"More than two decades ago, there was a discussion in Sweden about entering the eurozone. Sweden's economic situation was not so optimistic about the proposition. However, it took 20 years for Swedes to become a leader of EU development among high-income countries and have cut their debt to the GDP in half. Has the decision to stay outside of the single currency area been connected to these events?" asks Marcin Lipka, Conotoxia senior analyst.
The first half of the 90s was a difficult time for Sweden. The bursting of the credit bubble that was created by liberalisation that was too far extended and insufficient regulations of the financial sector caused a dangerous crisis. Unemployment, according to the World Bank, was at 2% in 1990 and rose to 10% within three years. The rate of public debt to the GDP shot up between 1991 and 1996 from 32% to 85%.
As a response to the economic collapse and Sweden's accession to the European Union (EU) in 1995, Stockholm decided on a number of reforms. Independence has been given to the central bank and changes in the pension system have taken place, internal competition has been increased by liberalisation of public utility services, for example. Strict rules regarding the control of the state’s expenditures were introduced as well (annual budget surplus goal of 1% GDP).
Recurring euro debate
Just after Sweden’s entrance to the EU, a broad discussion on implementation of the euro began for Swedes. It was preceded by a series of economic analyses and political debates by the Calmfors Commission that gathered economists and politicians chaired by Prof. Lars Calmfors.
A report published in 1996 indicated that although there were economic benefits in implementing the single currency (e.g. reduction of transaction costs) and political reasons (Sweden's influence on EU cooperation), the Commission recommended not joining the eurozone (EMU).
This was mainly due to concerns that the internal economic shock (similar to the experience of Sweden in the years preceding the report) could have had more severe consequences in case of a loss of influence on the national monetary policy.
However, several dozen pages worth of conclusions from a study of over 300 pages were rather neutral, and the recommendation to not join the EMU had a rather "wait and see” tonality. This confirms the suggestion that Sweden was to avoid joining the eurozone until the national economy stabilises. Therefore, it was stated that Swedes should not close the option of becoming a member in the future.
In 2003, a referendum was held in Sweden in which citizens rejected entering the single currency area (42% for; 55.9% against; turnout 82.6%). This likely improved the current economic situation better than if the euro had been adopted. This is confirmed not only by macroeconomic data, but also by later observations of Professor Calmfors.
Euroless Sweden at the forefront of the European Union
In order to assess the impact of Sweden's decision to remain outside of the EMU, it is worth reviewing Sweden's economic condition in relation to other eurozone countries (taking 2005 as the base year). The year 2005 was already past the crisis by a few years (crisis does not disrupt the result), and the rejected referendum accession to the EMU was expected to enter into force on January 1st, 2006.
According to Eurostat data, Sweden's GDP grew by 24.1% between 2005 and 2016 in comparison to the average result of other single currency countries of 10.2%. This puts Sweden in second place in the EMU (after Ireland) and is also significantly better than Germany (+17.7%). In neighbouring Finland, the increase amounted to only 5.8% and in Denmark, 9%.
The second fastest development in the EU was not accompanied by an increase in debt. In 2005, its relation to GDP in Sweden amounted to 49.2%, and at the end of 2016, it decreased to 42.2%. In the case of the eurozone as a whole, debt increased by over 20 percentage points (from 61.5 to 83.2% GDP) and in Ireland, it almost tripled (from 26.1 to 72.8% GDP).
Economic matters aren’t the only thing showing that being outside the euro area can be beneficial. In the Spring addition of this year's Eurobarometer survey (conducted by the European Commission), as many as 64% of Swedes believe that their voice in the European Union counts. This is the second highest result in the EU after Denmark (average was 42%). Therefore, concerns that Sweden being outside of the eurozone has depreciated their role in the have been disproven.
Internal discipline as a key to success
It is difficult to assess whether the positive Swedish economic condition is due to 90s reforms or remaining outside the eurozone. It is very probable that there is a different explanation that connect both issues.
In the 2013 study by Professor Calmfors, "The Swedish Macroeconomic Policy Framework," it is stated that Swedes have treated the fiscal rules of the EMU much more seriously than the countries that joined the monetary union. As Calmfors points out, now this gives them the power to decide whether or not entering the eurozone will benefit them.
Stockholm’s actions can be a lesson for other countries to follow. Reforms, combined with fiscal discipline, broaden a country's decision-making ability, and a lack of dependency on one or another’s decision to join the EMU can only improve the financial situation of its citizens.
