Keep Sweden out as long as Britain stays out

Margit Gennser 

Lars Wohlin

Prime Minister Göran Persson has heralded that a referendum on Sweden's EMU membership will be held during 2003. The referendum is likely to take place provided that the opinion polls show a clear majority for a Yes.

The referendum will mean that there will be a Yes side and a No side. On the political front, Vänsterpartiet (United Left), Miljöpartiet (Greens) and Centern (Center Party) will be against EMU membership. All centre to right parties, apart from Centern, have decided in favour of EMU membership. The Social Democrats are divided, but Göran Persson's strong position makes it likely that the Yes will win the day in his party.

Among centre to right voters there are relatively large groups - today perhaps one third, who are against Sweden's joining the EMU. Another large group are undecided. During the No campaign there will be a great risk that the left will be predominant. Many centre to right people who are against Sweden joining the euro will be unable to identify with leftist arguments which will only partly coincide with the attitudes of centre to right voters who are sceptical of EMU. Thus, many persons who normally vote centre to right will feel that they have not got any representatives who can run a campaign against Swedish membership. They have become homeless.

We will give a voice to the large centre to right groups in the civil society and in the business community who realize that EMU membership would be exceedingly dangerous for Sweden's economy

We are a number of persons who have founded an organisation called "Medborgere mot EMU" ("Citizens against EMU"). We are going to argue for a No in the referendum. We will give a voice to the large centre to right groups in the civil society and in the business community who realize that EMU membership would be exceedingly dangerous for Sweden's economy. Sweden would lose her ability to pursue an independent economic policy.

We will now briefly explain the main points behind our decision to say No to EMU membership.

We are in favour of extensive cooperation among nations, but we are opposed to the EU's developing into a federal state. A common currency is a very big step towards this federal state because it takes away the nations' ability to conduct an independent monetary and currency policy.

A Yes to the EMU is fundamentally the same as closing down our National Bank. It would be a subordinated unit of the European Central Bank. It is truly a paradox that the same centre to right parties that during the nineties fought so hard for an independent national bank are now taking up the cudgels for its abolishment.

There is a connection between an independent national bank and a floating rate of exchance. The floating rate of exchance has made it possible for the National Bank to conduct an active monetary policy. During the eighties and the beginning of the nineties the monetary policy failed, not because of a lack of indepencence, but because the monetary policy was locked by the defense of the exchange rate of the krona. Thus, the preservation of a floating rate of exchange aims not only at making room for currency changes, but it is in itself the precondition of having an independent national bank with an inflational goal.

Since Sweden changed to a floating exchange rate, the National Bank has been conducting a successful monetary policy and creating confidence to its ability to keep inflation within estabilshed limits. The new monetary policy with the floating krona has given Sweden a higher growth rate. It would be a very serious step for us if we should now abolish this system by linking ourselves to the euro, thereby running a risk of great damage to Sweden's economy.

It has been laid down as a condition for EMU membership that Sweden must show that we are able to make wage settlemets at the level of the other EMU countries. It has been said that as we have largely succeeded in achieving this, we are now ripe for joining. This type of reasoning is untenable.

In this manner of reasoning there is a failure to appreciate the central part played by the National Bank in shaping a stable economy. Nobody can say that we shall still be able to make low wage settlements if there is no longer any curb in the shape of a strong independent national bank which will give the wage earners a guarantee of low inflation. It would be unrealistic to believe that the employers' side would , as it is now organised, be able to manage this task.

The Calmfors Memorandum has analysed the preconditions for conducting a stabilizing policy with a linked currency in the absence of a monetary policy. One of its conclusions was that the instability of Sweden's economy would increase with EMU membership. Consequently, according to the Memorandum, the state will have to have a higher budget surplus in order to have a buffer during shocks which might harm its economy. That will mean a further over-taxation of the Swedish people - a new heavy and everlasting EMU tax.

The 1992 defense of the krona lead to devastating effects, leading to with a three year fall in the GNP and record large budget deficits. The damages to our industry would have beem much larger if Sweden had not finally given up the defence of the krona. Unemployment would have risen to unmanageable heights.

EMU menbership is no guarantee that Sweden would not get into situations of crisis like the ones that we have experienced during the last 30 years. What has happened that might guarantee that Swedish politicians' failures will not be repeated? The most positive thing that has happened is that we have now a floating rate of exchange and an independent national bank. And that is what they now want to abolish!

If we were to manage a change to the euro it would, according to many estimates, require a fundamental change of Sweden's economic policy system which would not at present be accepted by a majority. It would require that we converge our level of taxation from around 53% of our GNP to the EU average which is around 10% lower. At this level it would be easier to raise or lower the tax rates without colliding with the EU Stability Pact.

Changing the welfare system in order to bring us down at that level is a long term job. And until it has happened we should desist from joining the EMU.

Around 40% of Sweden's foreign trade (the sum of exports and imports) is with the EMU countries. If we add Denmark and Britain who are outside the EMU, the share goes up to around 55%. As long as Britain stays out the greater part of our trade is with countries outside the EMU area.

Two points should be noted:

1. Our trade with the rest of the world is expanding faster than that with the EU countries. This is because the outer world has enjoyed faster growth than the EU. It is therefore not the case that Sweden is getting more and more dependent on the EMU area, rather less so. This may, of course, change in a future when more and more countries join the EU, but that will not be for some time.
2. Since the world changed to floating rates of exchange the fluctuations between the great currencies - dollar, D-mark (now euro) and Yen been very great. This is not so much due to changes in the underlying competitive powers as to the enormous proportions of the international capital flow. If we link the krona to the euro we shall be forced to follow the euro both upwards and downwards, which will expose the large dollar dependent section of our industry, the wood industry, to heavy pressure.

If we look after our economy in such a manner that we keep a reasonably stable exchange rate against a trade weighted index we will be floating in between the euro and the dollar. With no link to the euro we will get a more stable exchange rate than if Sweden joins the EMU. During the recent currency disturbances the krona has also "splashed" less against the dollar than what the euro has.

Sweden's trade weighted currency index (tcw index) can, in simplified terms, be said to consist of a little more than one third dollars and two thirds euro. If the dollar goes up by 30% in relation to the euro, one should expect a devaluation of the krona by 20% and a revaluation of 10% against the euro. This also holds good in the opposite case. If the euro goes up against the dollar, the krona ought to be devalued against the euro.

A sensible krona connection rate to the euro will to a large extent be decided by the relation existing between the euro and the dollar. It is not possible to decide today which connection rate the krona should have to the euro.

as long as Britain - Europe's financial great power - stays outside, we have absolutely no reason to join the EMU

The balanced rate that might happen to be valid at the beginning of the EMU membership might, however, soon change. The general point of departure seems to be that the krona should be appreciated 6-7% in relation to the euro. This might turn up to be completely wrong in the case of a strong euro. Why accept such a point of departure which might cause serious damage to Sweden's economic life?

Now and then it is said even if we do not join the euro the Swedish interest rate will be decided in Frankfurt anyhow, and that consequently we might as well join and have influence on the decisions. This is not true. We are just about as dependent on the American bank-rate policy.

Sweden cannot stay outside the EMU in the long run, Sweden will lose influence, it is often said in the debate. But as long as Britain - Europe's financial great power - stays outside, we have absolutely no reason to join the EMU. We are in good company, both politically and economically together with a country that has a better growth rate than the rest of the EU.

Many industrialists and parts of the centre to right parties think that Sweden will be forced to change her policies in the right direction. If they cannot get a majority for such a policy in Swedish elections, they would like to import it.

Fundamentally, it is our belief that Sweden must show, before EMU membership, that we are able to manage a growth rate that is high from an international point of view. That we are willing to change our taxation policy so that we converge towards the average tax pressure in the EU, which will in the long run mean a reduction of the tax payment by about 10% of the GNP. Such a reduction will demand material changes in our transfer payment system. The will to change Sweden's policy ought to come with the support of the Swedish people and not be forced on it from the outside.

Finally we are unable to understand why Sweden should be in such a hurry to join the EMU which is meant to last forever and which has no exit clause. Let the EMU function during a few more economic cycles and let us see how it works. Do not join before Britain does. Show that Sweden is able to manage a higher growth rate. Carry through the tax reforms - not least in the area of capital - that are a precondition that industries and capital are not chased away from this country.

The authors of this article are:
Rune Andersson, Managing Director, Melby Gård AB; Sven Bergström, Center Party MP; Per-Olof Eriksson, former Managing Director, Sandviken; Björn von der Esch, MP, Christian People's Party; Margit Gennser, Conservative MP; Lars Wohlin, former national bank director and Managing Director, Stadshypotek.

The article was published in Swedish, in Dagens Nyheter on 2nd July 2002