A Blow to the Euro?

Sweden's no vote may alter the path of EU integration

Two days after Swedish voters decisively rejected the euro, Rune Andersson, one of the few top business leaders in the "no" camp, savored what may prove to be a landmark victory. "This is evidence of the Swedish people's common sense and independence," said the Electrolux Chairman. "We had a fraction of the yes side's resources and few political heavyweights on our side."

The 14-point margin of victory for the no's confounded the pollsters and left Swedish politics in tatters. It also sent shockwaves across Europe. Swedish Prime Minister Göran Persson, who staked loads of political capital on adoption of the European single currency, now finds himself in his worst political crisis since he took office in 1996. Persson has lost his most valuable ally and apparent successor, Foreign Minister Anna Lindh, who was fatally stabbed in a Stockholm department store four days before the vote. His own Social Democratic Party is badly split. And the centerpiece of his economic strategy -- boosting trade and investment by inserting Sweden firmly into the European Union -- looks unattainable for years. "There will have to be a tremendous change in the political and economic circumstances" before Sweden's leadership dares to hold another euro referendum, says Klas Eklund, chief economist at SEB, a Stockholm bank.

The Swedish vote also comes as an unwelcome message for Europe's leaders, although few are owning up to its significance. Even as Europe's nabobs are putting the final touches on a draft constitution designed to create a political and economic union that would eventually rival the U.S, the Swedish nej signaled that fissures over the single currency and other matters are likely to persist and even intensify. The humiliating defeat may give a boost to no-campaigners in the other euro holdouts, Britain and Denmark. While some think the Swedish vote will slow the pace of European integration, others think the French and the Germans will press on -- steamrolling the doubters. "The Germans and the French may now go ahead and do what they want without consulting the less reliable Europeans," says Katinka Barysch, chief economist at the Center for European Reform, a London think tank.

Indeed, Sweden's rejection of the euro may be a signal that the European integration train is breaking up into different segments. Core players such as Germany and France will continue to drive the process, even if they feel free to flout the EU's budget rules. Then there are the 10 countries from Eastern Europe, the Baltics, and the Mediterranean that are scheduled to join the EU next May and are ecstatic about being admitted to the club. It's no small irony that on the same day that Swedes snubbed the euro, Estonians voted overwhelmingly to join the EU. Bringing up the rear are the outliers, such as Britain and Sweden, where voters are increasingly wary about relinquishing control of economic and social policies.

Resistance to European integration could widen beyond the single currency. Unless Europe's political bosses do a better job of selling the benefits of their project, they may hit speed bumps in getting their constitution ratified. They already face potentially damaging plebiscites in Ireland and Denmark, whose national laws mandate that the new blueprint be put to a vote. And Britons are now pressing Prime Minister Tony Blair to do the same. Though an avowed europhile, Blair now looks unlikely to chance a referendum on the euro for at least three years. The Swedish vote was "a shot across the bow here," says Michael Hughes, chief investment officer at Baring Asset Management in London.

In Sweden the pros of the single currency were given a thorough airing and were found wanting. The business and political elite argued that the Swedish economy would suffer if the country opted out of the 12-member euro club. But with the outsiders -- Britain, Sweden, and Denmark -- outperforming the insiders, such claims fell flat. One Swede no-voter, retired librarian Doris Olson, 76, dismissed the often-cited threat of companies abandoning Sweden en masse as "empty talk."

German and French politicians seem likely to shrug off the Swedish result as a protest from a small country that has long embraced neutrality, shunning international alliances such as NATO. But Berlin and Paris have themselves to blame for some of the EU's poor image. Both countries are flouting the so-called Growth & Stability Pact, which stipulates that all euro zone members keep their budget deficits below 3% of gross domestic product. France has also flagrantly transgressed EU competition rules with its $3.2 billion bailout of engineering group Alstom, a major competitor of Swedish-Swiss conglomerate ABB Ltd. Swedish Finance Minister Bosse Ringholm warned, on the eve of the referendum, that France would have "a certain responsibility" if Swedes rejected the euro.

It's not just Sweden that's miffed. In Holland, which has stuck to the EU rules, Finance Minister Gerrit Zalm is threatening legal action if the European Commission doesn't bring the French to heel.

All this fractiousness contributed to Swedish voters' judgment that adopting the single currency at this stage was an unnecessary risk. After all, the country is currently running both a budget and a current-account surplus. And analysts expect GDP growth this year to come in at about 1.5%, well above the euro zone's 0.5%.

Nonetheless, some high-profile businesspeople warn that over the longer term, staying out of the euro may crimp Swedish prospects. "Investors will look cautiously at this country," says Jacob Wallenberg, chairman of SEB and a key figure in the powerful Wallenberg industrial clan. To offset some of the negative consequences of the vote, Persson promised at the opening of Parliament on Sept. 16 to review corporate taxes to ensure that domestic companies can compete on an equal footing with their euro zone rivals. But his government's ability to push through pro-business reforms may have been compromised by the referendum, which has strengthened the Left and the Greens, parties that campaigned for a "no" vote. In the coming years, Swedes will learn whether there will be a price to pay for their vaunted independence.

By Stanley Reed in London, with Ariane Sains in Stockholm, David Fairlamb in Frankfurt, and Carol Matlack in Paris

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