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What'll It Be, Sweden?

In high summer, Stockholm shakes free of its usual gloom. During the daytime, the bright sun picks out the Gothic spires and pastel facades dotted around the winding shores of the harbor. In the evenings, the bluish light that lasts until midnight confers a magical quality on the Swedish capital. Children swim off rocky islands, and the music of brass bands playing on antique steamboats floats across the water.

The serene setting is beguiling but deceptive. Beneath the surface, a political battle is brewing that could turn nasty as quickly as the first frosts change the birch leaves from green to yellow. On Sept. 14, Sweden will vote on whether to adopt the European single currency. When voters enter the booth, they will face a nail-biting choice about what kind of country they want: a go-it-alone welfare state that relishes its place on Europe's periphery or a full-fledged member of the Brussels-driven experiment to create a unified European state.

And it's not just the Swedes who are wondering which way they will vote. The shock waves could extend well beyond the Nordic zone. A resounding thumbs-down for the euro could be interpreted as a vote of no confidence in the European Central Bank, which is already under fire for being tardy in coming to the rescue of the floundering German economy. British Prime Minister Tony Blair's hopes of shepherding his country into the European Monetary Union (EMU) might also be dashed if the anti-euro contingent in Britain gathers fresh courage from a Swedish rejection.

The "yes" camp argues that Sweden needs to be part of the euro zone if it wants to be a player in Europe. The immediate rewards would be more trade and more investment. What's more, a Sweden bound by the euro's strict budgetary constraints would be less likely to backslide into higher taxes and inflation. The "no" contingent says that the free-floating krona has served Sweden's export-driven economy well: Once in the euro zone, Sweden will no longer have a currency that can adjust quickly to boost the fortunes of exporters such as Volvo and Svenska Cellulosa, the giant paper and forestry concern. Besides, adopting the euro hasn't been much of a boon for Europe's biggest economy, Germany, where growth is stagnating.

So, is it ja or nej? Just a year ago, the yes side was well ahead. But a sluggish euro zone, along with a slowdown at home, has helped shift sentiment sharply. Sagging stock valuations and the collapse of the country's once-dominant telecom-equipment industry will likely hold growth down to around 1% this year. Thus the most recent poll, released by TNS Gallup on July 17, showed the no's with 50% to just 30% for the yes contingent.

The dismal poll numbers have energized the pro-euro camp -- composed primarily of politicians and business leaders. To bolster their case, they have conjured up some doomsday scenarios. A no vote, they warn, will doom Sweden to marginal economic and political status and greatly reduce its prospects for attracting investment. "We are on the outskirts of Europe, and we have to work every day to persuade international companies to invest in our part of the world," says Jacob Wallenberg, chairman of SEB, a Stockholm-based bank. "Being on the outside" would make the job harder, he says.

Not all Swedish businesspeople are avid europhiles. Some ask: Why not wait and see how the euro experiment works for other countries before taking the plunge? After all, Sweden has outperformed the euro zone in recent years. That trend could end if the country were to abandon itself to the ECB's one-size-fits-all monetary policy, argues Per-Olof Eriksson, ex-CEO of steelmaker Sandvik: "[It's] like trying to regulate the temperature of all Swedish homes from the arctic circle to the south with a single thermostat in the center of the country." Such views are carrying more and more weight these days. That's why SEB's market strategists figure there's only a 40% probability of a yes win -- even though the campaign is just picking up steam and the yes side has plenty of big guns and money.

Even the ruling Social Democratic Party is badly divided over the issue. The split was evident at a recent cake-and-coffee party for the press in the courtyard of the central government complex known as Rosenbad. Deputy Prime Minister Margareta Winberg said she sided with her constituents in a northern district where a "huge majority is against." She worries that Sweden could come under pressure to dismantle its cherished welfare state in order to comply with the fiscal targets that underpin the euro. Yet Social Affairs Minister Lars Engqvist dismissed such concerns as "nonsense." He said: "If we want to find solutions to our problems with the elderly and with health care, we need good economic development. It will be more difficult to get this without participating in the EMU."

With the battle lines drawn, the country's CEOs are increasingly being pulled into the fray. Carl-Henric Svanberg, the new CEO of phone giant Ericsson, warns that a no vote might lead Swedish corporations to scale back operations in their home country. He thinks it will be "very dangerous" to have major costs such as research and development billed in a small, volatile currency while sales are largely to dollar and euro customers. But Rune Andersson, chairman of appliance giant Electrolux, claims pro-euro campaigners are overstating the advantages of the euro. "For the multinationals, it is very marginal," he says.

If Sweden does vote yes, the krona will likely be history by 2006. But some changes will be felt immediately. The European Union would likely insist on a slight revaluation of Sweden's currency to shrink the big trade surplus the country is now running with the euro zone. But if the no's win, interest rates would likely rise and the krona weaken, if only temporarily.

A more worrying, though still remote, prospect is that of political upheaval. Swedish Prime Minister Goran Persson, who has been in power since 1996, would probably come under pressure to resign if the no's win by a landslide: A skilled reformer of government spending, Social Democrat Persson has backed the euro strongly. Also, an outright rejection of the euro would bolster the political forces leading the no campaign -- the former communists, the agrarian center party, and the Greens -- in advance of the 2006 elections. That could set the stage for a return to an era of uncontrolled government spending.

Indeed, for Swedish business, the biggest attraction of the euro is that it will help keep free-spending politicians in line. But it's Sweden's voters, not Sweden Inc., that will decide the issue. It could turn into a sizzling September. By Stanley Reed and Ariane Sains, with Andy Reinhardt, in Stockholm

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