Sweden delivers latest rebuke to Europe's currency
Sweden's no to the euro is the latest snub to a currency
designed to rival the US dollar: rich countries don't want it, poorer
Since the euro's debut in 1999, Denmark and now Sweden have voted against
joining. UK Prime Minister Tony Blair shied away from holding a referendum
as polls showed voters would reject joining a currency bloc struggling
with economic stagnation and widening deficits. Only Greece, the European
Union's poorest country, has joined the club since the euro's advent.
The rest of the decade promises to heighten those divisions. Poland
and fellow ex-communist countries entering the EU next year have economic
output per head less than half the EU level - and need the euro to complete
the overhaul of their economies.
"It's a setback for the euro project in the sense that I don't
see any possibility of these richer countries - Denmark, Sweden or the
UK - holding a referendum on the euro within the next five years,"
said Daniel Moreno, who helps oversee the equivalent of USD5.7 billion
in bonds at DWS Investment Management in Frankfurt.
Eastern Europe will "gain stability" by moving toward the
euro, said Joerg Kraemer, chief economist at Invesco Asset Management
in Frankfurt, which manages USD178 billion. "Countries like Sweden
don't need it."
Swedes voted 56 percent to 42 percent to stick with an economic setup
that has given them faster growth than the euro region in four of the
past five years and six consecutive budget surpluses - the fruit of
cuts to the welfare state in the 1990s.
After Sweden's rejection, the euro was little changed.
To be sure, non-economic factors were in play in Sweden's vote. The
country's tradition of neutrality - it hasn't been invaded since 1808,
and stood apart from the Cold War military blocs - makes the country
of 9 million wary of foreign entanglements. The 1994 referendum to join
the EU passed by a narrow margin of 52 percent to 48 percent.
"One has to ask oneself why Swedes are so split about Europe,"
Lars Leijonborg, Liberal Party leader, told TV4 Sunday night. "During
decades we've been led to believe that we're better than everyone else."
Swedes were also put off by the battle over the "stability pact"
limits on government borrowing for euro users. While Sweden had budget
surpluses, Germany and France, the architects of the euro, broke the
rules last year and will remain in violation this year and in 2004.
The European Commission, the Brussels-based enforcer of the rules, says
France runs the risk of being fined if it keeps defying the rules. The
warning carries little weight: any two large EU countries could vote
to let France off the hook.
The euro's defeat "is a strong grassroots warning to the commission
and to France, Germany and Italy to implement structural changes which
will boost long-term growth," said Rajeev Demello, who manages
the equivalent of USD5.8 billion in bonds at Pictet & Cie. in Geneva.
Smaller countries' concerns that they would be punished for similar
budget transgressions while bigger countries escape sanctions burst
into the open on the eve of Sweden's vote, when finance ministers from
the Netherlands, Finland and Austria called for sanctions on France
for flouting the rules.
The Swedish result will "weaken the euro and Europe," said
Daniel Cohn-Bendit, a German Green member of the European Parliament,
in a statement. "All European countries - in and outside of the
euro zone - will ultimately pay the price."
Political forces that are keeping wealthy northern European economies
out are working the other way with the Eastern European countries that
regard their EU entry on May 1, 2004 as the final lifting of the Iron
Curtain. As soon as two years after that, they will be eligible to adopt
Estonia says Yes
On the same day that Sweden voted no, an EU membership referendum carried
67 percent of the vote in Estonia, a Baltic country of 1.4 million emerging
from 500 years of Russian domination. Switzerland, the seventh-largest
economy in Europe, rejected EU membership in 2001.
Estonians earn an average of 509 euros a month, making them the second
richest of next year's 10 new EU members, according to the Economist
Intelligence Unit. Greek workers, at the bottom rung of the current
EU-15, make 862 euros. Swedish monthly wages are 2,731 euros.
Eastern European economic production per person is 39 percent of the
EU average. The new members are three times as reliant on agriculture,
and life expectancy is higher only here in Malta.
Like Greece, Italy, Spain and Portugal, the Eastern governments can
use the euro's entry rules - caps on budget deficits and inflation,
plus two years of currency stability -as an excuse to make cuts in welfare
and modernise the economy. Sweden didn't need the euro as an incentive.
Collectively, the 10 new arrivals are heading for a budget deficit of
4.4 percent in 2003, above the euro's 3 percent limit, and an inflation
rate of 2.7 percent, above the current 2.1 percent in the euro region,
the EU forecasts.
"It's negative for the euro's image if higher inflation countries
join and good performers stay out," said Ulla Lahl, an economist
at Mizuho Corporate Bank Germany in Frankfurt.