The political economy of monetary unification : The Swedish Euro Referendum of 2003

Abstract

On Sunday September 14, 2003, voters in Sweden went to the polls to answer the question: Do you think that Sweden should introduce the euro as its official currency? Three options existed: Yes, No, and a blank ballot. The voters decided whether to maintain the domestic currency, the krona, which was introduced as the official currency unit in 1873, when Sweden adopted the gold standard, or to replace it with the euro, the currency of 12 of the then 15 member states of the European Union, that came into physical existence in January 2002. The Swedish referendum dealt with a clear-cut choice involving both the currency and the exchange rate regime--a choice different from that facing the voters in any previous referendum in Europe. The No-option implied that Sweden should maintain its domestic currency based on a floating exchange rate combined with inflation targeting by the Riksbank, the Swedish central bank. The Riksbank, which gained independence from the executive authority in the 1990s, announced, at its own initiative, in January 1993, a policy regime of inflation targeting. The bank set a target of a 2 percent annual rate of inflation within a band of plus or minus 1 percentage point to be valid from January 1995. The Yes-alternative implied that Sweden would be a member of the eurosystem by replacing the krona with the euro, at the earliest in 2005-2006. The policy of the European Central Bank would replace the national inflation targeting by the Riksbank. Other countries have held referendums on the Maastricht Treaty and on membership in the EU. However, in these cases the adoption of the new currency, the euro, was one of a larger set of issues on which the voters had to decide upon. The Danish euro referendum in September 2000 is an exception. In Denmark the choice was between adopting the euro or maintaining the fixed exchange rate between the euro and the Danish krone within ERM 2. From a monetary policy point of view, the Danish referendum did not represent much of a real choice. Although the Danish No-vote meant that the domestic currency unit was maintained, Denmark still behaves after the referendum as if it were a member of the euro area. The Swedish referendum is thus different from any previous euro-related referendum in the sense that the two alternatives facing the voters represented two distinctly different exchange rate regimes: either a free float or a monetary union. The referendum was the culmination of a long public debate in which the pros and cons of monetary unification and of a national currency were thoroughly analyzed--although Sweden had no choice but to join according to the EU Treaty. Two government investigations, one published in 1996 and the other in 2002, preceded the referendum, as well as a stream of books, pamphlets, and articles, and a heated public debate in the media and all over Sweden. The Swedish economics profession took a most active part in the exchange of views, reflecting the tradition of strong involvement of economists in public debate. (1) Foreign economists were involved as well. (2) Their articles were translated and they were interviewed in the media. Issues such as the theory of optimum currency areas, central bank independence, the proper balance between monetary and fiscal policies, and the Stability and Growth Pact of the EU became familiar to many voters. In short, the standard textbook arguments for and against membership in a monetary union were part of the messages of the two camps--although given different weights and combined and blended with noneconomic arguments in the campaign. To a researcher in monetary economics the Swedish referendum represents a unique opportunity to examine determinants of the voters' perceptions of the benefits and costs of two monetary regimes: a regime based on a domestic currency with a freely floating exchange rate versus a regime founded on membership in a monetary union with a freely floating exchange rate toward the rest of the world. …

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