I would like to break out a comment posted in response to my arguments against Sweden joining the EMU from a few weeks back. Gustav Holmberg writes, among other things, “As a no-sayer, I think you must come up with a constructive alternative to the European Union.” I’m not sure if that burden is mine; I am quite content with the present setup for Sweden — in the EU and outside the EMU. However, implicit in Gustav’s criticism is that if Sweden does not eventually join EMU, the EU will become an unworkable proposition for Sweden, outcast that it will beMeanwhile, Anders does some great line-by-line refuting of pro-EMU arguments on his blog, here and here [Swedish]..

So, against my better judgment, here is a constructive alternative to the EU: Basically, it’s an EU where you can be an EMU outsider and an EU insider. Is that too much to ask? Why would that not be feasible, given that monetary policy is officially divorced from the political sphere anyway? For the near to medium-term future, this is what the EU will be in any case; the slew of new countries joining will be doing so only on a political level, not on a monetary level. And both the UK and Denmark have opted out of EMU for now.

It is possible that the UK and Denmark eventually join, as do the newcomers, and that the EU’s mandarins remain adamant that all members join EMU. What should Sweden do then? It should join, then, and it should do so for the wrong reason, which is that it will otherwise be politically marginalized (go ahead, you may call this bullying). Luckily, PM Persson has stated that Swedes will get to keep voting to join EMU until they get it right, so there will be plenty of opportunities in the future to give in and adopt the euro.

But why wait? Why not just vote to join now, and reap the prestige of being an early adopter? I have two reasons why not, although the first one alone should suffice: First, because I think the euro is an economic experiment that will fray at the edges over time. I think that in the next 10 years, the euro will be tested in ways that make clear it is not a good idea for Sweden and other non-core members to be part of EMU. Better, therefore, not to rush into something that is practically impossible to undo. Better to watch and wait; if the eurozone is not the optimal currency area for Sweden, then this will become obvious over time. If I am wrong, Sweden can join with the likes of PolandI am willing to wager 50 euro that Sweden and the UK outside EMU will grow faster than the eurozone average over the next 10 years, mainly because I think Germany is experiencing an economic malaise and has no action plan, and ECB policy will need to take this into account..

The second reason involves where the EU is going at the moment. Both sides have made this referendum a vote of confidence in the political project that is the European Union, even though it should not be. But because it is, a yes vote would be seen as a great boost to the EU as a political project.

But what kind of political project is it? Well, Gustav mentions that the EU’s Common Agricultural Policy is a problem. To me, however, it’s a deal breaker. CAP eats up 45% of the entire EU budget — 45 billion euro, or the cost of a Gulf War every other year. In other words, almost half of all EU monies is spent on something that actively contributes to third world poverty and delays modernization in Europe proper, in order to buy the political support of narrow rural interest groups. 35% is spent on structural and cohesion funds, compensating, if you will, for the negative effects of CAP. That leaves 20% of the funds doing something useful. Whatever the intentions may be, this is a catastrophic waste of money.

Voting yes would amount to an applause for this state of affairs. That is exactly the wrong message for Sweden to send. Sweden can and should use its considerable moral authority to tell the French (mainly) that this is not okay; that if they expect Sweden’s full commitment to the EU, the EU should stop spending 45% of its money on patronage activities, clear bribes to get rural interests on board. This is not the kind of legitimacy the EU as a project should be seeking, nor should Sweden be rewarding this kind of behavior.

The Swedish blogging community is still in its infancy, yes, but a made-for-blog event is looming: The September 14 referendum on joining EMU. Can the Swedish blog rise to the occasion, and in doing so carve out a space for itself in the Swedish mediasphere?

It depends. Certainly, nothing is expected of them/usI have no idea if I qualify. I think globally but cannot help but blog locally, right?
 
Two excellent geek blogs that transcend the genre: Tesugen.com and mymarkup.net [Swedish, mainly about blogging].. If we keep to our geek blogs and personal journals, there is nothing to be ashamed of. But it would be a pity to forgo an opportunity to shape the debate in ways only blogs can.

Blogs can shine in part because of what they are not. They are not academic treatises, they are not fact-checked or edited, they are not immutable; instead, they are snapshots of the process of opinions forming. They are places where we can try on ideas for size, invite feedback, and move on. It takes courage to be an exhibitionist with one’s ideas and beliefs, but Pardon my massive breach of trust in foisting this tortured cliché on you…the unexamined life is not worth blogging. Also, it helps to have visitors who are as opinionated as you are. And to have a thick skin.

There is an element of the Hegelian thesis, antithesis, synthesis in the ideal blog. But stress any one element too much and the effort fails. In the Gulf War, for example, I think blogging failed through a surfeit of opinion at the expense of dialogue. Both sides hovered at their respective ideological watering holes, mutually offended by each other’s existence (and secretly loving it). Perhaps both sides were prisoner to a Darwinian conception of their purpose: In their quest for the survival of the fittest idea, ideological front lines were shored up to such an extent there was no more movement possible. It was an intellectual WWI.

In Sweden, if blogs err, they err in their eagerness to build consensus without first clearly defining differences. Afraid of offending anybody, they do not engage in dialogue either. Regarding EMU, it might be considered polite for the two sides to argue past each other, but it certainly does not do the democratic process any favors. Blogs can and should be in people’s faces and stepping on toes, brash and candid, making noise, homing in on sloppy thinking and keeping both sides honest.

So when it comes to making up your mind for the referendum, blog it.When you post, don’t forget to ping valblog.nu/EMU, which will hopefully become a clearing house for Swedish EMU blog posts. Let your post be a thesis of your views on the matter now. Hope for an antithesis to pop up from among your comments or on readers’ own blogs, and let a future post keep something from both. Rinse & repeat until September 14.

A comment by Charles Kenny on a post of mine last year has stuck with me:

One possible measure for innovation per capita (many flaws) is patent applications filed by residents per year. In the US its 141,342 as compared to 8,599 for Sweden. Works out at 1/2,000 people in the US, compared to 1/1,000 in Sweden. Suggests you’re right… [That Sweden is more innovative than the US.] Again, if you look at Science and Technical Journal Articles published in 2000 — 166,829 for US, compared to 8,219 for Sweden — or royalty and license fee receipts (36.5bn compared to 1.4bn) Sweden comes out ahead on per capita terms. Yay ray socialists.

I have to quote Charles Kenny as my sole authority here because I have looked for but not found this information myself on the public web. But he is a World Banker, so either he has special access to internal databases, or he made it all up, in which case this blog will have to go through soul searching not unlike that at the New York Times, and I’ll have to hold a meeting with myself and ask myself some hard questions (“Why did you promote Charles Kenny from sometime comment-leaver on your personal blog to editor on MemeFirst, despite his atrocious dress sense? Didn’t alarm bells go off when he started “blogging” from Kabul, but never produced the receipts?”).

Since that post, I’ve entertained a number of theories as to why Sweden is so innovative, but I came across a new one recently, again in the interview of Joe Stiglitz by the Wall Street Journal:

WSJ: Is the European approach [which focuses more on the role of government in the economy and the existence of a welfare state] a viable alternative?

MR. STIGLITZ: Countries like Sweden never bought into the American style. It hasn’t abandoned its welfare system [where medical care and social security are considered the responsibility of the government] and yet it’s still very strong. The New Economy has penetrated Sweden to a great degree, but the country has weathered the downturn much better than the U.S. It promoted the New Economy in a more stable way, having a strong welfare state that allowed people to take a risk [on investing in technology start-ups and other New Economy companies and offering a huge safety net if things faltered].

It’s a really interesting notion, and it might go a long way to explaining why the received wisdom that lower taxes lead to higher GDP growth is not backed up by statistics.

Here are my own two homespun explanations for Sweden’s exceptional innovation record. They might be completely bogus, so I will rely on sophistry to make them appeal:

Progressive regulations: Sweden is the world’s avant-garde for stringent regulations concerning pollution abatement, public health, natural resource management, safety codes, and the like. These are costly, and you might expect these costs to dampen growth. But Swedish businesses, forced to develop technologies to cope with these regulations, soon find themselves selling their innovations to Europe and the US, who tend to adopt similar regulations with a lag. First mover advantage by government decree, if you like.

Mercy taxing: In Sweden’s notorious high tax environment, so-so business ideas don’t survive. The companies that do make it have to be very efficient at what they do. The miracle happens when these companies then leave the nest that is Sweden and expand into low-tax countries, like the US. Look at Ikea. Look at H&M. Imagine the profits they reap in the US if they manage to be profitable back home. This is my “If it doesn’t kill you it will make you stronger” theory of economic development.

<irony>To conclude, Sweden should increase welfare spending, ban fossil fuels and raise taxes.</irony>

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?