As the chairman of Sweden’s Telefonaktiebolaget L.M. Ericsson, which exports to more than 100 countries, Michael Treschow knows currency risk. Right now a strengthening krona is putting pressure on Ericsson’s margins as it struggles to adjust to the depressed telephone-equipment market. So it’s no surprise that Treschow enthusiastically supports Sweden’s participation in the euro, the single European currency. Swapping the krona for the euro, he believes, will foster greater economic stability in Sweden, boost growth and investment by lowering interest rates and give a fillip to trade with the euro zone, the country’s biggest export market (a 44 percent share of the total).
“Sweden and Swedish business must participate in a bigger environment,” contends Treschow. “I’m a true European. If Europe has embarked on a common currency for a common market, it’s natural for Sweden to participate. Trade will increase for Swedish-based businesses.”
What seems natural and desirable to Treschow, however, is anything but to Rune Andersson, chairman of Swedish appliance maker Electrolux. Andersson argues that Sweden’s decision to peg the krona to other European currencies in the 1980s and early ‘90s largely caused the savage recession of 1991'93, the country’s worst since the Great Depression. By contrast, says Andersson, a subsequent policy shift that generated budget surpluses and granted independence to an inflation-targeting central bank ushered in a decade of steady growth with low inflation and nearly full employment.
“We have had ten years of an almost perfect situation,” the Electrolux boss says. “We have had better growth and lower unemployment -- better than the euro zone. I don’t see why we should change a winning system.”
Corporate chieftains rarely disagree this openly on major policy issues. But the clashing views of Treschow and Andersson reflect the deep divide among Swedes as the country prepares to vote on whether to give up the krona and adopt the euro. For every Swede who sees the single currency as a bulwark against financial instability and the logical fulfillment of Sweden’s membership in the European Union, another believes that adopting the euro would be a reckless surrender of economic sovereignty, threatening jobs and Sweden’s generous welfare state.
The euro skeptics have been growing in number as Germany’s deepening economic crisis and brazen attempts by both Berlin and Paris to flout the euro zone’s budget-deficit limits have underscored the problems of a single currency. Germany’s travails are “the single most important economic argument” against euro membership, acknowledges Klas Eklund, chief economist at SEB Group and himself a proponent of euro entry. “Why join a club when its biggest member is not performing well?”
A shift in public opinion against the euro poses a huge challenge for Swedish Prime Minister Göran Persson. He has staked his reputation on winning the September 14 euro referendum. When he began the push for a vote last year, polls showed that a majority of Swedes would back the euro. More recent surveys, however, show the “no” camp leading by more than 10 percentage points. The main opposition parties are on Persson’s side, but that has only fanned suspicions among euro opponents that the single-currency drive is a project of the establishment, not the people.
The two smaller parties that support Persson’s center-left government -- the Green Party and the former Communist Party, now the Left Party -- are both fervent opponents of the euro. They regard it as undemocratic because it would deprive Swedes of a measure of control over their economic affairs, and they consider it a threat to Sweden’s welfare system. Persson also faces opposition within his own Social Democratic Party: His popular deputy prime minister, Margareta Winberg, and his Trade and Industry minister, Leif Pagrotsky, both oppose euro membership.
For his part, the prime minister believes passionately in the euro. As Sweden’s Finance minister in the mid-'90s, Persson had to slash spending and hike taxes to plug a massive budget deficit left by the recession. He sees the euro as insurance against that kind of financial turbulence. He also thinks it’s time for Swedes to drop their ambivalence and become full-fledged participants in the European Union, especially now that the EU is about to admit ten new members from Eastern Europe, a growing market for Sweden.
“We will be protected inside the bigger currency -- that is the big argument for me from an economic perspective,” Persson explains. “Then, of course, we will have lower interest rates. We will probably have better competition. There will be a little more trade. On top of that, Do we want to belong fully to the European project? Yes, we do.”
Persson insists that he can turn the tide in the euro’s favor once campaigning goes into full swing this month. He has already forged a tentative agreement with the opposition Moderate Party, which favors euro entry, to increase the government’s budget surplus target to 2.5 percent of GDP from 2 percent. He hopes a bigger surplus will reassure voters that Stockholm retains the fiscal flexibility to stimulate the economy in a downturn. Final agreement on higher surpluses could win support for the euro from Sweden’s influential union federation, LO, which has been neutral until now.
Sweden’s 1994 referendum on joining the EU offers Persson grounds for optimism. Then, too, opponents held an early lead, but a late surge in support carried the referendum 52 percent to 47 percent.
Persson expects victory in the wake of a similarly close contest this time. The polls have already started to narrow, with euro opponents leading supporters by 11 to 13 percentage points in surveys in late July, compared with a lead of as much as 20 points a month earlier. A crucial difference exists today, however: The 1994 referendum was held shortly after voters in Austria and Finland approved EU membership by wide margins, lending momentum to the “yes” camp in Sweden. But British leaders recently decided against calling a euro referendum, saying economic conditions were not propitious. So momentum will be against the euro when Swedes go to the polls.
“What happens in Britain is very important to Swedish voters,” says Electrolux’s Andersson. “They know Britain has performed much better than Europe for a number of years. It has shown us one thing: We don’t have to hurry. We can wait.”
Next month’s referendum is likely to say as much about the attractiveness of the euro zone as it does about Sweden’s economic destiny. The single-currency club continues to be disappointing. The European Commission estimates that growth will be just 0.7 percent this year. Many economists predict negative growth for Germany.
French President Jacques Chirac has called for easing EU Stability and Growth Pact limits on budget deficits, creating, a big rift among the 12 euro countries. Austrian Finance Minister Karl-Heinz Grasser has proposed sanctions on France. And the European Central Bank has sharpened its criticism of budget deficits, raising fears that it will delay interest rate cuts to press for tighter budgetary policies. If Swedish voters reject the single currency on the heels of Britain’s choosing to stay outside of the euro zone for now, it would be an embarrassing no-confidence vote on the single currency and its governance regime.
Whichever way the vote goes, the Swedish economy looks set to perform relatively well this year and next. Growth is expected to be about 1.25 percent in 2003 and more than 2 percent in 2004. That would exceed the anticipated growth of the euro zone -- a feat Sweden has achieved for most of the past decade.
Even ardent supporters of the euro, such as Jacob Wallenberg, deputy chairman of investment company Investor and chairman of SEB Group, concede that Sweden will not suffer in the short term if the referendum loses. “This is not a black-and-white issue,” says Wallenberg, the leading member of the famous investing and industrial family. “This is about values over the long term.” He warns that Sweden stands to lose investment and competitiveness in the long run if it turns down the euro.
Weighing the pros and cons of the euro gets complicated. Proponents assert that adopting the single currency would intensify Sweden’s trade links within the euro zone and thereby boost the country’s growth and investment. It would also eliminate euro exchange rate risk and lead to lower interest rates for Swedish borrowers.
Opponents counter that Sweden would be abandoning an indispensable tool: the ability to use interest and exchange rates to guide and bolster the economy. And they consider the European Central Bank inferior to the Sveriges Riksbank, which pursues a clear, symmetrical inflation target and publishes detailed records of its meetings.
Even current and former Swedish central bank governors are split down the middle. Two, including incumbent Riksbank governor Lars Heikensten, are in favor of membership; two others are strongly opposed.
“I find the economic cons somewhat stronger than the pros, but there’s no objective way of comparing them,” says Lars Calmfors, a professor at Stockholm University’s Institute for International Economic Studies. Although Calmfors in the late 1990s headed a government panel that recommended that Sweden stay out of the euro, he now favors joining the currency union. “I will vote yes mainly for political reasons. More interaction between European countries is good. The single currency and increased trade will increase cooperation.”
The political disputes over the euro are as contentious as the economic ones. Sweden voted in favor of EU membership by the narrowest margin of any country, and many Swedes, particularly those in conservative rural areas, regard the Union as a centralizing and profligate bureaucracy dominated by venal and untrustworthy politicians. The extraordinary July outburst by Italy’s prime minister, Silvio Berlusconi, who opened his six-month presidency of the EU by comparing a German member of the European Parliament to a concentration camp guard, can only reinforce Swedes’ negative feelings about the EU. And Berlin’s inability to live by the deficit rules that Germany imposed on the EU hardly sets an example for the law-abiding Swedes. As Dan Andersson, LO’s chief economist, puts it: “Why join a club where Berlusconi is chairman and the founder of the club -- Germany -- can’t live up to the club’s rules? That scares a lot of people.”
THE MAIN EURO BATTLEGROUND, THOUGH, remains economic, and it revolves around an essential trade-off. In embracing the euro, does Sweden stand to gain more from greater trade and investment, lower interest rates and exchange-rate stability than it stands to lose by giving up the flexibility to respond to economic shocks by adjusting interest and exchange rates?
The trade argument posits that the euro will boost commerce between Sweden and other euro-zone countries by eliminating exchange rate uncertainty and currency transaction costs while increasing pricing transparency and stimulating competition. The British Treasury concluded in a study released in June that the single currency has already boosted trade among the 12 euro-zone countries by 3 to 25 percent since 1999. If the U.K. were to adopt the currency, the Treasury said, British trade with the euro zone could increase by 5 to 50 percent. Supporters of the euro believe that it could have a similar impact on Sweden.
The catch to the trade case is that it’s not supported by data. If the euro zone really is enjoying such a trade boom, why is its economic performance so poor? It’s quite possible, of course, that the euro zone would have fared even worse without the single currency. But that’s hardly a winning argument to put to Swedish voters.
The trade benefits “can’t be that important,” asserts Nils Lundgren, former chief economist at Nordea (see story, page 23) and leader of the lobbying group Europe Yes, Euro No. “If the currency area was so important, then Germany would be the richest country, and Denmark would be the poorest.”
The “good for investment” argument gets more traction with business executives. Polls indicate that they support the euro two to one. Yet no evidence can be produced to show that foreign companies have reduced or shifted investments out of Sweden because of currency concerns, says Ulf Dinkelspiel, who heads both the Swedish Trade Council, a government-backed export promotion agency, and pro-euro lobby group Sweden in Europe. He does note that a study by the government-funded Invest in Sweden Agency found that one third of foreign direct investors in Sweden would be likely to increase their investments if the country adopted the euro. Says Dinkelspiel of the referendum: “Obviously, it’s not a choice between heaven and hell. But it’s much more [positive] to be inside the euro than outside.”
SEB’s Wallenberg shares that perspective. “Any large multinational company, in its investment-decision process, will make a tally of the pluses and minuses of any country they may wish to invest in, and one of the important factors is currency and the cost of currency.”
For Electrolux’s Andersson, an attractive investment climate involves many factors besides currency. The vacuum cleaner maker’s biggest production facilities are in Germany and Italy, not Sweden, and it’s looking to increase capacity in Eastern Europe. The euro figures hardly at all in Electrolux’s investment decisions, he says: “We have never discussed that with the board.”
DIVERGING PERSPECTIVES ON INVESTMENT mark one of the few differences between Sweden and the U.K. in the euro debate. Although Britain’s share of foreign direct investment in Europe has declined some in recent years, it consistently ranks at or near the top of the European league table. Britons’ confidence in the allure of their economy, Europe’s third largest, goes a long way toward explaining why Prime Minister Tony Blair wasn’t prepared to risk an economic referendum. By contrast, many Swedes share a gnawing economic insecurity. As a small country of 9 million people on the periphery of Europe, Sweden runs the risk of being bypassed if it stays outside of the European mainstream, supporters of the euro say. “Europe will always have to take notice of Britain because it’s such a big economy and it’s such a big financial center,” says Ericsson’s Treschow. “We have a number of disadvantages, being far up north.”
Swedish Finance Minister Bosse Ringholm echoes the argument that Sweden’s size and vulnerability to economic turbulence are reasons for joining the euro. “Of course, we are more dependent than the U.K.,” he says. The EU’s expansion next year to take in ten new members from Eastern Europe is also a powerful motivator, he adds. The ten all aim to join the single currency by the end of this decade, and Swedish trade and investment in the region -- especially in the Baltic states and Poland -- is growing fast. “We think it’s very essential in the long term that these countries are members,” Ringholm says. “We know it will be a broader market.”
Sweden would benefit from lower interest rates if it joined the euro zone. Although the Riksbank cut its repurchase rate by a quarter point, to 2.75 percent, on July 3, this key rate is still 75 basis points above the ECB’s short-term rate. Joining the euro would wipe out that differential. The yield premium on ten-year Swedish government bonds versus German Bunds could fall from the current 50 basis points or so to as little as 10 basis points, estimates SEB economist Eklund. Declining interest rates, in turn, could offset the expected appreciation of the krona ahead of euro entry and keep monetary conditions in Sweden stable. The Riksbank’s Heikensten recently predicted that the krona would firm somewhat, to between 8.5 and 9 to the euro, thanks to Sweden’s current-account surplus. Eklund reckons that the government would aim to enter the euro zone at about 8.8, roughly 4 percent higher than the prevailing level.
The prospect of lower interest rates doesn’t tempt Bengt Dennis. The former Riksbank governor, an ardent opponent of the euro, raised short-term interest rates to an astronomical 500 percent in September 1992 in a vain attempt to defend the krona’s peg during the European currency crisis. When asked how high rates might go, he infamously replied, “The sky’s the limit.” For Dennis, having the ability to set an interest rate appropriate to the country’s economic health is much more important than the actual rate.
“I find the argument that we should vote yes to get euro-zone interest rates stupid,” he says. “If that was the case, it would be better to join Japan. Better to have growth and the right interest rate level than lower interest rates.”
And that’s the nub of the case against the euro. The single currency, with its one-size-fits-all interest rate, would strip Sweden of the freedom to set an independent interest and exchange rate policy. The country bounced back from the severe recession of the early 1990s in large part because Stockholm allowed the krona to depreciate, giving a strong boost to exports. But once inside the euro zone, Swedish policymakers would be hamstrung. “We will lose monetary policy as an instrument, and it is still important for Sweden,” says Dennis.
Germany’s plight serves as a stark warning of the potential pitfalls of adopting the single currency. It joined the euro at an exchange rate that most economists now regard as overvalued, hurting German manufacturers’ competitiveness. Now the country is teetering on the verge of its second recession in as many years. Berlin’s budget deficit already exceeds the 3 percent limit for euro countries, and any fiscal stimulus would mean a flagrant breach of the Stability Pact. Germany can’t devalue against its European partners to regain competitiveness, and it’s stuck with too high an interest rate for its struggling economy because the ECB has to worry about controlling inflation in the whole euro zone, which includes faster-growing countries like Ireland and Spain.
“The free market is a much better guardian than a political system like the euro system,” says Electrolux’s Andersson. “You know that sooner or later the currency will adjust to the costs and productivity of the country. I see now in France and Germany that they don’t solve their problems. That shows how incredibly difficult it is to change the economy with other methods.”
Those on the left draw a different lesson from Germany. They see the austerity measures Berlin agreed to in June, including cuts in unemployment and health care benefits, as evidence that the euro and its fiscal rules threaten the welfare state.
This fear explains the strong opposition to the euro among Swedish women. Fifty percent of the country’s working women are employed in the public sector, and polls show that nearly 80 percent of them plan to vote against the euro because they regard it as a threat to their livelihoods. Ulla Hoffmann, leader of the Left Party, drives home the point by recalling her struggles as a single mother trying to raise three children while working in a hospital and in a government research center. “I needed the public sector,” she says. “I needed the day care center. That is what the public sector is about. You should be able to survive and raise your family.”
Prime Minister Persson maintains that Germany’s problems stem from its inability to reform its welfare and labor policies, not from the euro. “If Germany had done the same things that we did in Sweden, it wouldn’t have any problem with the Stability Pact,” he says.
To win the referendum, however, Persson needs to show that Sweden can avoid a German-style predicament if the Nordic country’s economy tanks. He considered a labor proposal to create a buffer fund of about 1 percent of GDP to stimulate the economy and finance welfare payments in a crisis. But he abandoned the idea after it drew strong criticism from the Moderate Party, which wants to reduce the unions’ sway over the economy. Union confederation LO, with 2 million members, responded by withholding its support from the government’s “yes” campaign, a major setback for the prime minister.
Now Persson is focusing on increasing budget surpluses to build up a reserve sufficient to stimulate the economy in a serious downturn. He promises to unveil detailed proposals for the surplus before voters go to the polls in September.
“We want to have a margin so we can meet a downturn in the economy,” he says. “There seems to be a broad majority in the Parliament behind that.”
Persson’s new 2.5 percent surplus target won a warm reaction from LO’s president, Wanja Lundby-Wedin. “That is not enough for us, but it’s a very good beginning,” she says. Lundby-Wedin has begun negotiating with Persson on other fiscal measures that would accompany euro entry, raising prospects that she will ultimately support the “yes” campaign.
Can Persson pull off a victory in next month’s referendum? With the unions turning positive and most of the industrial and political class on his side, he has marshaled an impressive array of supporters for his vision of closer integration with Europe. “We can’t isolate ourselves,” he says. “The opportunity to go ahead with effective policy in Europe is much bigger if you cooperate, and cooperate inside the monetary union.”
Unfortunately for the prime minister, he’s getting very little cooperation from the euro zone’s off-putting economic performance. As Lars Wohlin, a former Riksbank governor who opposes the euro, puts it: “What’s the cost of saying no? Very little. Economic growth is better outside than inside.”
That will be a hard argument for Persson to beat.
