Sweden and the euro: Why the voters are reluctant

Date: 13/09/03

Sweden seems far from keen to embrace Europe's new currency

THE murder of Anna Lindh has made the outcome of Sweden's approaching referendum on the euro harder to predict. The popular foreign minister was keenly in favour of adopting Europe's new currency, and her death may arouse sympathy votes on September 14th. The most recent polls, conducted before she died, had given the noes a lead of at least nine percentage points.

The government and its pro-euro business allies had thrown everything - including far more money than the other side, and, lately, a measure of political deviousness - into changing voters' minds. The yes-campaigners had been hoping that enough waverers would decide in the end to follow their leaders' advice, much as in 1994, when the country voted by a narrow margin and only after a great show of reluctance to join the European Union.

A no vote would be a blow for opponents of euro membership in the two other EU countries still outside the system: Britain, where opinion remains pretty firmly against, and Denmark, where euro supporters are now in the majority. Such wider implications aside, however, would a decision to join really be in Sweden's economic interests?

One can see why voters doubt it. Sweden's central bank, like Britain's, has conducted its monetary policy to good effect in recent years. Inflation is subdued; unemployment, at 5.4%, is much lower than the euro area's average of nearly 9%; and growth in output, though sluggish this year, looks all right by European standards. The Economist Intelligence Unit, a sister company of The Economist, predicts that Sweden's GDP will grow by 1.3% in 2003, rising to 2.3% in 2004, against growth of 0.6% rising to 1.8% in the euro area.

Sceptics allege that the euro area's poor performance is not just down to bad luck. Economic policy in the euro area is a mess. The European Central Bank has been widely criticised for keeping interest rates too high for too long, and for adopting an unduly severe target for inflation: a ceiling of 2%, to be contrasted with the Swedish central bank's milder target of 2% plus or minus 1%. At the same time, euro-area co-operation on fiscal policy is in disarray, with the rules for budget deficits laid down in the stability and growth pact criticised or flouted by France, Germany and others. Since Sweden appears to conduct economic policy more intelligently than does the euro area, and since the results are currently superior, why switch?

Göran Persson, the prime minister, and his allies emphasise the long-term costs of staying out: less influence for Sweden in the EU, and less inward investment. Whether Sweden, with or without the euro, can expect to exert much influence in the Union seems doubtful, but fears about investment might prove well-founded.

Sweden competes successfully in the market for global capital. Measured by trade and by flows of investment, it is one of the most open economies in the world. No doubt it would continue to do well outside the euro area, but the question is whether it would not do even better as part of the single-currency zone. With time, and assuming that the EU will eventually repair its defective euro arrangements, the price for retaining the krona is likely to be some net loss of investment due to exchange-rate uncertainty.

This cost must be set against the benefit of retaining control over interest rates. Sweden's labour market is not the most flexible in the EU: the labour force is highly unionised, wage-bargaining is relatively centralised, and the country has an enormous public sector. This, it might be argued, strengthens the case for an independent monetary policy. On the other hand, the smaller and more open the economy, the greater the benefits of exchange-rate fixity; and Sweden is small and very open. Whatever the precise balance may be, it certainly lies more in favour of euro membership for Sweden (and for Denmark) than it does for Britain.

The pragmatic Swedes, one might suppose, would weigh all this and do what Britain has done: wait and see. Say no to the euro in 2003, while the euro area is struggling and its policy arrangements are in question, but reserve the option to say yes later, when the system is performing better or if investment starts to droop. This thought seems to have occurred to the prime minister. In what could be a case of pragmatism, or just brazen dishonesty, he has recast the terms of the referendum.

The question on the ballot seems admirably simple: “Do you think Sweden should introduce the euro as its currency?” The prime minister has made it more complicated. He argues that voting yes does not oblige Sweden to introduce the currency straight away; it merely gives the government authority to do so if conditions seem right; whereas saying no, the prime minister has deemed, is to rule out any such possibility for ten years. This seems an abuse of the referendum, and the prime minister is being criticised for it. Redefining yes to mean “yes or unsure” may nonetheless prove to have been a clever tactic. But if the government loses the vote despite such cunning manoeuvres, the defeat will be all the more telling.

The real question

As in Britain, opposition to the euro in Sweden reflects discomfort with the broader thrust of European political integration as much as, or more than, it expresses doubts about the single currency itself. Many Swedes worry that deeper integration will eventually threaten the Swedish welfare state. Winning support for adoption of the euro might have been easier if the two issues had been kept separate - if the government had promised a further referendum on the new European constitution, for example. That is where voters' reservations about deeper integration are very much to the point.

The prime minister has neither promised a further referendum on the constitution nor ruled one out. Whatever the outcome on September 14th, after the struggle, embarrassment and, now, tragedy of the past few months, Mr Persson may feel that asking citizens what they think is best avoided.