The political economy of monetary unification: the Swedish euro referendum of 2003.

• Author: Jonung, Lars

On Sunday September 14, 2003, voters in Sweden went to the polls to answer the question: "Do you think that Sweden should introduce the euro as its official currency?" Three options existed: Yes, No, and a blank ballot. The voters decided whether to maintain the domestic currency, the krona, which was introduced as the official currency unit in 1873, when Sweden adopted the gold standard, or to replace it with the euro, the currency of 12 of the then 15 member states of the European Union, that came into physical existence in January 2002.

The Swedish referendum dealt with a clear-cut choice involving both the currency and the exchange rate regime--a choice different from that facing the voters in any previous referendum in Europe. The No-option implied that Sweden should maintain its domestic currency based on a floating exchange rate combined with inflation targeting by the Riksbank, the Swedish central bank. The Riksbank, which gained independence from the executive authority in the 1990s, announced, at its own initiative, in January 1993, a policy regime of inflation targeting. The bank set a target of a 2 percent annual rate of inflation within a band of plus or minus 1 percentage point to be valid from January 1995. The Yes-alternative implied that Sweden would be a member of the eurosystem by replacing the krona with the euro, at the earliest in 2005-2006. The policy of the European Central Bank would replace the national inflation targeting by the Riksbank.

Other countries have held referendums on the Maastricht Treaty and on membership in the EU. However, in these cases the adoption of the new currency, the euro, was one of a larger set of issues on which the voters had to decide upon. The Danish euro referendum in September 2000 is an exception. In Denmark the choice was between adopting the euro or maintaining the fixed exchange rate between the euro and the Danish krone within ERM 2. From a monetary policy point of view, the Danish referendum did not represent much of a real choice. Although the Danish No-vote meant that the domestic currency unit was maintained, Denmark still behaves after the referendum as if it were a member of the euro area. The Swedish referendum is thus different from any previous euro-related referendum in the sense that the two alternatives facing the voters represented two distinctly different exchange rate regimes: either a free float or a monetary union.

The referendum was the culmination of a long public debate in which the pros and cons of monetary unification and of a national currency were thoroughly analyzed--although Sweden had no choice but to join according to the EU Treaty. Two government investigations, one published in 1996 and the other in 2002, preceded the referendum, as well as a stream of books, pamphlets, and articles, and a heated public debate in the media and all over Sweden. The Swedish economics profession took a most active part in the exchange of views, reflecting the tradition of strong involvement of economists in public debate. (1) Foreign economists were involved as well. (2) Their articles were translated and they were interviewed in the media. Issues such as the theory of optimum currency areas, central bank independence, the proper balance between monetary and fiscal policies, and the Stability and Growth Pact of the EU became familiar to many voters. In short, the standard textbook arguments for and against membership in a monetary union were part of the messages of the two camps--although given different weights and combined and blended with noneconomic arguments in the campaign.

To a researcher in monetary economics the Swedish referendum represents a unique opportunity to examine determinants of the voters' perceptions of the benefits and costs of two monetary regimes: a regime based on a domestic currency with a freely floating exchange rate versus a regime founded on membership in a monetary union with a freely floating exchange rate toward the rest of the world. Presently, according to the majority view among economists, these two options are the only viable exchange rate arrangements in a financially integrated world. They represent the two corner solutions or the bipolar choice so prominent in recent literature on exchange rate regimes (Fischer 2001).

The purpose of this article is to examine the result of the Swedish euro referendum from an optimum currency area (OCA) approach. It is structured as follows. First, the election result is summarized. Then the views of the economics profession on the benefits and the costs of membership in a monetary union are briefly considered. Next, the main arguments of the Yes- and No-campaigns are presented. Thereafter, the voting behavior predicted by the political economy of exchange rate regimes is described. Against this background, data compiled by the Swedish State Television through exit poll surveys on the distribution of Yes- and No-votes across socioeconomic groups are examined. The results from a number of referendums on EU membership are then compared with the Swedish euro referendum. The role of trust and history in determining the monetary regime is briefly considered.

The Outcome of the Referendum

The referendum attracted a large share of the eligible voters: 82.6 percent cast their votes, and a total of 5,843,788 voters participated. In 10 municipalities the turnout was in the top range of 87 to 89.9 percent. In some smaller districts it exceeded 93 percent. The voters clearly viewed the choice of the currency as important. (3)

The No-alternative received a clear majority with 55.9 percent of the votes. The Yes-vote comprised 42 percent and approximately 2 percent opted for a blank vote. A mere 0.1 percent of the votes cast were declared invalid.

The referendum revealed a strong geographical divide. The Yes-vote was concentrated in two parts of Sweden: first, Stockholm, the capital, and the municipalities surrounding it, and second, Skane, the southernmost province. The rest of Sweden, in particular Norrland, the northernmost part, voted against the euro and for keeping the krona. In short, the farther north and the farther away from the capital, the stronger was the No-vote.

The municipality of Haparanda, the main town on the border with Finland in the far north, was one much publicized exception to this pattern. Here the outcome of the vote was a solid Yes. The voters of Haparanda were familiar with the euro as it is in circulation in neighboring Finland. Thus, many shops in Haparanda display their prices in both kronor and euros. The euro is accepted as a means of payment in most shops in Haparanda. It is generally held that this everyday contact with the euro contributed to the local Yes-majority.

The No-vote was larger than most observers had expected, although predicted by the opinion polls. The result was immediately recognized as a resounding victory for the No-camp. The government announced that the outcome was to be respected. No attempt will be made to enter into the euro area in the near future. (4)

As stated earlier, the referendum was preceded by many months of information dissemination and campaigning. The arguments advanced in this process most likely influenced the voters' perceptions of the benefits and costs of joining a monetary union.

The Views of Economists

Already at an early stage, economists were involved in the debate about Swedish membership in the Economic and Monetary Union. A government commission report published in 1996, the Calmfors Report, set the stage for the ensuing discussion, within as well as outside of the economics profession (Calmfors et al. 1997). The commission consisted of economists and political scientists, and was headed by Lars Calmfors, professor of economics at the University of Stockholm and chairman of the scientific advisory body of the Ministry of Finance (Ekonomiska radet).

In short, the economic analysis of the report was based on the theory of OCAs, listing the expected benefits and costs of Swedish membership in the EMU. The main benefits were identified as the efficiency gains from a common currency, in other words, the reduction in costs concerning international transactions and the abolishment of uncertainty concerning fluctuating exchange rates within the monetary union that would generate more foreign trade and more competition. The loss of monetary policy autonomy was deemed the main cost of full EMU membership. No longer would the Swedish interest rate be set by the Riksbank to stabilize the domestic economy. Instead, the rate of interest would be determined for the euro area as a whole by the ECB. The surrender of monetary policy autonomy was regarded as associated with high costs for Sweden in the event of asymmetric shocks to the domestic economy. An independent Swedish currency was viewed as an insurance device (Calmfors et al. 1997: chap. 13).

In its political analysis, the Calmfors Commission focused on a political tradeoff. On one hand, Sweden would gain influence within the EU by adopting the common currency. On the other hand, the political legitimacy of the common European currency was regarded as weak.

In its summing up, the commission in 1996 recommended Swedish membership in the long run, but proposed that Sweden should not join EMU at the start in 1999. The two main economic arguments in support of this view were that, in the wake of the financial crisis of the early 1990s, Sweden would be vulnerable to country-specific shocks as long as unemployment remained high and budget deficits were large. In this case, fiscal policy measures were deemed insufficient to counteract negative asymmetric shocks to the Swedish economy. The commission therefore suggested that Sweden should postpone joining the common currency until unemployment had been reduced and the budget had been consolidated. The commission also thought that public attitudes would become more positive toward EMU in due time.

...