Not the currency, but the concept. Sweden’s emphatic rejection of the euro in a nationwide vote on September 14 was a setback not only for Prime Minister Göran Persson and other Swedish backers of the single European currency but also for its British supporters. Although Prime Minister Tony Blair continues to promote his country’s entry into the currency union, he appears to be too weakened by the backlash in the U.K. against the Iraq War to try to sway a public that opposes the euro by a 2-to-1 margin.
Thus the Swedish repudiation of the euro effectively rules out a U.K. referendum on the currency under this Parliament -- expected to last until 2005 -- and also makes a vote in the subsequent Parliament, which probably will run until 2009, “very unlikely,” contends Michael Saunders, chief European economist at Citigroup.
All of which leaves the great euro project looking increasingly troubled. Sweden, Denmark and the U.K. may remain outside the euro zone for years to come. Meanwhile, the 12 member countries continue to be afflicted by slow growth and riven by disputes over the Stability and Growth Pact. The French government confirmed last month that it expects to violate the pact’s 3 percent budget deficit limit for the third year in a row in 2004 -- a prospect that prompted the Dutch to threaten legal action in the European Court of Justice.
The euro zone now finds itself in “the worst of all possible worlds,” contends Eric Chaney, a senior economist at Morgan Stanley. France and Germany have undermined the zone’s rules by repeatedly violating the pact without offering a credible policy alternative to stimulate growth, he says.
France, for example, proposed to cut taxes by a modest 0.3 percent of GDP in its 2004 budget, a step that enraged the Dutch and other deficit-minded countries. But the French Treasury also proposed spending cuts and increases in tobacco taxes that more than offset the stimulus.
The Swedish referendum was a vote of no confidence in the euro zone, observes Daniel Gros, director of the Centre for European Policy Studies in Brussels. Sadly, the vote also coincided with a national tragedy for Swedes when Anna Lindh -- the popular Foreign minister and vocal supporter of the euro -- was brutally and inexplicably murdered on the eve of the vote.
Despite the death of the woman who had become the public face of the “yes” faction, there was no last-minute sympathy vote by Swedes in support of the euro. Following a heated campaign for and against the currency, they delivered an unambiguous verdict, rejecting the euro by a margin of 56 percent to 42 percent (spoiled or blank ballots accounted for the remaining 2 percent). That was wider than most opinion polls had predicted (Institutional Investor, August 2003).
Yet the rejection of the euro didn’t generate even a hint of turbulence in the Swedish financial markets. The krona fell slightly the day after the vote but quickly rebounded 3 percent to about 8.85 to the euro, and interest rates held steady. Staying out of the euro zone could cause Sweden to forfeit investment in the long run, but the referendum seemed to impose no short-term costs at all.
And why should it? The country’s economic prospects remain relatively bright, with growth forecast to accelerate to 2 percent in 2004 from 1.4 percent this year -- both rates ahead of those of the euro zone. Prime Minister Persson has announced that the government will consider cuts in corporate and capital gains taxes to maintain Sweden’s competitiveness now that it has chosen to remain outside the euro zone.
Despite his support for the euro, Persson’s own position appears secure. After all, opposition parties also backed the currency. Moreover, in the absence of Lindh -- who was widely viewed as a future prime minister -- Persson has no rival for party leader.
Although Swedes face many soul-searching questions -- including how to balance their society’s traditional openness with the need for greater security -- the debate about the euro has been shelved. Sweden’s main political parties agreed not to reconsider the currency before the end of the decade, at the earliest.
Within the euro zone, meanwhile, tensions are mounting. The Centre for European Policy Studies’ Gros says that it is becoming imperative for France, Germany and Italy to begin respecting the deficit rules and making major structural reforms -- such as giving employers more flexibility to fire workers -- to foster long-lagging growth. But as he concedes, their track record inspires little confidence.
“The Swedish referendum was a wake-up call,” says Gros, “though I’m afraid they won’t hear it.”
