Selma Lagerlöf graces the 20-kronor note in the currency
that remains valid in Sweden. Far more important is
retention of national control over monetary policy.

Swedes Vote ”NO!” to
European Monetary Union

Rejection raises fundamental questions
about the future of the EU project
Of the European Union's fifteen member-states, two have held referendums on whether or not to join the European Monetary Union (EMU). The people of Denmark have twice voted against joining, most recently in year 2000; and the Swedes rejected the EMU on 14 September 2003 by the extraordinary margin of fourteen percent.

The magnitude of the Swedish "No" vote came as a severe shock to the European establishment. Although opinion polls during the preceding months had found a stable lead of 10-15 percent for the "No" side, past experience indicated that the gap would narrow when it was time to vote; polls conducted during the final week indicated as much. It was also anticipated that the murder of Foreign Minister Anna Lindh, just four days prior to the referendum, would generate a sympathy vote in her honour; she had been the most popular figure in the government and a strong advocate of the EMU (see "Tragic Prelude").

But those expectations were not born out. Rounded off, the final figures were 56 percent against joining, 42 percent in favour, and 2 percent blank votes. Among the voting categories most opposed were women, blue-collar workers and, perhaps most significantly, young people. One very surprising result was that nearly half of business owners and managers voted against, despite intense pressure from the business establishment to vote in favour.

The Swedes' emphatic rejection of the EMU had an immediate impact on two other countries of the European Union (EU). In the United Kingdom, a referendum on the issue is now out of the question for the foreseeable future-- presumably to the dismay of Prime Minister Tony Blair & Co., who have been struggling to persuade their countrymen that joining would be to everyone's advantage. In Denmark, the government is not soon likely to risk yet another rejection by the citizenry.
EMU members


Thus, three important countries along the northern perimeter of the European Union remain outside one of its most central institutions. There would almost certainly be others if the citizens of all EU countries had been allowed to vote on the matter. But their governments did not offer them that choice, a circumstance reflecting the general level of democracy within the EU. The original twelve participants in the monetary union may be joined eventually by up to thirteen new EU member-states, primarily from Central and Eastern Europe (details on EU web site).

There does not appear to be any immediate threat to the EMU's continued existence and, outwardly at least, the results of the Swedish referendum were shrugged off as merely disappointing by leaders of the EU and other member-states. But there is no doubt that they have reason to be concerned. The absence of the three prospering countries in the North, and especially the size of the Swedish "No" vote, have raised fundamental questions about the future of the EMU and of the entire EU project. Among the most crucial unresolved issues are those relating to democracy, sovereignty, and ambitions to transform the EU into a superstate on a par with the USA.
More than coins and notes
The economic advantages of a single currency are obvious and largely undisputed. Tourists no longer have to exchange currencies and pay transaction fees when they move between EMU countries; and businesses trading with other EMU countries do not have to worry about unpredictable import and export prices due to shifts in exchange rates.

However, those advantages appear to be limited. Regarding tourism, an opinion researcher who supervised a survey of over 6500 citizens in eight EMU countries reported that, "They feel it is positive to avoid exchanging currency when travelling to Austria and then on to Italy, for example. But when you ask them how often they make such a journey, most of them say, 'Never'."

The potential trade benefits also appear to be somewhat limited. For one thing, exchange rates can shift in both directions, so that costs and benefits tend to even out over time. In any event, it is an issue that affects only a narrow range of businesses. A national survey conducted in the summer of 2003 found that, of the 820,000 Swedish businesses with less than twenty employees, only three percent were directly involved in exporting, and only one percent exported to the EMU area. Large international companies find it easy to cope with exchange differences. It is primarily medium-sized companies conducting substantial trade with EMU countries which had the most to gain, and they comprise a very small portion of the total.

A serious disadvantage is that the international exchange rate of the euro cannot fluctuate in response to changes in the particular circumstances of each member-state, but only of the EMU as a whole. This means that the prices of an individual country's exports may increase when they ought properly to decline or remain stable, with consequences that can include reduced market shares and increased unemployment. Alternatively, the cost of imports may increase at a time when some of the member-states are ill-prepared to absorb them, leading to problems of inflation.

There are also psychological, cultural and political implications of abandoning such a concrete and ubiquitous symbol of national identity as one's own currency. Such factors are difficult to grasp or measure; but they may have considerable long-term significance, especially for the training of citizens to shift their orientation-- and ultimately their allegiance-- from the nation-state to the European Union.

Opinion surveys conducted among the citizens of EMU member-states in 2002 found that roughly sixty percent agreed with the statement that, "We feel a bit more European than before". According to Prof. Professor Thomas Risse of Berlin's Free University, "If your money talks Europe, that has immense symbolic value.

"My life's work is not complete. A body of law and a common currency are necessary for Europe to acquire its final stability. Before that happens, I cannot leave politics."
-- Napoleon, before  
setting out to
conquer Russia
Far more important and far-reaching, however, is the surrender of monetary policy to the EMU's principal agency, the European Central Bank (ECB) which is located in Frankfurt, Germany. The most powerful instrument of monetary policy is the key interest rate, which determines the cost of borrowing money and is used to stimulate or restrain economic activity.

Here again, the circumstances of the individual member-states vary widely, and an interest rate that may be suitable for some may cause problems for others. It is generally understood, for example, that the EMU interest rate has thus far been too high for Germany, which needs to stimulate its stagnated economy and thereby lower its unemployment rate. Conversely, it is felt that Ireland would benefit from a higher interest rate to dampen an overheated economy that has generated high inflation since the inception of the EMU.

Rigid system
Such problems are aggravated by the rigid rules embedded in the EMU system. One of them requires the ECB to maintain an overall inflation rate of between zero and two percent. The ECB is also supposed to enforce a set of "convergence criteria", including a national debt that does not exceed sixty percent of Gross Domestic Product, and an annual budget deficit no greater than three percent of GDP.

These rules have no discernible basis in fact or theory. They were nailed down years ago in a process that was largely concealed from view, just as the deliberations of the ECB are kept secret-- in contrast to the national Bank of Sweden, which routinely publishes the minutes of its meetings.

Whether the EMU will have the intended effect of accelerating economic growth "in the long run"-- how long has not been specified-- remains to be seen. But there are many doubters, including those who feel that the two-percent ceiling on inflation is too restrictive. Research conducted in the United States, whose economy is frequently cited as a model by European economists and politicians, suggests that a range of 2-4 percent is more appropriate for a modern economy.

Another target of criticism is the EMU "stability pact" by which national budgets are supposed to be kept in surplus or in balance over the course of a business cycle, and never exceed an annual deficit of three percent. The EU's highest official, Romano Prodi has condemned the stability pact as "stupid".

But the ECB is committed to its rules, and is expressly prohibited from concerning itself with anything other than the rate of inflation. No matter how high a country's unemployment rate may climb or how low its financial reserves may fall, the unelected technocrats who administer the ECB must take no notice.

Of course, there are and will continue to be fluctuations in economic activity, unemployment rates and state finances, both within and between the member-states. Since those fluctuations can no longer be dealt with by means of monetary policy, i.e. through changes in interest and exchange rates, countries that experience difficulties are forced to rely upon fiscal policy-- i.e. adjustments in taxes and public expenditures.

Given the prevailing neo-liberal dogma, the effect of the EMU is to place pressure on national governments to limit or reduce public expenditures and to make their labour markets more "flexible", as the terminology goes. This almost invariably translates into reductions of human welfare that include cuts in social benefits and public services, wider income gaps, and weaker protection for workers. Such a process is already under way in Germany, for example.

More generally, the EMU system creates pressure for convergence at all levels-- as confirmed by, among many others, the first and recently retired head of the ECB, Wim Duisenberg of The Netherlands: ”The euro, and particularly the internal market, are functioning as catalysts for closer co-operation in other areas-- economic, social, foreign and defence policies.”

Duisenberg's view was reinforced during the Swedish referendum campaign by former prime minister Carl Bildt of the Conservative Party, who let it be known that the monetary union was merely one step along the path to a more perfect union-- an acknowledgement that was not very helpful to presumptive allies in the "Yes" campaign who were struggling to reassure voters that the EMU was merely a convenient device for making everyone wealthier.
Marginal benefits   
In any event, there is a broad consensus among economic experts that the purely economic advantages of joining the EMU would be marginal, and that the risks involved are very great. The former include the elimination of transaction costs and a potentially slight increase in trade, due to the single currency. The latter include sharp reductions in exports, mass unemployment and economic stagnation-- the consequences of which would vastly outweigh any advantages.

That was the basic conclusion of an expert panel appointed by the Swedish government in 1997 to review the likely economic consequences of joining the EMU. Among other things, it concluded that, "It is not possible to demonstrate that participation in the EU's monetary union would lead to any significant economic benefits due to increased trade and investment."

A similar panel of Danish experts came to much the same conclusion prior to that country's referendum in year 2000.

Among a panel of eight Nobel laureates in economics who debated the issue in 2001, only one stated that the EMU was a viable project. The lone exception had worked as a paid consultant to the ECB (the central bank of the EMU), and his enthusiasm was based primarily on his belief that the monetary union would hasten the collapse of Europe's general-welfare systems, which most citizens want to preserve.

Arne Karlsson, a Swedish market analyst summarized the basic problem as follows: "The EMU would function very well if none of the member-states ever experienced problems with inflation, deflation, natural catastrophes, incompetent governments, unemployment or overheating. And since the EMU is supposed to last forever, none of those things can ever happen again."
Transfer of sovereignty
While the economic advantages of the EMU appear to be uncertain, there is no doubt that joining it would entail a major transfer of power. Due to strong public opinion in all member-states for the preservation of national independence, political leaders have tended to deny the obvious trend toward unification or try to conceal it in a fog of rhetoric. But in recent years— especially since the current occupants of the White House started throwing their imperial weight around with a belligerent, mindless arrogance that is extraordinary even for the United States— talk of building an EU strong enough to balance the power of the USA has become more open and frequent. Such a project would surely require member-states to surrender most or all of what remains of their independence.

In short, the EMU is both a recipient of transferred sovereignty, and a "catalyst" of the ongoing process by which successive layers of national sovereignty are being surrendered to the European Union. That process is essentially preordained, given the goals that have been set for the EU. Indeed, it is difficult to see how the EMU will ever be able to function as intended unless all of its members adopt policies and create conditions that are identical or very similar to each other.

That is certainly not the case at present, as Swedish Prime Minister Göran Persson observed a few years before he made an about-turn and attempted to lead his countrymen into the EMU: "When an unemployed Finnish forest worker can take a job in a Spanish vineyard, then there will be the labour-market mobility that is necessary for a common currency."

European language barriers, alone, present a major obstacle to such a labour market. There are other significant differences between the member-states, including the basic structures of their societies (see "Three Types of European Society"). For these and other reasons, the European Union is decidedly not an "optimal currency area", which is generally regarded as an essential precondition for a functioning monetary union.

Tensions are bound to arise-- they have already done so-- and they are most likely to be resolved, if at all, by resort to a lowest common denominator which will require the "harmonization" of taxes and public services, among other things. Since Sweden is an extreme case in many respects, e.g. its comparatively high levels of general welfare and worker protection, it is one of the countries that would be under the greatest pressure to change-- from the mutual solidarity of the Nordic model to the self-centred ethos of neo-liberalism.

These and related issues were, of course, stressed during the referendum campaign by those opposed to membership in the EMU. Those in favour tended to emphasize alleged economic benefits, including stronger economic growth, more jobs and lower prices. But those benefits have yet to materialize for most current members, and the economies of the three non-participants have been performing better than the EMU as a whole. Moreover, the overwhelming opinion of economic experts was that the potential benefits for Sweden were small, at best, but that the risks were great.

Other arguments offered by various elements of the "Yes" campaign were that, by joining the EMU, Sweden would help to consolidate peace in Europe and to build a strong European Union as a counterweight to the power of the United States. But the outcome of the referendum indicates that none of these arguments was especially convincing, and some of them called attention to the issue of national sovereignty.
Part II . . .  

Part III
Part IV