A debate has emerged in Sweden over whether or not the country should join the euro zone. The Swedish currency—the krona—is weak, something that many Swedes experience firsthand when they travel abroad. With growing euro support among businesses, the time appears to be ripe for euro proponents in politics to bring up the issue to public debate.
The question of Swedish euro membership is not new. When Sweden entered the EU in 1995, it pledged to adopt the euro upon its minting. Unlike its neighbor Denmark, Sweden has no formal exemption from the currency union in its EU membership.
Time went by, and Sweden never joined the euro. One of the reasons was public opinion, which in a few short years shifted from positive to negative. In a 1994 referendum, the Swedes voted to join the EU; when the realities of the membership became apparent, opinion turned unfavorable toward Brussels.
In a referendum in September 2003 on euro zone membership, 56% of the voters said no.
It remains to be seen if two decades’ worth of economic stagnation in Sweden has changed enough minds to render a different outcome in a new referendum. To date, nobody has proposed one, but the euro proponents are ramping up their advocacy for the common currency. The most high-profile contribution thus far came on June 27th, when Mr. Johan Pehrson, minister of labor in the Swedish government, officially proposed euro membership for Sweden.
Debating the euro: a political game?
In a debate on public television, Mr. Pehrson explained his views:
The Swedish people, Swedish businesses, and Swedish standard of living deserve a strong currency. That is what is needed to increase investments, to increase trade, to make sure that we continue to develop our standard of living, and for that, we don’t need a weak currency. There, there, there is a world out there where small currencies, not just the Swedish one, are put under pressure, which leads to, so to speak, falling exchange rates, and that means we all become collectively poorer.
To a foreign observer, Mr. Pehrson comes across as phlegmatic, even borderline incoherent. However, this is a character trait that resonates well with Swedes in general: he is more popular than the party he represents, the Liberals. He is sometimes referred to as ‘the guy by the grill,’ with reference to the likable host of a backyard barbecue.
It is hard to find anyone who dislikes Johan Pehrson. This is the reason why his public push for the euro looks like part of a plan. The fact that he is the one to bring the question of euro membership into the public debate is a good reason to expect a more organized opinion-making effort in the coming months. His folksy appearance gives the pro-euro argument some good credit with the general public.
That said, Pehrson cannot remain the front figure for too long. He can provide talking points on the euro, but as the quote above indicates, his analytical acumen falls short. He also refers to the euro as “an international global currency.”
In the public TV debate where Pehrson made his pitch for the euro, he was opposed by Linda Lindberg, who represents the Swedish Democrats in the parliament, the Riksdag. When confronted with Pehrson’s droning argument for euro membership, Lindberg made a surprisingly modest counterargument. She replied that it would be unwise to move forward with it now, given that there is no support for it among voters. She also expressed opposition to the idea of moving Sweden into the euro zone without first asking the people in another referendum.
Pehrson explained that public opinion can change quickly. He reminded Lindberg that both the Swedish people and their elected representatives in the Riksdag were massively opposed to NATO membership. That shifted on a dime, he noted, when Russia invaded Ukraine.
This statement from Pehrson, who, again, is a minister in Prime Minister Ulf Kristersson’s cabinet, is very important. We will return to it in Part II of this article.
Lindberg noted that the Danish krona has remained strong, despite the fact that their economy is smaller than the Swedish economy. This argument was conspicuously weak: she could have done a great deal more with this point. In general, countries outside the euro zone fare better economically than do currency-union members. Lindberg could have exemplified this with Hungary, whose economy is one of the strongest in Europe, even though their currency has weakened over time vs. the euro.
Her weak performance, and the fact that it was not any of the Swedish Democrats’ formidable debaters that contested Johan Pehrson, suggests that the debate was in reality a charade. The current government likely sees euro membership as critically important to saving the Swedish economy from a disaster, and the Swedish Democrats likely share that view. To sway public opinion, though, they have to appear to debate the euro membership in such a way that the skeptical side is swayed by the arguments and the country’s economic reality.
It would be unfortunate if there was no solid opposition to Swedish euro membership. There are plenty of points to make; from an economic viewpoint, there are primarily two reasons why Sweden should not join the euro. The first has to do with the country’s economic structure, and the second with government finances. I will return to the latter issue in Part II.
Exports: The Dominant Economic Activity
The structure of the Swedish economy puts it in an unfavorable position for joining the euro. Sweden relies primarily on exports for its economic growth, but—as we will see in a moment—that growth is unstable compared to growth reliant on domestic demand. A euro membership will deprive Sweden of much of this unstable but only main source of growth.
Furthermore, the Swedish economic structure degrades private consumption as a source of growth. In the event of an entry into the currency union, Sweden would lose its exports edge without being able to replace it with domestic demand.
In this regard, Sweden is in a worse position for euro membership than Hungary.
The Swedish dependency on growth is by no means unique in Europe. Exports dependency is natural for small economies with limited industrial diversity, but some countries become dependent on exports as the result of a deliberate policy strategy.
The important difference between exports as a necessity and as a policy is unfortunately overlooked by many political leaders and, sadly, many economists.
In the case of Sweden, this dependency is deliberate. Since the 1950s, Swedish governments have politically promoted exports at the expense of primarily consumer spending; see the section on the so-called R-M economic policy model in my book The Rise of Big Government.
By politically promoting an export-driven economy, Swedish governments have tilted the very structure of the economy to such an extent that the country now uses more of its resources to sell goods and services to other countries than to satisfy the needs of the Swedish people. Figure 1 reports that exports (red line) currently account for approximately 53% of the country’s GDP, while private consumption (blue) is below 43%:
Figure 1
Source of raw data: Eurostat
So long as private consumption was sustained at reasonable levels, the political promotion of exports had a limited impact on the economy. That changed with the tax reform almost 35 years ago, with the economic crisis of the early 1990s and with the ensuing destructive austerity episode (see Chapter 2 of Industrial Poverty). The tax reform raised taxes significantly on private consumption, effectively without compensating consumers on the income-tax side. More tax hikes in the 1990s exacerbated the export-promoting structural tilt in the Swedish economy.
Private consumption slowly declined relative to GDP, while exports kept growing. As Figure 2 reports, the collapse of the Swedish krona in 1992 poured gasoline on that fire. A similar currency-driven rise in exports has taken place in the last ten years. When the euro was first introduced, it took SEK8.50 to buy €1; after some volatility around the Great Recession in 2009-2011, it returned to that level.
From 2013 to the first quarter of 2023, the krona gradually weakened to nearly SEK11.50 per €1:
Figure 2
Source of raw data: European Central Bank via Eurostat
From Growth Instability to Stagnation
At this point, most of my fellow economists, especially in Sweden, will comment that this is all good for the Swedish economy. I agree: unstable growth is better than no growth. The problem is that the export-driven policies over the past several decades have put the Swedish economy in a position where it simply cannot join the euro without losing its only source of economic growth.
Having to choose between growth instability and stagnation is not fun, but as Figure 3 demonstrates, that is exactly where Sweden is today. The growth rate in exports fluctuates with higher amplitude than does private consumption. With exports dominating the economy, the Swedish business cycle becomes more unstable. This means sharper increases and decreases in unemployment, a more difficult environment for fiscal and monetary policy, and overall a less predictable economy (as in Figure 1, exports is red and private consumption blue):
Figure 3
Source of raw data: Eurostat
If instability is bad, joining the euro is worse. It would effectively appreciate the currency, especially over time. To see how this would work, suppose a manufacturer in Sandviken, Sweden, is selling power drills on export markets in the euro zone. Suppose that in 2012 it sold its drills in the euro zone for €100. At an exchange rate of 8.50:1, this means SEK850 per unit sold.
In 2023, the exchange rate was SEK 11,50 per €1, generating 35.3% more sales revenue at a constant price (and all other things equal). Suppose instead that the drill manufacturer cuts the price: if they sell their tools for €74 apiece, they can maintain the same revenue in Swedish kronas and hopefully sell a lot more power drills.
So far, so good. The depreciating currency benefits the exporter. But what if Sweden had joined the euro in 2012?
That is a simple question to answer: the export boom that the country has experienced since then would not have materialized. This would have deprived the Swedish economy of a large part of the economic growth it has experienced over the past ten years. Since 2013, exports have outgrown private consumption by a ratio of 2:1.
Without this export boom, there would have been no variable driving growth in the Swedish economy. The economy would have exhibited more stability over time, but the stable growth rate would have been considerably lower than the 2.4% average over the past ten years. There would have been no help to expect from the domestic economy: the Swedish tax system punishes private consumption and work-based income, and with higher interest rates, it is no longer possible for Swedish households to borrow their way to a decent standard of living.
In short: if Sweden were to join the euro, its current economic structure suggests that the economy would be less unstable, but more stagnant. The situation for Swedish households and domestic-oriented businesses would go from bad to worse.
This is one major economic reason for Sweden not to join the euro. There is another economic reason, which I will address in Part II.
