The Swedish government asked a group of Swedish economists – a group of wise men and women – to write a White Paper and answer the following two questions:
Firstly, what changes must be introduced to Swedish fiscal policy if Sweden is to join the euro?
Secondly, which of these changes are the most important for an efficient Swedish stability policy?
The answers were published in March.1
The first task the group tackled was that will macro-economic disturbances grow, diminish or not alter at all. The answer: ‘We do not know’. The Swedish economy may change and become more like that of the other Euro countries, but the Eurozone economies may also grow apart. It is also likely that due to the growing regional specialisation of the industries in the Eurozone countries will lead to greater risks for disturbances in a small country like Sweden.
The conclusions of the commission are:
‘The economic and financial problems will be different from those of today. To abolish the floating currency will hurt the Swedish economy. To abolish the hitherto independent Central Bank and the national monetary policy in favour of the policy of the European Central Bank will presumably increase the Swedish macroeconomic instability.'
To make up for a growing instability the labour market will have to become more flexible. The strain on the fiscal policy will also be much greater.
Moreover, joining the euro, and abolishing its national monetary policy, will increase the tensions in the labour market. The conventional wisdom is of the opinion that a flexible labour market will ease the new stability problems, however, the hard question is if the unions are willing to accept higher nominal wage flexibility, shorter labour contracts, more frequent negotiations and in some instances nominal wage decreases? Combined with low inflation it will be very difficult, if not impossible, to move towards the increased flexibility in the labour market that membership of the euro will demand. The only remaining way to compensate for the loss of Sweden’s national monetary policy is through our fiscal policy, i.e. through changes in taxation and/or changes in public spending. The fiscal and budget rules have therefore to be altered and the White Paper proposes that,
”the difference between the expense ceiling of the budget and the spending shall increase from about 2% of GDP to 2.5-3% calculated over a business cycle. In figures, not mentioned in the White Paper, Sweden has to introduce an “EMU-tax” of an average of 21 billion Swedish crowns (about £1.5 billion) and much more during years of high economic activity.”
“the difference between the expense ceiling and the spending of the budget shall be split in two halves, one to be used when there are big disturbances in the economy and the other to fend off the uncertainty in the calculations of budget spending.”
The stability measures may consist of changes in taxes or public spending. The recommendation is that these increases in taxation as a stability measure shall only be used for a short time.
To speed up the implementation of fiscal or budgetary measures – when the business activity is very high or very low - the government was recommended to use a package of already decided tax measures, e.g. laws which are allowing decreases or increases in VAT.
Regional and local councils shall also be partners in the stability policy of Sweden.
The commission has found that formal financial co-ordination within the European Union will increase Sweden’s stability problems. It will diminish the national freedom to react swiftly in case of big macroeconomic disturbances. The Swedish Prime Minister, Goran Persson, expressed an opposite view in Barcelona, welcoming further fiscal co-ordination within the European Union.
Professor Nils Lundgren, a prominent Swedish economist, has submitted a special statement to the report. In this he agrees with the conclusions in the White Paper but he is worried that it lacks a conclusion.
In 2003 Sweden will probably hold a referendum on whether or not to join the euro. The White Paper is to be used by the citizens when they want to get the pros and cons of monetary union but the important answers are lacking as to whether the solutions given in the White Paper are good for Sweden or not. The proposals are certainly the best possible, but only if Sweden is accepts Economic and Monetary Union.
According to Professor Lundgren the best solution for Sweden is an independent Central Bank, a floating currency and a national monetary policy. Therefore, the measures proposed in the White Paper must be regarded as a second best solution that will be forced upon Sweden if the euro is adopted.
Other questions not answered by the commission are:
1) How worse is this second best solution compared to the first best, which is keeping the Swedish crown?
2) Are the countries inside the Eurozone growing less or more economical equal?
If they are becoming less equal, the risks of more frequent changes in business activities and structural problems can only increase. In that case Sweden will have a greater need of national measures to stabilise the economy, but as a member of the EMU Sweden will have less efficient tools to meet ups and downs in the economy. A better labour market flexibility will not solve the problems due to our loss of a national monetary policy. The experiences of the West German Union in 1948-91 shows that the economic convergence was very slow or non-existent over a total of 33 years. The market of southern Germany was often overheated while northern Germany had unemployment problems. In fact, the convergence in Germany should have been strong as the Germans speak the same language, have the same welfare systems and the same labour laws. There is thus no reason to presume that the convergence in the Eurozone will be any faster.
Professor Nils Lundgren last conclusion is – a paraphrase of Cato maiors concluding remark - Praetera censeo adiuctionem EMU esse repudiandam. (Furthermore I consider that the EMU should be repudiated.)
Comments and Reactions
The chairman of the commission, a former member of the Swedish Government, Bengt K Å Johansson told the press that the problems are very hard to solve. Problems of the forest industry, the motor industry and the IT-sector make the Swedish economy very sensitive to business cycles and structural changes.
Professor Lars Calmfors, also belonging to the commission, told the press that other EMU-countries are not good examples. They have the same problems as Sweden but they are not prepared to tackle the changed stability problems.
The big daily newspapers are all in favour of the euro did not know how to comment upon the report.
Expressen which is in favour of Sweden joining a federal Europe was of the opinion in an editorial (13/3) that, 'it was outrageous to ask the taxpayer to pay higher taxes to solve problems that are caused by high taxation. The euro has existed for several years and the problems have been surprisingly small,' wrote the paper.
The business paper Dagens Industri stated that, 'EMU was a political project and not a economic project. But that is not an excuse for Monetary Union being a policy that is wrongly rigged for an efficient stability policy.'
And the Swedish Prime Minister and the opposition leader Bo Lundgren, what did they say?
Virtually nothing! In a television debate between the two the day after the White Paper was published monetary union was not mentioned once! Astonishing?
One of the main questions in this television discussion dealt with taxes. The conservative opposition leader will fight the election with a program of lower taxation. At the same time he favours full membership of EMU but what about the stability policy of the White Paper? He is saying he just does not see any problems with a macroeconomic policy dictated from Frankfurt instead of Stockholm. But is that correct?
Also the Prime Minister, Goran Persson, was quite silent. Why? Presumably because he does not know what the labour unions are going to decide during this election year.
Mr Dan Andersson representing the labour unions in the commission has like Nils Lundgren submitted a special statement to the report. One of his conclusions is that it is not acceptable to join the euro when the wage earners have to pay the price with higher unemployment.
1 Stabiliseringspolitik i valutaunionen (Stability policy in the EMU) SOU 2002:16