So far there is nothing to worry about. With every passing day, Swedes are less and less likely to be choosing EMU when they vote in a referendum on September 14. Earlier this month, a Gallup poll [Swedish] pinned the yes-vote at 31%, down from 35% a month earlier, while the no-vote grew to 46% from 40%Less than a year ago [Swedish], support for joining EMU stood at 56%, with 41% against..
With only a short summer left for campaigning, it’s time to panic if you’re a Swedish politician in favor of joining EMU. Obligingly, Prime Minister Persson and the leaders of other pro-EMU parties last week decided to ramp up the yes-campaign immediately [Swedish], and to coordinate their canvassing. Their big hope: winning over the sizable percentage of undecided voters.
The main problem for the yes side is that its arguments are just not compelling enough. To their credit, they have mainly pushed the supposed economic benefits of eurofication to the fore Benefits: no more transaction costs, price transparency, no more exchange rate uncertainties. Downsides: read on.rather than dragging out the old bugbear of political marginalization. I think this is because the debate has become remarkably depoliticized. A decade ago, there were heated argument about the merits or otherwise of an “ever-closer union.” Today, the question is, “Which currency regime makes more sense for Sweden?” and the answer to that does not depend on whether you know the words to the Internationale, but on whether Sweden is A similar level-headedness is prevailing in the UK, where EMU membership depends on the passing of 5 tests that involve purely economic considerations. Quite an improvement from the days of “Up Yours, Delors!” (Well, maybe not.)an optimal currency area [PDF].
It’s hardly something to storm the barricades over. Clearly, people vote with their pocketbooks, not their passports. The Quebecois and the Puerto Ricans never seem to manage to secede. In Europe, separatist movements only gain clout in regions that stand to gain financially: It’s the rich Catalans, Flemish and Northern Italians who would shed their poorer cousinsEven New Yorkers are not immune to the impulse..
In any case, the marginalization bugbear has no bite. Demanding currency union as a prerequisite for political union would only make sense if politicians still controlled monetary policy. Thankfully, in modern economies, independent central banks now control interest rates, lest governments are led into temptation. The grand vision of a single European currency has appeal in its simplicity, but lacks the adaptability to serve the interests of those countries not at the core of euroland. Instead, Europe should have as many or as few currencies as is economically sound. This should have no bearing on political projects going forth, some of which I am in favor of, and others that I am notThe CAP, for example, really stinks..
But the likes of Delors and Giscard d’Estaing see currency union as a tool for building a common identity. This strategy worked during the unification of Italy, the creation of Belgium, and most recently, with German reunification. There’s no denying that over time, a common currency can help with nation building. The euro is clearly a political project. But at what price?
Several regions could really use a weaker currency than what they have now. Quick economics recap: Currencies are an efficient way to compensate for fluctuations in productivity between regions over time. Wages do so only partially — they tend to only go up. If there are variations in productivity within a currency area, then the state needs to shore up the less productive region with infrastructure works and other fund injections, or else people leave for the jobs of the more productive regions, if there is labor mobility.In the US, West Virginia comes to mind, as do Sicily and Wallonia in the EU. For the comparatively unproductive West Virginians, the US dollar is overvalued, so their “exports” to other states are uncompetitive. With no recourse to a depreciating currency, West Virginians have coped by moving the hell away from there. In Wallonia the story is slightly different; the workforce is not nearly as mobile as in the US, so Walloons stay put, relying instead on the European Commission’s program for “social and economic cohesion.” Even so, this program only chips away at the problem; Wallonia could really use a cheaper currencyFor Europe’s traditional basket case currencies — Greece, Italy, Portugal — the exchange-rate mechanism that led to EMU was a godsend, letting them dismantle their disgraced central banks, which allowed them to control inflation. Different story..
Sweden has the opposite problem. Its economy has been more successful than the eurozone’s over the past 3 years, in part because the central bank has been able to fine-tune the response to exogenous shocks. Had Sweden joined the euro at its inception, it would have been subject to sub-optimal interest rates, which would have led its economy to grow slower than it has, by a margin greater than the savings from abolishing transaction costsHere [PDF] is a great overview of how Sweden has managed outside the EMU so far.. These transaction costs, by the way, are getting smaller all the time, while ever more efficient hedging strategies are neutralizing exchange rate volatility risks.
There is a further fiscal constraint imposed on EMU members and aspirants that Sweden could do well without: the misconceived Stability and Growth Pact, which has been plaguing France and Germany. Joe Stiglitz explains in this Wall Street Journal article:
WSJ: Europe thought it could weather the downturn in the U.S., which turned out not to be the case. Do you think Europe’s economic and monetary union made Europe better or worse off in coping with the slowdown? You don’t think Europe’s economic and monetary union, EMU, is working well?
MR. STIGLITZ: A lot of people focused at the time [it was constructed] at the risk to the periphery — that Portugal could be in recession while everything else in the region was going fine — and then not having the flexibility to react to that. Policy would be set with a focus on Germany and France, and so much the worse for Portugal. As it turns out, it’s Germany and France that are having the problems. Also, it was set up at a time when the main problem was inflation. But, of course, inflation isn’t the problem today; unemployment is. France has made it very clear that it wants the Stability and Growth Pact redefined so it can have a more expansionary fiscal policy, and I think that is perfectly correct. As it is, Europe has adopted a regime that is pro-cyclical, which flies in the face of what it should be doing. [It should be anti-cyclical. So when the economy is going well, you don’t want your government spending more, pushing the economy faster. Similarly, when a recession hits, the worst thing would be cutting government spending, which would worsen things.]
But why are Sweden’s big business leaders for joining EMU, while small business organizations and trade unions are not? Because the costs and benefits of joining are not distributed equally. Sweden’s multinationals export far more than medium and smaller businesses, so they stand to gain more from abolishing transaction costs completely. But it is the economy as a whole that stands to suffer if Sweden is constrained by a maladjusted monetary (and even fiscal) policy.
So the eurozone is not the optimal currency area for Sweden. Nöro in Swedish, nØro in Danish (the Ø deftly reminding us it isn’t the euro). “Oro” was briefly considered — it means gold in Spanish and anxiety in Swedish: a fortuitous juxtaposition.Instead, I propose the Nordic euro, or neuro. The neuro will comprise Sweden, Finland (as soon as it leaves the euro), Denmark, Norway and the UK at its core. Iceland is free to join, as are the Baltic trio when they feel their economies are mature enoughAnd if it really tries, Russia can join by 2025, the 300th anniversary of the death of Peter the Great..
Like the euro, the neuro is made up of countries with which Sweden trades. In fact, of Sweden’s five largest export markets only one uses the euro; three are neurozone: Germany (10.6% of total exports), USA (10.3%), Norway (8.8%), the UK (7.5%), and Denmark (6.5%). Finland (6.3%) comes next. One of the arguments made by the pro-EMU side is that joining a currency union encourages growth in trade between its members, leading to more synchronized economies. To the extent that this argument is true for the euro, it applies equally to the neuro.
In addition, neuro economies are much more similar to each other than to all those Mediterranean economies the euro took on board; no strikes interrupting tourism in the neurozone, nor olive crop failures. Instead, neuro economies revolve around high-tech knowledge-based industries,One possible exception: the oil industry in Norway so they react to exogenous shocks in much the same way. Linguistically, the neurozone is very compatible: all speak fluent English, while the core speaks a Swedish/Danish/Norwegian that is mutually intelligible. This has led to much higher levels of labor mobility among neuro countries than among euro countries. In short, The neuro passes all the tests for an optimal currency area. The euro does not.
EMU makes sense for the Benelux, France and Germany. The other countries should get out while they can. Perhaps the Mediterranean basin can start its own currency union. May I propose the miró?
Stefan, you’re a lunatic. If I weren’t so tired right now, I’d try to respond. But let’s just leave it at this:
1) You write that “Had Sweden joined the euro at its inception, it would have been subject to sub-optimal interest rates, which would have led its economy to grow slower than it has”. You then point to a PDF file which shows that euro-zone interest rates have in fact been lower than those in Sweden. Are you saying that lower interest rates would have caused the Swedish economy to grow more slowly?
2) As for your proposed neuro, it’s hard to tell whether you’re being serious or not. But you do seem to think, in comments like “Finland (as soon as it leaves the euro)” and “The other countries should get out [of EMU] while they can” that EMU is a two-way street, and that countries can leave the euro if they want to. Care to explain how that could happen?
Hi Felix. That’s the best you can do? I hope you’re tired.
1) Check that chart of central bank interest rates spreads again. It covers 9 years. Yes, krona rates were higher during the nineties. Then watch that line dip below zero just around the time the euro was born. Watch both the nominal and the real spread dip below zero. If the chart were up-to-date, you’d see it below zero now. Then, read what the text says: “Already by June 2000, the Swedish key rates had been cut so far that they were even below the German rate, and the gap remained negative for more than a year. In real terms, i.e. adjusted for inflation, the short-term interest rate gap narrowed significantly and actually crossed into negative territory in the past year.” And that’s where it stays today.
2) Yes I was being somewhat tongue-in-cheek (thank you for noticing). Yes, you of all people should know that currency regimes are not immutable. Remember that Argentine peso – dollar peg, enshrined in law? That went out the window after a long-enough period of US Fed monetary policy not catering to the needs of the Argentine economy (not surprisingly). Believe it or not, EU nations are still sovereign: all it takes is for a government to get elected with a promise to lead the country out of EMU, and it is done. There’s been plenty of speculation whether the euro can survive a deep recession hitting just part of the eurozone. All it takes is for electorates to decide the euro is a bad idea and want out.
Swedish CB rates might be slightly below ECB rates, just because the ECB is so hawkish. But if you add the Swedish sovereign spread over, say, German risk on top, we’re back above zero again. That spread’s been coming down — it’s about the same as the Czech republic’s, now — but net net the rate of interest that real people and businesses pay in Sweden is not noticeably lower than in Germany.
As for currency unions, Argentina was never in a currency union with the USA. It’s not even clear that dollarised economies like Panama and Ecuador are in a currency union with the USA. But even Argentina, when it broke the currency board laws, found that it had to break so many other contracts at the same time that it ended up completely imploding. (And BTW, the Fed’s monetary policy was the least of Argentina’s worries: an independent Argentine central bank could hardly have set interest rates much lower.) But let’s take up your hypo: what would happen if a govt got elected on a platform of leaving EMU? It would have to set interest rates much higher than the ECB’s, since there would be a huge anti-convergence trade. So how could the country be better off?
Argentina imploded because it had so much dollar-denominated debt. And Fed policy was: “A strong dollar is in the interests of the United States.”
About the hypo: I can only foresee a country leaving if it is obviously in its interests, say because it feels the euro is too weak (in order to accomodate the laggards). Say that the Irish continue to outpace in GDP growth at the ECB rate, but are running into sustained inflationary pressures. They’d like to see a windfall through increased purchasing power abroad, and at the same time open up the release valve on their economy. If they were to opt for a return to the punt, it would appreciate immediately as the higher interest rate attracts capital keen on getting a piece of Ireland’s wealth creation machine. Explaining all this to the electorate might be quite a challenge, but it’s an example.
I certainly wasn’t tired when I started to read your article but afterwards I felt like I wanted go to sleep and preferably never wake up again. Please read my articles under the link below where most of the economic “arguments” against EMU are dissected. But the point is not an economic one: what about loyalty and international solidarity? What about fulfilling an agreement towards your partners that you have already entered into? What about participating fully in a historical unification process? And, by the way, what is it that we know in Sweden that Finland, Belgium, the Netherlands, Ireland, Portugal and several other smaller countries didn’t know? Surely, we believe we are smarter -or at least better- but unfortunately this is not always born out by the statistics.
But, by all means Stefan, please go ahead and join the group of frustrated bankers, has-been economists and left fringe politicians: you are on the winning side which is always nice. It is not a good time in Sweden right now, particularly not for the ruling party and voters are likely to project all their pent up frustration and vote against the proposal in order to give the government a “Denkzettel” , as we say here in Euroland.
Don’t expect the Finns to leave: much more likely is that Denmark will join soon since their currency is already pegged to the Euro – they enjoy most of the benefits except the common currency which is the most tangible short-term advantage. The Baltic countries are obliged to join the EMU as soon as they meet the established criteria.
Kind regards
Bengt O. Karlsson, Vienna
Bengt, I’ve been on your site before and forgive me but my Swedish economics vocab is so bad that you may just as well be dissecting frogs as economic arguments. But I’d love to hear them. Perhaps over martinis next time you are in town.
I disagree with you that the point is not an economic one. In any case, if it isn’t, it should be. I used to be all into European Union in my idealistic days, but I am so over empire now. Now, I’m against borders of any kind. Free trade everywhere, no restrictions on economic migration, open the floodgates and let everybody in. Ironically, this is what got the US to where it is today. I wrote about my despair that Europe prefers cultural hogeneity over new blood here.
Point of information: I’m not used to being on the winning side. I reckon this is a first. It’s entirely possible for people to be against EMU for all the wrong reasons, but that doesn’t invalidate the good reasons.
PS: From the length of your postscript explaining your decision to stop blogging, I don’t think you can stay away for long.
The strong dollar was (and is) Treasury policy, not Fed policy. And your Ireland example makes no sense at all. “Open up the release valve on their economy”? What on earth are you talking about?
Perhaps a better metaphor for raising interest rates would have been “turning down the gas”?
You’re right, Treasury secretaries get to say it, but Greenspan gets to do something about it, within the constraints of his mandate to combat inflation while allowing for job growth.
Tanks Stefan, you made my day by suggesting that I am misled by youthful idealism, a stage which you say you have overcome! At my age I am more than happy to accept this. If you believe that the EU is an imperialistic project I think, nevertheless, that you have got it slightly wrong. And how much easier will it not be for a strong EU to open borders as you -and I- apparently wish than it would be for small individual countries in a high risk position.
If you loook at the Commissions “Structural indicators” for the Lisbon process you will see that Sweden is not at all that exceptional as you -and the majority of Swedes- seem to think. This is particularly true for our pet areas such as environment, equality etc. You and Kenney are right about the patents though – that and parts of the IT is where Sweden really comes out tops (statistically). This favorable circumstance is, however, not reflected in the productivity development, where the Swedish performance is mediocre. Also Swedish prices are way above the EU average and obstacles to competition are legion. Thus it is slightly luducrious when the no-people claim that joining EMU would raise prices.
I agree with you about the martinis although I am not sure which “town” you are talking about. If you ever come the Vienna way it will be my pleasure to treat you to some of our specialities, stirred or shaken exactly like public opinion on the EMU-issue.
Kind regards
Bengt
Oh ha ha stefan, the neuro, the miro, how droll, but no. won’t happen. like your mate bengt above, i have come to believe that the Euro has a wider significance than just your economic sphere, and think that your opposing swedish euro entry while espousing the ideals you do is, in a purely practical way, inconsistent.
by the way bengt, i was in germany when the euro arrived; don’t tell me that prices didn’t go up.
steffles, while i’d love to share your ideal globalised world of free trade and movement of peoples, it just won’t happen with the current set up in the US (and let’s be honest, the EU isn’t really that keen either). forget it. if we can’t make good globalisation err, global, then let’s try it in one country, and try and make the country a really really big one.
it may not be the right choice for sweden now, –and surely whether it is or not depends to a great extent on the FX you lock down at entry — and no doubt the poor swedes may have a miserable time of it for a while if it isn’t. but there aren’t that many of them. can’t you sacrifice them on the pyre of your ideals?
Just one problem with your analysis, Eurof: Creating regional trade blocks tends to do more harm than good to the poor countries outside it. Trade that previously was with countries outside the block gets diverted, replaced with trade from countries inside the block.
If you want a world of free trade, you need to get the WTO to eliminate tariffs and quotas — why this would be easier to do with a fortress Europe than with a host of smaller countries is not obvious to me.
yes yes we all did international trade theory, and i even went so far as advanced topics in international trade theory, a leetel bit farther than you hmm? what you say is true according to the theory, but in practice is totally wrong.
think about what you’re saying; either we 1) achieve WTO-sponsored utopia or are 2) doomed to failure, autarky and war. there is nothing inbetween. between this US administration and the French, how likely is it that the WTO will put in place your brave new world? not very. as it is, the first rounds of a war of competitive devaluations may have been fired. because it won’t be perfect, according to you we should give up then, and continue to let the barbarians run things. always the belgian way, huh?
CAP and US farm subsidies are the single biggest issue which blocks free trade in the only sectors where poor countries have a competitive advantage. fix that, and your free trade zone within a wider liberalising framework has in practice a much better chance of not diverting trade outside the zone. moreover, the bigger the zone, 1) the less distress (fewer countries to potentially divert from), 2) the more weight it will carry in negotiations against the evil and selfish US, and 3) the more disparate and less powerful the trade distorting special interests within it (the French) will be.
so NOT fortress Europe, happy nice open powerful Europe. if however you still think a nordic trade alliance would be much more powerful and influential, then feel free, consign yourself to the dustbin of history. remember EFTA?
What’s the point with the nation state, anyway? I agree with you about the borders, but I also think that teaming up more closely with Europe – yes, that entails a common monetary system – is a way forward for Sweden, that leads to less nationalism and, in fact, less borders.
Then the EU have lot’s of problems. The agricultural policies is one. But the world is not perfect. And being the outsider is also problematic.
As a no-sayer, I think you must come up with a constructive alternative to the European union. (No, a Scandinavistic solution doesn’t cut it. Been there, done that.) A monetary union with … yes, with what?
And I think your arguments are way too economistic. The EU (and, hence, the EMU) is a political project whereas your arguments are the bean counters’. Come on, even your no-saying buddies in parties on the extreme left and right have presented ideological arguments (albeit of a very screwed nature) for saying no.
And what about Finland? This really shows how flawed your neuro “alternative” is. Sweden and Swedish industry – yes, I agree that it is quite innovative and high tech, even though the innovations seems to lead to slimmer organisations, rather than new jobs – has more in common with Finland than with bulk producing old-schoolers that are strong on natural resources like Denmark (agriculture) and Norway (oil and fishing).
To me, saying no to European integration is enhancing the rural component of the Nordic culture, whereas saying yes to Europe is something that enhances urbanism and internationalism. In my world, urbanism wins over ruralism hands-down. (In the Norwegian referendum, the countryside was against the EU, the cities for. I guess you could find similar statistics for Sweden as well.)
Also, your language argument about Sweden/Denmark/Norway should be teaming up doesn’t say much. Many Finns have worked in Sweden over the years, even though Swedish and Finnish languages are about as dissimilar as Baldrick and the Prince Regent. They have learned Swedish in school.
I’m a student at The University of Notre Dame and don’t know any of you. However, I stumbled across this article in researching a paper concerning Sweden joining EMU.
The question that I present to all of you is whether you honestly believe that EU membership would be benificial to the Swedish economy? Sweden, being a social democracy, has a far different fiscal agenda, and I’m not sure that they would be willing to forgo many of their freedoms in deciding to join to EMU.
Also, the Riksbank has shown that it can combat inflation effectively (even with an unemployment rate below the “natural rate”–where many contend that inflation is imminent). In joining the EMU they would, of course, forgo the freedom to exercise their own monetary policy. In giving this power to the ECB they would then be under a policy that would be far less accomodating to their proven economic performance. The economy clearly illustrated during the last downturn that it was NOT in sync with the EU15, so why should it join in monetary union with these countries???
Any of your thoughts on this would be appreciated…
-Mike
It speaks volumes that Mike hasn’t yet received an answer to his question.