Swedish companies will join the euro-zone from start
Birgitta Gunnarsson *
While there was previously much doubt that Sweden would meet the convergence criteria in order to qualify for the first round, the performance of the Swedish economy, now indicates that this might be the case after all, depending on how the debt ratio and the ERM-criterion will be interpreted, when the final selection of participants is made in spring 1998.The debt ratio will certainly be too high, but is moving in the right direction. When it comes to the ERM-criterion, Sweden's refusal to join the ERM so far, may prove to be the convenient formal excuse for not naming Sweden among the qualified, since there is no opt out clause for Sweden to the Maastricht Treaty, as is the case for Britain and Denmark.
A WAIT-AND-SEE POLICY
On the domestic political scene this counts for little in any case. The social democratic party, forming the present minority government, has now made it clear that it is not going to opt for a Swedish participation from 1999. Even if it is so far only a decision taken by the executive committee of the party - the issue has still to be debated by the party congress and by the parliament - the chances of a Swedish yes to EMU now are practically nil, unless something exceptional happens on the European scene.
The fact that neighbouring Finland has expressed a strong will to be among the first has not made any impact on the Swedish opinion, in spite of otherwise close links and strong similarities in industrial structure. Chased by vociferous euro sceptic groupings, demanding yet another referendum, and squeezed between conflicting views within its own party, the government's political manoeuvring now seems to be aimed at steering the issue through congress and parliament and past the general election in early September 1998, avoiding a definite no on the way. Hence the wait-and-see policy.
THE CORPORATE SECTOR IN FAVOUR OF EMU
When the Swedish corporate sector and its organisations began looking in depth into the issue of EMU and its possible consequences, the picture that emerged spoke strongly in favour of a Swedish participation from the beginning. On the macroeconomic level the road to EMU would mean improved policies and increased stability in the regulatory frameworks. It would also mean a definite end to a long tradition of devaluation policy, which in turn would create an increased and much needed pressure for structural change in the economy.
One could also draw the conclusions that EMU would mean an increase in international trade and favour exports, especially for small firms. It would also provide access for companies to a more efficient capital market, lower interest rates and, of course, diminish exchange rate risks and other costs related to cross-border payments. Thus, after careful consideration, the vast majority of Swedish enterprises have expressed a strong support for a participation in the EMU as early as possible.
Now that this possibility seems to be out of reach, it is clear all the same that for the Swedish corporate sector there could be no wait-and-see approach. Taking into account the structure of Swedish industry, it is obvious that even if Sweden as a country remains outside the euro-zone from the start, the introduction of the euro would affect companies to a much greater extent than by just adding another currency to the trading portfolio.
A STRONG DEPENDENCE ON EXPORT
Sweden's export dependence is a well known fact. This is very much the case for the big multinational companies which account for some 70 percent of Swedish export (when referring to the big multinationals in Sweden this generally means some 125 companies). More than two thirds of their production in Sweden is exported. But what is perhaps more important: well over half of their production today takes place in other countries. This means that almost 90 percent of their customers are to be found outside of Sweden. The same is true for more than 52 percent of the big 125īs total assets and around two thirds of their total workforce.
But even the smaller firms show a surprisingly large dependence on exports. According to one survey as many as 33 percent of firms with 2 - 19 employees, could be characterized as export dependant.
Accordingly, when the Federation of Swedish Industries did a report in 1996 on the consequences of EMU for Swedish industry, one of the most significant conclusions was, that a Swedish participation in the EMU would be most beneficiary to the small and medium sized companies, whereas for the big multinationals the Swedish decision, whether yes or no, would not be of such a great importance. Most of them would join, or rather, already be part of the euro-zone in any case.
So when Sweden decides to refrain from EMU-participation, it will be the small and medium sized companies that will bear the most negative consequences of this dissociation from an important part of the common market. They will generally lack production facilities in the euro-zone. They more often than not lack the capacity to handle exchange rate risks on their own and they don't have access to international capital markets. The price will be continued exchange rate risks an transaction cost, higher interest rates, and thereby higher costs than for their competitors. This will put unnecessary and unwanted restraints on growth in precisely those companies on which so much hope has been pinned when it comes to creating new jobs for the future. This sad fact has also been stressed emphatically to the Swedish government after the wait-and-see decision, from all levels of the business world.
On the other hand, the fact that the big multinationals are in the position that they can join the euro-zone on their own, also touches upon a very sensitive debate between the government and business in recent months. That is, a debate on the business climate in Sweden in general. The possibility that big companies might decide to leave Sweden, or move headquarters, R&D or parts of production, has been perceived, not as a fact based on today's corporate reality, but more as empty threats or even as attempts of blackmailing. With the third phase of EMU in place and Sweden not in, this may prove to be not such an empty threat after all. Companies will necessarily have to take steps to compensate for the negative effects of Sweden remaining outside the euro-zone.
PREPARATIONS UNDER WAY
The political situation being as it is, there is not much "campaigning" to be expected in favour of the EMU at present. But preparations within the companies are gaining momentum and was given a considerable impetus by an activity organized by the Confederation of Swedish Employers and the Federation of Swedish Industries last winter.
In the beginning this activity took the form of a series of hearings, devoted to practically all aspects of the EMU, and its likely impact on the various sectors of economic life. From these hearings one could conclude, firstly that preparations were already under way in many companies and institutions, albeit mostly on an analytic stage and secondly, out of the discussions and exchange of experience grew the insight of the sweeping effects on practically all sides of economic activity, no matter if Sweden would be among the "ins" or the "outs".
It was of course not so surprising to learn that the banks were in the lead in terms of preparations. For them the competitive disadvantage of a Swedish opt out will probably also be among the most strongly felt. This is not only true in terms of more expensive funding, but also, among other things, because they will probably have to offer euro-accounts and other services in euro to customers anyway. These apparent disadvantages in relation to continental competitors are most likely factors that have speeded up recent restructuring in the sector and encouraged already decided or ongoing mergers among the banks and the mortgage institutes.
The Stockholm Stock Exchange will find itself in a similar position, and has acknowledged the need to be able to offer companies the possibility of quoting in euro. With this follows that also the clearing system will have to adjust to the disadvantage of having to operate with double currencies in the foreseeable future.
The multinational companies are facing the same questions and the same need for strategic planning as their continental counterparts: should they, and in that case when, adopt the euro as a unit of account, store of value and means of payment? Should they shift to euro as a company and a remuneration currency? A number of companies, mainly continentally owned subsidiaries in Sweden have indicated that the will do so already from the 1st of January 1999. Some companies are most certainly also contemplating a shift of production from Sweden to the subsidiaries in the euro-zone.
But also the domestic sectors of the economy are beginning to realize the need for planning, not least against the background that the euro probably, with time, will be in wide use within the country anyway.
The tangible result of the above mentioned workshops is a recently published book, "Your Company and the Euro". The idea is that it should be used as an incitement and basis for studies and discussions, especially in small and medium sized companies, on the effects of the euro on their own operation. The book was launched with a big seminar in Stockholm in collaboration with the Association for the Monetary Union of Europe, and has already attracted a great interest and demand. When the referendum-campaign was fought in 1994, for a Swedish yes to membership in the EU, one of the lessons learned was that it was very much on a company level that the battle was won. The often abstract and distant character of the European integration needs to be made concrete by bringing it down to the micro- and grass root level. It is normally not until you see, in your own accounts or on your own pay check the gains and losses of one alternative or the other, that you can grasp the magnitude of Sweden's dependence on Europe and on the outside world, and thereby also have a good basis for a rational decision. In due time, I am sure, this approach is going to shift the mood on EMU participation as it did on EU membership.