As a member of the European Union, Sweden along with Denmark and the United Kingdom decided against monetary union by declining to adopt the Euroland euro as new national currency at the euro’s inception. Each nation would put a respective referendum vote to their citizens at a later date for euro membership at their own will and timing. Sweden with a total population of 8.9 million recently went to the polls on this very euro decision on September 14, 2003. The result was surprising as Sweden voted against Euro membership by a bigger than expected NO vote of 56.1 percent to the YES side at 41.8 percent, the krona accordingly fell to 9.15 SEK (krona) to the EUR (euro) or 8.1 SEK to the US-dollar (‘USD’). Many Swedes who voted NO were concerned about the fate of their sovereignty & lifestyle while many felt that Sweden was doing better economically than the eurozone, so why rock the boat? The majority of Swedes still support its unique luxurious welfare state ideology.
Even with pro-euro support from Sweden’s centre-left Prime Minister Goran Persson and the late Foreign Minister Anna Lindh who was tragically murdered, the vote still went down in defeat. The Swedish business community was pro-euro membership and they now want to have reforms implemented to be compensated for the NO victory. Prime Minister Persson’s Social Democratic Party was divided on the issue as was the nation. Rejection of the euro is a big blow to the Swedish business community as the possibility of closer EU integration for Sweden is not a reality for the near future and may result in lower economic GDP growth over the long term for Sweden. The net result, many Swedish companies are now using foreign currencies outside the krona.
POLITICS: very stable. Sweden has had a history of peace and stability during the 20th century which has helped Sweden achieve a very high standard of living for this mixed social welfare state of high-tech capitalism and social welfare benefits. Prime Minister Goran Persson of the centre-left Social Deomocratic Party (SDP) has been in power since 1996 and re-elected on September 15, 2002 to a minority government with the support of the Green party and Left party. The Greens essentially hold the balance of power, both the Left & Greens opposed euro memebership as they believed Sweden would have been force to change its unique lifestyle by sacrificing their generous welfare system. The SDP party provided tax relief in 2002 although tax burden is expected to decline gradually. Next election is scheduled for September 2006. Sweden has one of the world’s most advanced social welfare systems amongst wealthy nations, it has the highest government spending at 52 pecent of GDP (2001). The SDP have ruled for most of the last 70 years and do support this policy of high tax/welfare state. Many in the opposition include the business community believe that this high tax environment deters investment, wealth creation & GDP growth, capital flight and forces skilled entrepreneurs to leave. Sweden follows a foreign policy of strict neutrality and is not a member of NATO.
ECONOMY: sound economic fundamentals, resilient open economy recovering from economic slowdown in 2001-02 particularly in the Swedish telecomm industry when tech stocks collapsed in value. Sweden is a modern industrialized economy that supports free trade that is export based for national income. The current account is a key pillar of support for the krona as they have been large and persistent with the surplus at approximately 4.5 percent of GDP. The government in 2002 implemented large fiscal stimulus to enhance economic recovery. Economic risk is structural including a labour force where 80 percent of employees in Sweden belong to a union. If phase two of the global recession unfolds ‘asset liquidation’ phase as BI.C predicts, the krona may experience further currency pressure similar to many other of the world currencies, however, the trend is favorable for the krona unlike the US-dollar (‘USD’). Debt to GDP has fallen to 53 percent of GDP by year-end 2003 from a high of 76 percent in 1996. Since the mid 1990’s, Sweden’s macroeconomic variables have improved tremendously with low inflation unlike the financial crisis it experienced in the early 1990’s. A major structural economic weakness for Sweden is its ageing population, increase in healthcare costs to be expected, further tax cuts are unlikely. In order to tackle the serious demographic issue and finances, the government is allowing people to retire later, changes made to the current generous long term sick leave and new parents to remain in the workforce to help mitigate the affects of the decline in the working population. The reverse side of the equation is the fact that Sweden’s large inherintance taxes will realize a gain in revenue with generational asset shift. Sweden’s oil imports are partially offset by exports of electricity although Sweden is a net energy importer particularly for oil, natural gas & coal. Significant Swedish industries include steel, car, furniture, telephone parts, hydropower, iron ore, paper products and processed foods.
GDP as measured by purchasing power parity is at $230 billion USD (2002). GDP/Capita is measured at $26,000 USD (2002). Year 2004 GDP growth projected at 2 percent, 2003 at 1.3 percent, year 2002 at 1.9 percent, 2001 at 1.1 percent, year 2000 at 4.4 percent. Inflation for 1996-2000 at 0.5 percent, year 2002 at 2.2 percent, inflation has averaged from zero to 2 percent for the last 5 years with 2003 at 1.5 percent, 2004 projected at 2 percent. Budget surplus at 1.5 percent of GDP. Unemployment is low at 4.2 percent (2003) well down from 6.5 percent in 1998. Engineering component of economy represents 50 percent of GDP. Economic structure consists of services at 69 percent, industry at 29 percent, agriculture at 2 percent. Major export markets include United States, Germany and Norway while import markets include Germany, Denmark.
POSITIVE: literacy rate at 99 percent, lowering of debt levels, persistent large current account surpluses. CONCERN: lower birth rate, it is questionnable if the generous welfare state can sustain itself financially coupled with the desire by the citizens for more financial freedom and lower taxation levels, labour market weakening - keeping some wages restrained although high public sector wage increases took place in spring 2003.
BANKING SYSTEM: stable and sound. Swedish banks are diversifying offshore into countries like Latvia, Germany, Poland. In global banking today, Swedish banks are the most advanced and at the forefront of e-commerce & bank technology and a world leader in online banking. Sweden’s interest rates fell 25 basis points on February 6, 2004 to 2.5 percent, its lowest level in 59 years. In 2003, they lowered rates 3 times for a total of 100 bp to 2.75 percent. The interest rate differential is presently narrowing with the euro where the euorzone repo rate is at 2 percent while the UK’s Bank of England interest rate is at 4 percent. Foreign exchange reserves as at December 2003 for Sweden were at $22.4 billion USD. Sweden’s central bank, the Riksbank battled the nation’s unions in 2002-03 to keep wage pressures in line. Some have commented that the Riksbank is open to political interference as noticed when the central bank was forced to transfer $20 billion krona to the government in 2002. During the early 1990’s, difficult economic times for Sweden resulting in the nationalization of Swedish banks. During Sweden’s currency crisis in November 1992, overnight interest rates in Sweden skyrocketed to 500 percent in attemp to support the krona.
REGIONAL ANALYSIS: Eurozone, Finland, Norway, Baltic, United Kingdom
Several Baltic countries are expected to adopt the euro as new national currency in the next round of membership. Denmark voted against euro membership in September 2000 while other original EU member, the United Kingdom has yet to set a date for a national referendum on whether to adopt the euro or keep the pound. Sweden’s neighbour Finland is a euro member. Has Sweden isolated itself by refusing to adopt the euro? Sweden’s economy currently only represents 3 percent of the total eurozone GDP although Sweden’s economy is tightly connected to continental Europe. Sweden’s rejection for the euro may result in a loss of investment and potentially increased currency volatility for the krona. At present, 40 percent of Sweden’s trade is with the eurozone, 80 percent of invoices for big corporations are in euros. The euro in a way is already a parallel currency within Sweden.
KNOWLEDGE: Sweden is home to some of the highest tax rates in the industrialized world in order to fund its generous welfare system including steep inheritance taxes, the VAT is at 25 percent, high income taxes, gift taxes, etc. During year 2000 - 1st half 2001, the krona was overvalued and accordingly fell sharply primarily from capital outflows that took place as liberalization of Sweden’s pension industry coupled with heavy selling of Ericsson shares in addition to capital flight as citizens seeked offshore tax havens to mitigate the taxation level. If Sweden were to scrap its wealth tax, capital inflows from Swedish citizens holding offshore bank accounts may take place plus this tax change would help to deter future capital flight. This tax policy may require a tax amnesty similar to what Italy’s government recently implemented with Italians holding Swiss bank accounts in order to repatriate their capital home. A removal or a lowering of Swedish taxes would be considered very bullish for the krona as capital inflows will put upward pressure on the krona. Swedes are estimated to hold $500 billion SEK abroad in offshore bank accounts.
CURRENCY: ISO symbol ‘SEK’, Swedish krona, kronor (plural), crown. At time of review on February 16, 2004, the Swedish krona had an exchange value of 7.1909 SEK to 1 US-dollar (‘USD) and/or 9.1753 SEK to 1 EUR. Floating exchange rate regime with Sweden’s central bank, the Riksbank is implementing a successful policy of inflation targeting at a 2 percent cap inflation rate, no exchange controls. As measured by purchasing power parity ‘PPP’, on February 16, 2004, the krona was 38 percent overvalued to the USD. For comparison, in April 2002 the krona was equal to the USD as measured by PPP. If Sweden did decide to join the euro at a later date, Sweden would join the exchange rate mechanism for 2 years ‘ERM2’ while bringing central and bank legislation into line with the Maastrichat Treaty prior to taking on the euro, currency transition in stages.
CURRENCY HISTORY: history of volatility for the krona, historical quotes for the Swedish krona include: January 2004 at 7.2387 SEK to 1 USD, September 2003 at 8.0415, August 2003 at 8.2870, May 2003 at 7.9139, Janaury 2003 at 8.6365, July 2002 at 9.35, January 2002 at 10.454, June 2001 at 10.7918, (near the record lows to the USD reached on July 6, 2001 trading at SEK 11.024 to 1 USD), January 2001 at 9.4886, August 25, 1999 at 8.318. December 29, 2000 at 9.4158, January 1998 at 8.008, 1997 at 7.634, 1996 at 6.706, 1995 at 7.1333, 1994 at 7.716, 1993 at 7.7834. In relation to the Euroland euro, recent historical quotes include January 2004 at 9.1386 SEK to 1 EUR, January 2003 at 9.1761, January 2002 at 9.2328, September 2001 at 9.6892, January 2001 at 8.8999. Crisis dates for the krona include November 1992, October 1982 and August 1977. Further back in Sweden’s currency history, a Swedish krona that was in circulation from 1873-1931 only survived 58 years. Of the last 100 years, Sweden has had a fixed exchange rate regime for 70 years, not many good times during the 1970-80’s, large fiscal deficits and stagflation during this time. The fixed peg made the krona vulnerable to currency speculators.
Why did the Swedish krona experience continuous exchange depreciation pressure from 2000 to mid 2001? In early July 2001, the central bank ‘Riksbank’ raised interest rates to 4.35 percent, a defensive move but it failed to restore confidence in the currency. The rate increase was prompted by inflationary pressures and most obviously, the krona’s weakness as Sweden had to absorb the global economic slowdown that was taking place in 2001. The floating currency acted as a shock absorber to minimize the harm. During June 2001 alone, the Riksbank used 9 percent of its foreign reserves to help defend the krona of which the bank was unsuccessful.Large capital outflows were taking place out of Sweden due to reforms within the pension program and the relaxation of rules for investment thus allowing monies to be invested abroad. Higher return on capital rates abroad are the main attraction within other jurisdictions that offer lower tax rates unlike the high tax levels of Sweden. In today’s world where over $1.5 trillion USD change hands in global currency markets every day, capital flows determine for the most part which currencies are strong and those that are weak. Of this amount, only about 1.5 percent of this daily exchange represents trade in goods, the rest is strictly the movement of capital across jurisdictions. Investments and rates of return determine a large extent a nation’s currency valuations as the movement of capital in and out of borders will equate a valuation to the currency in question.
Up and until the year-end 2001, the krona was highly correlated to the success of Swedish global giant ‘LM Ericsson’s’ share price, one of the largest wireless and mobile phone network suppliers in the world with 100,000 employees in over 140 countries in 2001. They announced further massive job cuts for 2002-03 by eliminating 20,000 positions, steep losses in 2001 after the hi-tech peak in spring 2000. At present, a technology rebound is in place for Ericsson and other global conglomerates such as Motorola and Nortel Networks although the boom times are over for now unlike the late 1990’s- early 2000. During year 2001-02, the Stockholm Stock exchange is one of the worst performing markets in Europe. Ericsson alone helped to facilitate a decline of 20 percent in the stock market, investment capital dried up at that time as Ericsson’s share price alone fell over 80 percent from the technology market peak in 2000. During May 2001 alone, capital outflows from portfolio shifts due to Ericsson’s share collapse and pension fund reforms reflected in an investment deficit of 7.6 billion SEK, more than double from a year earlier.
CURRENCY FORECAST: stable as Sweden’s economy is surprisingly performing better than the rest of Europe. Interest rates between Sweden and the eurozone reflect a very narrow spread in favour of Sweden. The outlook for the rest of year 2004 and into 2005 is for the krona to remain stable and/or slightly depreciate versus the Euroland euro. What are the full ecomomic implications for Sweden voting NO for remaining outside the eurozone currency, further economic isolation going forward?
The krona has had a great curency move versus the USD up 35 percent since July 2001, this trend is still in motion. In the short term, modest continued appreciation for the SEK against the USD due to the United States fiscal and current account deficit position misalignments. A gradual reversal in capital flows towards Sweden’s benefit, and to Sweden’s positive interest rate differential with those interest rate levels in the United States. However, over the long term the SEK may depreciate or stabilize versus the USD as suggested by krona overvaluation as measured by purchasing power parity. Fortunately for Sweden, there is room on Swedish short term rates to increase to defend the krona if need be. The IMF stated that it supports lower taxes to increase Sweden’s GDP growth hence resulting in greater stability. Sweden currently holds a favorable triple A sovereign credit rating.
UPDATED: February 16, 2004