17 September 2003

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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 ones do.
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.
Sweden outperforms
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."
Widening deficits
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.
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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 the euro.
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.

Copyright © Newsworks Ltd. Malta.
Editor: Saviour Balzan
The Malta Financial & Business Times, Newsworks Ltd, Vjal ir-Rihan, San Gwann
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