The krona’s current weakness is leading to growing problems. Among other things, it drains household purchasing power in Sweden and abroad while pushing up interest rates and bond yields. But the krona’s weakness is a bad argument for abandoning it. We need to understand the driving forces behind this weakness. Switching currency has both an economic and a political dimension. Abandoning the krona is a multifaceted issue, with both pluses and minuses that require new analyses.
Sweden held a euro referendum 20 years ago, on 14 September 2003. With an 83 per cent turnout, the result was clear: 55.9 per cent of Swedes said “No” to switching from the krona to the euro and 42.0 per cent said “Yes”, with 2.1 per cent blank ballots. At that time, the krona was trading at around 9 kronor per euro. Today, it is trading at a record low against the euro of just below 12 kronor. That is a significant decline in value: 25 per cent.
One interpretation of the 2003 referendum outcome is that economic arguments, not political ones, were decisive when the Swedes chose to keep the krona. For example, Swedish companies would not have to deal with FX transaction costs between kronor and euros, but the voters apparently saw no good reason to believe that the euro could provide Sweden with faster growth, lower unemployment or stronger public finances.
Since then, the world and Sweden have gone through two highly dramatic decades. The 2008-2009 global financial crisis left deep scars in economies and financial systems. After the Lehman Brothers collapse, euro area countries faced severe fiscal debt crises in 2009-2012 that called into question the future of the euro. In June 2016, the British voted to leave the EU. In 2020 the Covid pandemic hit with full force and the world came to a halt. At this writing, the world is dealing with a war in Europe, the emergence of a new security policy order and an accelerating climate crisis.
Opposition to the euro has gradually diminished, according to the Statistics Sweden (SCB) twice-yearly surveys. Swedish opposition to the euro was strongest in 2012, when more than 80 per cent said “No”. According to SCB’s latest poll in May, the figure was down to 50 per cent, while 31 per cent were prepared to adopt the euro. The “No-Yes” gap had thus shrunk to about 19 percentage points.
We are now publishing a late summer follow-up survey, given continued krona weakness and how it affects household travel budgets and imported inflation and, by extension, the Riksbank’s interest rate decisions. We note that opposition to the euro has fallen further, while support has risen. “Don’t know” responses have also increased. In a referendum today on replacing the krona, the “No” side would attract 41.9 per cent and the “Yes” side 34.0, with 24.1 per cent uncertain. The “No-Yes” gap has thus narrowed from 19 percentage points in May to less than 8 in September.
Weakening krona a growing problem for Sweden
The weakening trend for the krona is a growing problem for Sweden. Granted that a weak krona is good for Sweden as a net exporter and increases the value of our external net worth, since our foreign assets (SEK 21.327 tr) exceed our liabilities (SEK 17.414 tr). But the krona is about 20 per cent undervalued against the euro; it should theoretically be worth about SEK 9.50 if we factor in how strong the balance sheet of “AB Sweden” is in practice. Krona weakness causes problems on several levels: (1) an erosion of household purchasing power in Sweden and abroad, (2) increased pressure on the Riksbank to raise its policy rate, (3) reduced pressure for change in sectors exposed to competition.
We have identified several explanations for the krona’s weakness in the past decade (see, for example, the theme article “The krona and flows” in Nordic Outlook, August 2023).
In the short term, it is reasonable for the krona to be weak due to various risk premiums in a troubled world and given a Swedish real estate sector that is challenged by higher interest rates. Because the US dollar normally moves in 10-year trends – the latest being upward– the krona is falling against the USD and the EUR. We also note that foreign trend-driving model funds are sellers of SEK. Aside from more structural flow forces, pension fund managers are seeking green and digital/physical infrastructure investments abroad (due to a shortage of investment options in Sweden) and Swedish multinational industrials must relocate operations and build up new production units and value chains in a new geopolitical landscape.
Sweden has had a strong track record over the past two decades without the euro. Its GDP growth has been nearly twice that of the euro area. Swedish inflation has largely followed global patterns and euro area inflation performance. The Riksbank’s policy rate has thus followed the globalisation of inflation and the structural decline in the natural interest rate rather than, for example, the European Central Bank (ECB). The world’s appetite for Swedish manufactures and investments in Sweden does not seem to have been affected by the fact that we have been outside the euro area.
Sweden’s public debt trend continues to stand out. After the Swedish economic crisis of the 1990s, which led to major changes in both fiscal and monetary policy, Sweden’s public debt has been declining. Since the euro referendum, it has fallen from 50 to just over 30 per cent of GDP. Over the same period, euro area public debt has grown from 70 to 90 per cent of GDP. It is outside the scope of this article to decide whether the downturn in Swedish public debt is optimal in the long term. But Swedish household debt has grown in an undesirable and potentially destabilising way, which may increase the need for our own “Swedish” monetary policy – not an ECB policy – over the next few years.
High public debt a challenge for the euro
The euro area’s high public debt is a challenge for the euro, especially when interest rates and yields have risen. Economic and monetary cooperation is viewed as incomplete as long as a fiscal union is not in place. To some extent, the ECB’s huge purchases of government securities have become a substitute for establishing a fiscal union. But there is a risk of future euro instability when centralised monetary policy confronts decentralised fiscal policy. Introducing the euro in Sweden is both about what we will commit ourselves to and get, and about what we will give up (its own monetary policy, meaning that its influence over this policy will shrink from 100 per cent to 4 per cent – equivalent to the weight of Sweden’s GDP in the enlarged euro area.
The euro debate has gained momentum, as our new poll show, but the road ahead is bumpy. Sweden’s existing EU membership makes it natural to eventually discuss switching to the euro. There is no requirement that a new referendum be held before introducing the euro, but we believe the public is expecting one. The euro issue is not a priority for the parties in the Swedish Parliament, except the Liberals. Nor are policymakers expected to pursue the issue until support for the euro has increased sufficiently and shows long-term stability. In terms of confidence, Sweden cannot afford to say “No” to the euro once again, since this could damage our important EU membership.
Epilogue – we can draw several conclusions: (1) there is no doubt that today’s weak Swedish krona is a problem – for the economy, households and companies – but this may be transitory if all krona forecasts prove correct; (2) a weak krona is a bad argument for switching currency; (3) a new euro decision needs to weigh economic factors against political ones, and it is far from an easy analysis or an easy decision to make; (4) two decades have passed since Sweden’s euro referendum and we are on our way into a new world: the euro issue certainly deserves both new analyses and new debates – but no hasty decisions.