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?