Market Insights

Why Sweden Doesn't Use The Euro

Swedish Krona (SEK)

Sweden joined the European Union on 1st January 1995 following the 1994 Treaty of Accession between the 12 countries that were already EU member states at the time and four proposed new member states.

The four countries that proposed to join the European Union under the Treat of Accession were Sweden, Austria, Finland, and Norway. While they were all accepted, a referendum held in Norway did not pass and only Sweden, Austria and Finland joined the European Union when the Treaty of Accession came into effect on 1st January 1995.

The Treaty of Accession made the new member states subject to the Treaty of Maastricht, which was the founding treaty of the European Union and contains many of the fundamental agreements that EU member nations have to commit to as part of EU membership.

These agreements relate to a number of matters including shared European citizenship, common foreign policies, a greater level of freedom of movement across European borders, and the introduction of a single currency.

Officially, having signed the Treaty of Accession (and so having made itself subject to the Treaty of Maastricht), Sweden is obliged to join the eurozone and adopt the euro as part of its commitment to maintaining a single currency in the European Union.  

However, following a national referendum in 2003, Sweden has avoided joining the eurozone and has instead stuck to using the Swedish Krona (SEK).

The 2003 Swedish Referendum

Following political support in the late 1990s for a referendum being held into whether or not Sweden should adopt the euro as its currency, one was finally held in 2003.

The outcome of the referendum was that Sweden voted against adopting the euro as its currency. 56% of the public voted not to adopt the euro, 42% voted in favour of it and there were 2% blank votes.

This left the Swedish government in a contradictory position given that the Swedish acceptance of the terms of the Maastricht Treaty officially required Sweden to adopt the euro as its currency. However, the Swedish government followed the result of the referendum and avoided joining the euro by choosing not to fulfill the criteria that EU nations must fulfill before they are allowed to adopt the euro.

Sweden is still in the same position today, being officially required to join the euro but choosing to deliberately not fulfill the criteria that it was originally expected to. Thereby, Sweden retains the use of the Swedish Krona.

The Convergence Criteria

The criteria that EU nations must meet before being allowed to adopt the euro as their currency are known as the convergence criteria. These relate to:

1. Price Stability

Price-performance is expected to be stable and, specifically, the rate of inflation cannot be higher than 1.5% above the rate of the three best-performing member states. Rates of inflation are measured according to the Harmonised Index of Consumer Prices.

2. Public Finances

A country is not allowed to be in excessive debt or have an excessive budget deficit before adopting the euro. Specifically, it should not be under the excessive debt procedure.

3. Long term Interest Rates

In order to ensure that the adoption of the euro is sustainable in the long term, a country should be able to demonstrate certain long-term interest rate levels. Specifically, interest rates should not be more than 2 percentage points above the rate of the three best-performing member states in terms of price stability.

4. Exchange Rate Stability

In order, to demonstrate that a country can manage its economy without recourse to excessive currency fluctuations, it is necessary to prove that it can maintain a level of exchange rate stability. Specifically (and importantly for Sweden), a country must participate in the European Exchange Rate Mechanism (ERM II) for at least two years, without strong deviations from the ERM II central rate and without devaluing its currency's bilateral central rate against the euro in the same period.

The European Exchange Rate Mechanism (ERM II) is a system whereby, amongst other things, a greater level of economic stability is achieved and trade is facilitated between EU nations by operating a system of fixed exchange rates between participating currencies. The ERM II system came into effect in 1999 as a replacement for the previous European Exchange Rate Mechanism.

5. Legislation Compatibility

Countries must also ensure that various aspects of national legislation are compatible with EU membership.

Sweden and the Convergence Criteria

Sweden has avoided adopting the euro by not joining the European Exchange Rate Mechanism (ERM II).

Sweden fulfills all of the criteria for adopting the euro but has argued that membership of the ERM II system is optional and has refused to join. As such, they have avoided joining the euro in spite of what was originally expected. This method of retaining an original currency despite being an EU member contrasts to EU countries that have not adopted the euro because they are either unable to fulfill the convergence criteria or have negotiated an exemption with the EU.

Should Sweden Adopt the Euro?

The issue of whether or not Sweden should adopt the euro or not is one that has been heavily debated. Arguments focus on whether or not Sweden would benefit economically from eurozone membership and also whether or not having an input into eurozone monetary policy would benefit Sweden.

Arguments in Favour of the Euro

A chief argument in favour of joining the eurozone is that it would benefit the economy of Sweden by opening up new opportunities with eurozone countries. Many argue that Sweden’s recent economic prosperity is not down to their refusal to adopt the euro (as those against euro adoption argue) and that adoption of the euro would simply bring new opportunities to the Swedish economy.

Another major opposing argument relates to monetary policy in Sweden.

Various countries, including Denmark, that have also not adopted the euro have been able to benefit from the economy of the eurozone by having exchange rates that are fixed against the euro. Where a fixed exchange rate system is in place, a country has to control its monetary policy for the purpose of maintaining exchange rates at a certain level.

While having a fixed exchange rate is beneficial, lacking control over monetary policy is generally not beneficial, which leads to a point of debate.

While Sweden does not have a fixed exchange rate policy against the euro, it appears to many that the monetary policy that Sweden follows closely matches that of the eurozone. This may be in order to stabilise exchange rates between Sweden and Europe in order to allow for smoother trade and stable economic conditions.

The argument in favour of joining the euro is that, in this situation, Sweden loses control of its monetary policy because it is forced (in order to maintain exchange rate stability) to follow the monetary policy of the eurozone. However, this is in spite of the fact that they are not a member of the eurozone and therefore cannot contribute to eurozone monetary policy.

It is argued that if Sweden did adopt the euro they would be able to benefit in the same fundamental way from eurozone financial integration, while also having an input into eurozone monetary policy by being an official eurozone member.

It is argued that, in the current situation, Sweden has very little control of its monetary policy at all.

Arguments Against the Euro

The chief arguments against joining the euro are that Sweden’s recent economic success has been in part due to the refusal to adopt the euro. Those who argue against the adoption of the euro, claim that Sweden’s refusal to adopt the euro has benefited the economy and that membership of the eurozone would actually damage Swedish opportunities. This issue is much debated with strong evidence on both sides and a degree of uncertainty on the matter.

The other argument is that, while Sweden does appear to be limited in terms of the monetary policy that it follows, the independence that it maintains by having control of its own currency is very useful in times of crisis.

If Sweden did join the euro, control of monetary policy would be completely passed to the eurozone which acts as a collective in the interests of the group as a whole. While Sweden would be able to input into decision-making, the level of influence they would actually be able to exert would be reduced or even negligible.

The argument is that by refusing to adopt the euro and by maintaining monetary policy independence (while it may be limited), Sweden is much better able to overcome localised financial crises than it would otherwise be. Under eurozone membership, monetary policy would be very unlikely to be sufficiently tailored to the needs of Sweden.

Sweden’s actions in the 2008 financial crisis and the country’s ability to overcome this crisis by adopting independent monetary policies are often cited as an example of why Sweden should not adopt the euro.  

Where is Public Opinion at the Moment?

Before the onset of the eurozone crisis in 2010, public opinion was relatively mixed on whether or not Sweden should adopt the euro with some expecting that they would. However, since the onset of the eurozone crisis public opinion has consistently been against the adoption of the euro.  

Share on :
Linkedin icon

Related Blogs