Swedish Model: An Overview of the Correlation of Policy, Economics and Society.

Before describing the relations between Sweden and the EMU it is necessary to make a short overview of the internal situation in the country, or in other words to have a look on the organizational model for governing the political and economic functioning of the state as well as on the relations between the Government, business and labor.

There is a direct link between the organization and conduct of the domestic polity and governmental position on European Integration as any Sweden European policy must accommodate domestic attitudes and constellations. Consequently, the interface between domestic perceptions and external influences is one of the central assumptions surrounding the concept of the 'Swedish Diamond'.

Table 1. Swedish 'Diamond'¹.

The Diamond's four Points in effect govern Swedish governmental policy. Through the Diamond the main considerations that have historically dominated governmental perspectives regarding European Integration could be explained.

Sweden is a typical example of the state with high standards of state-financed social services. Both workers and employers generally reject government income policy. The role of unions and employers is to control wages (indeed, relative high) through centralized bargaining following the principle of solidaristic wage policy.

The tri-partite relationship between commercial banks, industry and government has traditionally been closed in Sweden. Firstly, Swedish transnational corporations are less internationalized than similar firms for example in the Netherlands, in the sense that they until relatively recently invested more at home than abroad. Maybe because of their less extensive global reach, Swedish transnational corporations have taken advantage of the growth oriented export strategy of the Social Democratic government. One example is that Social Democrats never objected to a large accumulation of assets by only one family. Not surprisingly, at the end of 1990, the Wallenberg dynasty accounted more than 35% of the total capitalization of the Swedish stock market². Moreover, the economic elite played a direct role in politics from the late nineteenth century. Secondly, the relationships between commercial banks and Swedish industrial companies have traditionally been close. Banks often asked their own staff to sit on the board of directors or advise the firm. Finally, in the late 80s the relationship between government and business began to change for one reason: transnationalization. The Swedish market absorbs increasingly less products³. If Swedish transnationals are indeed increasingly thriving beyond the nation borders, the pact between the Social Democratic Party and private capitalism is bound to break up⁴. A credit-based system which gives financial institutions some influence in industry and which can be we can term a negotiated style of modern capitalism became a capital market-based financial structure with market-led adjustment⁵.

European Monetary Union Convergence Criteria: Are They Fulfilled by Sweden?

European Monetary Union Convergence Criteria.

The monetary union was fully worked out with the irrevocable decision to adopt a single currency by January 1, 1999. The detailed working of the system was fully described, including the statutes of the ECB and the conditions under which monetary union would start.

In order to join the monetary union the country has to fulfill the following five convergence criteria, which remain applicable to all future candidate countries:

• Inflation
  This criterion deals directly with the inflation. To be eligible for the monetary union membership, a country's inflation rate should not exceed the average of the three lowest inflation rates achieved by the European Union member states by more than 1.5 percentage points.
• Long-term nominal interest rate
  An inflation-prone country could possibly squeeze down inflation temporarily, on the last year before admission - for example, by freezing regulated prices (electricity, transport) - only to relax the efforts afterwards. In order to weed out cheaters, a second criterion requires that the long term interest rate should not exceed the average rate observed in the three lowest inflation rate countries by more than 2 percentage points. Achieving a long-term interest rate therefore requires convincing the naturally skeptical financial markets that inflation would remain low 'for ever'⁶.
• The exchange-rate
  The third criterion reflects a concern about superficial conversion to price stability. It is obligatory for every country to demonstrate an ability to keep its exchange tied to the currencies of its future monetary union partners. Therefore, every country must have participated to the ERM for at least two years without having to devalue its currency.
• Budget deficit
  The fourth criterion sets limits on acceptable budget deficits, which should not exceed 3 per cent of GDP. Actually, this sum was introduced as a result of influence of Germany, where it was considered that budget deficits are only acceptable if they correspond to public investment spending⁷.
• Public debt
  The fifth and last criterion mandates a maximum level for the public debt. The ceiling was set at 60 per cent of GDP. The reasons for this amount were the following:
  a) it was the average debt level when the Maastricht Treaty was being negotiated in 1991,
  b) 60 per cent debt limit can be seen as compatible with a deficit debt ceiling of 3 per cent⁸.

Sweden and the EMU Convergence Criteria.

In 1995 Sweden joined the European Union; however Swedish authorities were less than enthusiastic towards the monetary union. They asked for an opt-clause, which was denied. The diplomatic solution was found in this situation: Sweden did not enter the Exchange Rate Mechanism and was therefore disqualified for monetary union membership. De facto, Sweden is treated as Denmark, with the right to decide when to apply for membership to the Euro area⁹.

1. The Inflation Criterion.

The graph shows the inflation rate, calculated as the change in harmonized index for consumer prices (HICP)¹⁰ over twelve months. As a comparison HICP for the European union and for the Eurozone is also shown.

Graph 1: Inflation Rate as the change in HICP in Sweden¹¹.

Over a long period, the increase in the HICP has been compatible with price stability. The rise in consumer prices followed a downward trend for most of the 1990s after monetary policy was refocused on price stability, which became the Riksbank's main monetary policy target. The increase in the HICP in the spring of 2001 was due to factors such as the food scares associated with the mad-cow and foot-and-mouth epidemics and higher oil prices¹².

2. Long-term nominal interest rate

Graph 2: Long-term interest rate and HICP differentials: Sweden vis-à-vis the euro area^13>.

Sweden has consistently fulfilled the criterion for convergence of long-term interest rates since December 1996. As it could be seen from the Graph, between 1996 and 1999 long-term interest rates in Sweden headed downwards. Subsequently, they began to increase, which reflected the influence ofrising international yields as well as a gradual improvement of the economic outlook in Sweden.

3. The exchange-rate

Since November 1992, Sweden has had a floating exchange rate, which means that the exchange rate is not a target variable for monetary policy. With an explicit inflation target and a floating exchange rate, the value of the krona is determined, among other things, by capital flows, in addition to fundamental factors, such as terms of trade and relative productivity growth. Following a considerable depreciation of the krona in 2001, which can largely be explained by financial factors, the krona began to strengthen during the autumn of 2001. The krona increasingly stabilised during 2002 and its development has been relatively stable during 2003 and 2004¹⁴. In exchange rate policy, the government decides on the exchange rate system, while the Riksbank is responsible forthe practical application, e.g. which central rate applies in a fixed exchange rate system. Sweden's experiences of the current monetary policy regime, with an inflation target and a floating exchange rate, are favourable. Pegging the Swedish krona to ERM2 is not under consideration.

4. Budget deficit.

Sweden is known as one of the highest public spending economies. It had the fastest growing state debt sector in the industrial world but since 1991, has made substantial efforts of bringing the budget deficit to 3 per cent of GDP in line with the EMU criteria. Sweden had made great progress in reducing its budget deficits from the -12.2% in 1993 to below the reference value, i.e. to -0.8% (-0.7%) in 1997¹⁵. This was largely due to the end of public support to the banking system. The table illustrates changes in the reference value within last 5 years.

Table 2. Budget deficit: reference value: -3.0% of GDP¹⁶.

5. Public debt

Sweden has a long social democratic tradition of universal services for its citizens that continue to be at one of the highest levels across Europe. However, in the early 1990s, Sweden experienced its deepest recession since the 1930s. In some years public debt doubled Gross public debt, which jumped from 43%t of GDP in 1990 to 78% in 1994, stabilized, however, around the middle of the 1990s and, as it could be seen from the Graph 2, started to come down again more significantly beginning in 1999.

Graph 3: General Government Gross Debt in Sweden¹⁷.

Summarizing all above-stated data, we can come to the following conclusion: Sweden fulfils the government finance, inflation rates and long-term interest rate criteria. Only the exchange-rate criterion is not fulfilled. Sweden has a derogation but there is no provision to exempt it from participation in the third stage of EMU Sweden is, therefore, required to adopt the euro, and this means that it must fulfil the exchange-rate criterion.

Compatibility of the National Legislation with the EC Treaty.

Fulfillment of the convergence criteria is not enough to join the EMU. As it is stated in the Articles 108 and 109 of the EC Treaty, the candidate state must bring its national legislation, including the statutes of the national bank, in accordance with the requirements of the EC Treaty and the Statute of the European System of Central Banks (ESCB). Compatibility with the requirements of the Treaty requires the fulfillment of the following criteria:

• independence of the national bank;
• primacy of the objective of price stability;
• legal integration of the national central bank in the ESCB (statute, tasks, instruments, organisation and financial provisions);
• prohibition of public-sector financing by the national central bank;
• prohibition of privileged access by the public sector to financial institutions;
• free movement of capital within the Union and with countries outside the Union;
• compatibility of other legislative texts (issue of notes and coins, exchange-reserve management, exchange-rate policy, etc.).

In fact, Sweden is a typical example of the instrumental model of independence of the national banks, i.e. the model with the government as a principal-agent with an overall responsibility for economic policy¹⁸. The Riksbank besides having the legal authority for setting targets of monetary growth and inflation and changing the key interest rates chooses the exchange rate regime to the Swedish krona. So it is the Government that decides if and when the krona is to join ERM2, whereupon the Finance Ministry and the Riksbank discuss the SEK/EUR exchange rate that is compatible with a stable economic development. However, the Riksbank is a prototypical dependent bank since its directors are appointed by the governing political party and can be dismissed by the prime minister.

The following legislation serves as the legal basis for the Riksbank and its operations:
- the Instrument of Government (Regeringsformen)
- the Sveriges Riksbank Act (Lagen om Sveriges riksbank)
- the Currency Rate Policy Act (Lagen om valutapolitik).

The Convergence Reports of 1998, 2000, 2002 and 2004 of the European Central Bank identified the abovementioned legal acts as requiring amendment pursuant to Article 109 of the Treaty.

In these Convergence Reports, the ECB has noted that one area in which Swedish law, and notably Lagen om Sveriges riksbank, remains incompatible with the requirements of the Treaty and the ESCB Statute for the adoption of the euro is the full integration of Sveriges Riksbank into the Eurosystem. The fact that Swedish law does not prepare for Sveriges Riksbank's integration into the Eurosystem implies that it is still not compatible with the Treaty. A number of provisions in Lagen om Sveriges riksbank are concerned, and will therefore require a thorough legislative review at national level. However, no such legislative review has taken place since 2002¹⁹. Accordingly, the ECB maintains its assessment and the remarks made in the 2002 Convergence Report with regard to the integration of Sveriges Riksbank into the Eurosystem.

The inconsistencies and imperfections concern in particular:
1. the requirement on the Riksbank to inform the government in advance of any major decision;
2. the Riksbank's powers in the monetary policy field;
3. the Riksbank's monopoly over the issue of bank notes;
4. the imposition of minimum reserve requirements on financial institutions;
5. exchange-rate policy;
6. the rules governing access to public documents.

Since the middle of the 1990s, the Riksbank had been collaborating with the financial sector with a view to ascertaining the adaptation measures necessary ahead of a potential Swedish changeover to the euro and how long these measures would take to implement. The aim had been to make the time between a Swedish Riksdag decision in favour of participation and entry itself as short as possible.

The EMU issue has created serious problems for the government. The Riksbank and the Swedish Employers' Confederation (Svenska Arbetsgivareforeningen) have informally urged the government to be even among the first batch of countries to form the single currency. On the contrary, Sweden's most powerful trade Union congress, the LO (Landsorganisationen i Sverige) has been more cautious on the subject.

However, the final decision whether Sweden should participate in the monetary union in accordance with the Government Bill "Sweden and the Economic and Monetary Union" (Sverige och den ekonomiska och monetara unionen) from 1997 was put to the Swedish population for consideration. The Swedish government had recommended that Sweden, in the event of a "yes" vote at the referendum, should strive to enter monetary union on 1 January 2006.

Swedish Referendum and Further Outlook.

Sweden is one of the members of the EU whose sense of national identity could not easily be enhanced by the European project and which found it most difficult to adjust to the political dimension of integration.

Swedish society itself was split upon the decision whether the country should join EMU. Those in favour, leading by the Prime Minister Goran Persson, tended to emphasize alleged economic benefits, including stronger economic growth, more jobs and lower prices. But those benefits have yet to materialize for most current members, and the economies of the three non-participants have been performing better than the EMU as a whole. The basic conclusion of an expert panel appointed by the Swedish government in 1997 to review the likely economic consequences of joining the EMU. In any event, there is a broad consensus among economic experts that the purely economic advantages of joining the EMU would be marginal, and that the risks involved are very great. The former include the elimination of transaction costs and a potentially slight increase in trade, due to the single currency. The latter include sharp reductions in exports, mass unemployment and economic stagnation - the consequences of which would vastly outweigh any advantages.

The decision on the adoption of the euro in Sweden was taken in the national referendum on 14 September 2003. Sweden's voters rejected their government's plan to adopt the euro by a surprising margin. Although the government of Goran Persson was itself divided on the issue (five cabinet officials, including the Minister of Industry and Commerce Leif Pagrotsky opposed the EMU), the weight of opinion across the main political parties, the business press and other media had been overwhelmingly in favour. The yes campaign was many times better financed than the comparatively invisible no campaign. However, the final results, published by the Electoral Commission, showed that a majority of 56.1% were against the adoption of the euro. Those in favour polled 41.8% of the vote, while 2.1% of ballot papers were blank and 0.5% invalid²⁰.

Election analysts say that the "no" voters' main reasons for rejecting the euro were a perceived lack of democracy and national sovereignty. But a very powerful argument also concerned the economy. The anti-euro lobby was able to point to high unemployment and heavy cutbacks in major EU countries, and this seems to have convinced many sceptics that Sweden would be better off managing its own economy.

From an economic point of view, there are things to be said on both sides. In some ways, Sweden is the ideal euro candidate: a small, open and internationally competitive economy, with more than most to gain from exchange-rate stability across Europe. On the other hand, the euro area is performing badly, partly because its economic-policy rules have been poorly designed, whereas Sweden is doing well²¹. A vote to wait and see, if that is what it was, makes sense. Sweden can adopt the euro later, if it seems to be losing inward investment, or if the policy rules are mended, or if the euro area's performance inspires.

For the Riksbank "no" vote meant that it would continue to conduct its monetary policy on the basis of forecasts of inflation 1-2 years ahead. There has been no reason to make any changes to Swedish monetary policy strategy because of the referendum result.

"The significance for the Swedish financial market of a "no" vote to participation in the Eurosystem should not be exaggerated. Developments in the financial sector are largely governed by other trends that are not dependent on currency, such as technological progress and establishment of joint regulatory frameworks with other countries. These are global factors, which are reinforced by the harmonisation in the EU's single market. However, it is possible that a single currency could hasten this development"²² said Lars Nyberg, Deputy Governor of the Riksbank about the Riksbank and the situation for the Swedish economy following the referendum.

The evolution and enlargement of the euro area concerns Sweden. Moreover, Sweden is one of the EU nations that benefits most from the enlargement of the European Union due to its economy is one of the EU's most integrated with the new member-states Also, should Estonia, Latvia and Lithuania adopt the euro, Sweden would be directly affected because Swedish banks own most of the Baltic banking system. Therefore, Sweden remains a 'pre-in'; and considers euro adoption again at some point in the future.

List of the Used Sources:

Books:

Baldwin Richard and Wyplosz Charles. 2004. The Economics of European Integration. McGraw-Hill Education.

Begg Iain (ed). 2002. Europe: Government and Money. Running EMU: the challenges of policy co-ordination. The Federal Trust for Education and Research: London.

van Bergeijk P.A.G., Berndsen R.J and Jansen W.J. (eds). 2000. The Economics of the Euro Area. Edward Elgar: Cheltenham/Northampton.

Kurzer Paulette. 1993. Business and Banking - Political Change and Economic Integration in Western Europe. Ithaka/London: Cornell University Press.

Laffan Brigid, O'Donnell Rory and Smith Michael. 2000. Europe's Experimental Union: Rethinking Integration. London/New York: Routlege.

Miles Lee. 1997. Sweden and European Integration. Ashgate: Aldershot.

Minkkinen Petri and Patomaki Heikki (eds). 1997. The Politics of Economic and Monetary Union. Edited by. Kluwer Academic Publishers Boston/Dordrecht/London.

Articles:

Voters can be such a nuisance. 18.09.2003. From The Economist print edition. Will Europe's leaders ever start listening to their citizens? http://www.economist.com/displayStory.cfm?story_id=2071643.- 29.01.2005.

Official Documents, Official Publications, Statistics and Press Releases:

Convergence Report 2002. The European Central Bank.
http://www.ecb.int/pub/pdf/conrep/cr2002en.pdf

Convergence Report 2004. The European Central Bank.
http://www.ecb.int/pub/pdf/conrep/cr2004en.pdf

Government Bill 1997/98:25 on Sweden and Economic and Monetary Union Bill 1997/98:25.
http://www.regeringen.se/content/1/c4/36/82/6f5eccd1.pdf

Inflation Rate According to HICP. Statistics Sweden (Statistiska centralbyran). http://www.scb.se/templates/tableOrChart____73318.asp

Riksbank Press Releases. 9/24/2003 Nyberg: Sweden after the euro referendum.
http://www.riksbank.com/templates/News.aspx?id=8323

Stability and growth pact: implementation and key figures.
http://europa.eu.int/scadplus/leg/en/lvb/l25057.htm

Sweden: Convergence reports (2002) http://europa.eu.int/scadplus/leg/en/lvb/l25062.htm

Update of Sweden's Convergence Programme. Swedish Ministry of Finance November 2004. http://www.sweden.gov.se/content/1/c6/03/38/22/a81de1b5.pdf

¹ Miles Lee. 1997. p.17.
² Kurzer Paulette. 1993. p. 128-129.
³ Minkkinen Petri and Patomaki Heikki. 1997. p. 90-91.
⁴ Social democracy needs to cooperation of capitalists, but the reverse is not true at all. In the age of international production business's commitment to social concentration and dependence on national state policy has diminished.
⁵ Minkkinen Petri and Patomaki Heikki. 1997. p. 91.
⁶ Baldwin Richard and Wyplosz Charles. 2004. p.360.
⁷ Public investment spending embraces spending on roads, telecommunication, other infrastructures. German 'golden rule' considers that public investment typically amounts to some 3 per cent of GDP.
⁸ Richard Baldwin and Charles Wyplosz. 2004. p. 361.
⁹ Richard Baldwin and Charles Wyplosz. 2004. p. 363.
¹⁰ Methods for calculating the consumer price index vary among different countries, which make international comparison more difficult. Because of this, harmonized index for consumer prices (HICP), have been developed within EU, based on coordinated methodology. HICP is a basic indicator used by the European Central bank (ECB) when evaluating monetary policy.
¹¹ Source: Inflation Rate According to HICP. Statistics Sweden (Statistiska centralbyran).
¹² Sweden: Convergence reports (2002).
¹³ Source: Convergence Report 2004. The European Central Bank. p. 209.
¹⁴ Update of Sweden's convergence programme. November 2004. p. 8.
¹⁵ van Bergeijk P.A.G., Berndsen R.J and Jansen W.J. 2000. p.47.
¹⁶ Source: Stability and growth pact: implementation and key figures.
¹⁷ Source: Convergence Report 2004. The European Central Bank. p. 204.
¹⁸ Begg Iain (ed). 2002. p. 42.
¹⁹ Convergence Report 2004. The European Central Bank. p. 237-238
²⁰ Source: Sweden: Convergence reports (2002).
²¹ Voters can be such a nuisance. Will Europe's leaders ever start listening to their citizens?
²² Press Releases. The Riksbank. 9/24/2003.
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Kirył Kaścian (born in 1982) LLM student at the University of Bremen, Germany; graduated in International Law from International Relations Department, Belarusian State University. Legal interests deal with the law of the European Law and legal systems of particular member-states of the European Union within the context of the law of the EU, EMU, and sociology of law.