Sweden back on the road to the euro

Date: 21/03/02

Prime Minister Göran Persson wants to introduce the single currency in Sweden by 2006 - but there are still obstacles to overcome, warns Dick Leonard

WHILE the UK still procrastinates, Sweden is actively preparing to become the 13th country to adopt the euro.

Prime Minister Göran Persson recently presented a timetable which forecasted his country joining Economic and Monetary Union on 1 January 2005, and introducing the euro in January 2006.

Persson's initiative followed a surge of support for the euro in opinion polls. These had been strongly negative for a long period, especially after the defeat

of the Danish euro referendum in September 2000, but last summer the 'yes' voters crept back into the lead, which subsequently grew steadily larger, culminating in a lead of nearly 20, following the smooth introduction of notes and coins in 12 member states in January.

The main reason for the swing-round in the polls has been the prolonged weakness of the krona in the foreign exchange markets, which has been a painful experience for the large numbers of Swedes travelling abroad. This has caused a crisis of confidence in the future of Sweden's own currency.

Unlike Britain and Denmark, Sweden neither sought nor received an opt-out under the Maastricht Treaty provisions for EMU. Yet there are a number of obstacles for it to overcome before it can meet the criteria laid down in the treaty.

These are fully discussed in an excellent white paper, The Road to the Euro, published by the Scandinavian Enskilda Bank (SEB), and written by two of its senior economists, Klas Eklund and Ingela Georgii-Hemming. Two problems in particular stand out, both of which could seriously affect Persson's timetable.

One is the requirement to join the exchange rate mechanism of the EU, and to maintain the exchange rate within the normal fluctuation margins for at least

two years, without devaluing. Persson proposes that Sweden should not join the ERM until February 2004, leaving a mere four months before the EU decision on Swedish EMU membership.

This, the SEB authors consider, would be pushing Swedish luck, even though the Italians and the Finns were permitted to join the EMU after only 18 months in the ERM.

They therefore propose that Sweden should enter the ERM in June 2003, soon after the referendum result if it is favourable rather than waiting until its parliament had approved the terms of its EMU application the following December. This would mean that Sweden, too, would have been in the ERM for about 18 months before its admission.

The other problem concerns Sweden's central bank, the Riksbank, which would have to transfer certain powers to the European Central Bank. This involves amending the Swedish constitution, requiring two separate parliamentary decisions, on either side of a general election. This process could not be completed until some time after the general election scheduled for September 2006, after the target date for Swedish adoption of the euro.

The SEB authors argue, however, that this would probably be acceptable to the EU, provided that the first parliamentary decision is taken earlier in the process. They suggest, therefore, that it should be brought forward to the autumn of 2003 over two years earlier than Persson proposes. There remains the major political challenge of getting the powerful trade union movement onside. Over 80 of Swedish employees are union members, and the LO, the Swedish Trade Union Confederation, has declared that it would only be willing to back the euro if a state-supported 'buffer fund' was set up to help stabilise employment in the event of a downturn in the economy.

Last week a government-appointed committee of experts, headed by former deputy finance minister Bengt Johansson, advised against such a fund, suggesting instead that an increased budget surplus would provide a better hedge. The LO was unconvinced and reiterated that it would not advise its members to vote for the euro unless a buffer fund is created.

It points to the existence of a similar fund in Finland, though this is on a smaller scale and is not state-funded.

The Social Democratic government is keeping its own counsel for the moment, but the strong expectation is that, if it wins the general election in September, it will seek to do a deal with the LO. Otherwise it would be unlikely to risk a referendum.

If it successfully goes ahead in March or April next year, it will almost certainly prompt the Danes to follow suit with little delay. Already there has been a big turnaround in Danish opinion since their earlier poll in 2000.

The effect on Britain will be more marginal, but Tony Blair is believed to have discussed the issue in detail with Persson, and to have informally agreed with him that Sweden should go first, as its public opinion is better prepared, and a positive result might help create a bandwagon effect. According to one Swedish source, Blair even told Persson that he had pencilled in 1 May 2003 as his favoured date for a British referendum.

This sounds a credible choice; it will be the sixth anniversary of his election victory in 1997, and is also the date on which Britain's local elections will be held, which would be an administrative, as well as a political, convenience.

Before that can happen, however, Blair will have to square his Chancellor of the Exchequer, and Gordon Brown is still holding his cards very close to his chest.

Commentary feature. Prime Minister Göran Persson wants to introduce the single currency in Sweden by 2006, but there are still obstacles to overcome.