has been stripped out of the equation. Riksbankers have hinted in the past, however, that if and when ERM-day comes, they would rather see the krona pegged at the euro-equivalent of around 4.30 per deutschemark rather than the current level above 4.50.

The euro-zone governments would almost certainly be ready to buy such a deal since nobody could argue that it locked in a competitive advantage for Swedish industry.

Assuming Persson is returned to power in the elections, which is far from assured, the Social Democrats have made it clear that they will take a decision during their 2001 congress at the earliest. If Bildt rises to power at the head of a coalition, the time frame would definitely be compressed.

It is just possible that, the success of the first years of the euro permitting, Sweden, Denmark and the UK could join the single currency area in time for the arrival of the new banknotes and coins in January 2002.

Facts and figures

Name: Konungariket Sverige

Capital: Stockholm

Area: 449,964 sq kilometres

Population: 8.7 million Head of state: King Carl Gustaf XVI

Head of government: Goran Persson since March 1996

Main industries: Steel, machinery, autos, shipbuilding and shipping

Main crops: Cereals, sugar beet and potatoes

Workforce: 3&percent; in agriculture, 21&percent; in manufacturing and 38&percent; in services

Currency: Krona (current rate: 9.02 per ecu)

Economy: In 1997, gross domestic product totalled 193 billion ecu, GDP per capita 18,900 ecu and the net trade surplus 14.5 billion ecu; unemployment in July represented 8&percent; of the total workforce and annualised consumer price inflation was 0.6&percent;.