How Sweden Steered Clear of the Greece Fiasco

They are taking to the streets in Stockholm, but not with demands. Swedes, this month, ask for no more than a spare patch of grass or dockside granite to bask in the midsummer. The country has never really gone in for protest anyway, and right now there's nothing to protest about. The economy grew at an annual rate of 6.4 percent in the first quarter, after 5.7 percent last year, which was the strongest recovery in the European Union. And Sweden still has its krona.

Though it joined the union in 1995, Sweden never adopted the euro. It still enjoys the advantages of a tariff-free common market. It sends ministers, commissioners, and members of parliament to Brussels and Strasbourg. And right now, Swedes are looking south with relief. While Sweden enjoys monetary independence, Germany—another strong exporter with high-end manufacturing and solid growth—shoulders responsibility for saving Greece and preventing a wider financial collapse among the 16 other countries that use the euro. On June 13, Standard & Poor's gave Greece the world's lowest credit rating, while Greece's debt load reached 143% of gross domestic product, the highest in Europe. Sweden's krona has joined the Swiss franc as a favored currency for traders looking to profit from Germany's expansion while avoiding the European debt crisis. "If you are buying the Swedish krona," says Nick Parsons, head of markets strategy in London at National Australia Bank, "you are getting European growth without Greek politics."

Sweden's doing fine. The EU should find this only slightly less distressing than the chaos in Athens. The European project has always fed off of the momentum of ever more integration. Now Sweden's success offers a counterargument: Less integration works, too. It turns out that sovereignty matters, not just to the euroskeptical fringe but to the Swedes, the people who gave the world ABBA, Ikea, and benign socialism.

Sweden cherishes its modern tradition of neutrality, and the Baltic Sea serves the same function as the English Channel: Sweden keeps a cold, English distance from Europe and has a comfortable sense of its place in the world. Swedes lean on an untranslatable word, Lagom, to describe the fairness, comity, and reserve they practice in public life. They believe their system works, and suspect that continental Europe's doesn't.

Sweden has stayed out of the euro through an elegant legal dance. Denmark and the U.K. negotiated in the early 1990s to opt out of a monetary union, if they chose to. (They did.) When Sweden joined the EU in 1995, it theoretically agreed to the union's goal of a single currency. But the country's economy was still recovering from a domestic banking crisis earlier that decade, and public opinion in Sweden turned against the EU after accession. When the euro launched in 1999, Sweden deliberately failed to fulfill all of the common currency's membership criteria, and held on to its krona.

In 2003, Sweden scheduled a referendum on joining the euro. Swedish industrial organizations and large companies supported monetary union; it would reduce transaction costs and currency risk, and increase the competitiveness of Swedish companies on the Continent. Trade unions opposed the euro, worrying about its effects on wages and, more generally, Sweden's unique social contract. Figures in the country's major political parties were divided on the euro, but Sweden's voters were clear. 56 percent voted against the common currency, with a turnout of 83 percent, higher than the previous year's parliamentary elections. Brussels reacted with paternalism. The European Commission released a statement showing confidence that "the Swedish Government will choose the way forward to keep the euro project alive in Sweden." Romano Prodi, then head of the commission, told the Italian newspaper la Repubblica that Sweden's influence in the union would fade, and that "Sweden was afraid."

If so, there was wisdom in fear. From 2004 to 2007, Sweden averaged annual growth of 3.7 percent, compared with about 2.4 percent for the euro-zone countries. Prime Minister Fredrik Reinfeldt's government, which won a second four-year term last September, has cut income taxes four times since 2006 and has said it may do so again next year.

In the wake of debt crises in Ireland, Greece, Portugal, and now Greece again, support for joining the euro has plummeted further. In May 2010 it stood at 28 percent. One year later it's at 24 percent, and few Swedish politicians are inclined to test the anti-euro mood. Håkan Juholt, the current leader of Sweden's perennially ruling Social Democrats, still supports the unified currency, but with less enthusiasm than in 2003, when he campaigned for a "yes." More important, he knows it's a nonstarter, politically. He told Bloomberg Businessweek on June 9 that there are no plans for a referendum this parliamentary term.

An independent monetary policy, meanwhile, is looking like a pretty good idea. Like the Fed and the European Central Bank, Sweden dropped rates during the crisis, but can tune them now to its expansion, avoiding a housing bubble. The ECB, meanwhile, is stuck trying to cool off Germany without smothering Greece. In a way, Sweden played a dirty trick on Europe. It sends 40 percent of its exports to euro countries and benefits from the reduced transaction costs and increased trade and competition within the euro zone. Dependent on exports, Sweden isn't entirely immune from the rest of the Continent's ills. And yet it stands apart, holding on to its options.

Lars Calmfors, a prominent Swedish economist who advocated for the common currency in 2003, believes the economic arguments for the euro balance out the economic arguments against it. He says that the "yes" camp focused too much on the economic arguments for a common currency, and not enough on the political arguments.

But maybe the political arguments just weren't that compelling. Europe lacks effective anti-federalists. The European Commission, which has the sole right to write legislation, self-selects for European enthusiasts. The European Parliament contains euroskeptics, but they're voted in through nationalist parties, which by definition don't like to work together. The European Council, composed of ministers from each of the states, often works in the national interest of individual member states but cloaks its decisions in praise for the European project. The institutions of the EU often ask whether it's more important to make the union wider (by bringing in more countries) or deeper (by strengthening treaties and institutions). Few voices in Brussels push for narrower or shallower. To understand that city, imagine Washington with no Republican party.

The divide on federalism tends to put political leaders of major parties on one side, and voters on another. The only effective brake on integration comes from national referendums. Europe rumbles ahead, and when voters get the chance to say "no" they often take it, as they did more recently in France, the Netherlands, and Ireland when asked to adopt the European constitution. Sovereignty is more an instinct than a policy, but it's not just for knuckle-draggers. In 2003, a simple "no"—an urge to hold on to Swedish money, Swedish choices, and the Swedish model—turned out to be a sophisticated monetary strategy for the next decade.

In the '90s, European leaders wondered if it was possible to have monetary union without political union. It seemed an abstract question then, but now the answer looks painfully obvious. When the EU is done with Greece, Portugal, and maybe Spain, it will have to take another look at political union. Sweden's euroskepticism wasn't wrong back in 2003. The real trouble is that Europe's "no" votes happen in referendums, when it's too late to fix what the vote is about. Rather than wish the next referendum result away as an inconvenience to be corrected later, the EU will have to figure out how to get people to say "no" more often in Brussels, too.

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