Sweden Debates Embracing The Euro As Its Currency Depreciates And Inflation Rises
"The longer we wait to introduce the euro, the poorer Sweden will be." Johan Pehrson, leader of the Liberal Party of Sweden and Minister of Labor, defended in Swedish politicians are debating the introduction of the euro into the country, despite the country's currency falling and inflation rising. The Liberal Party of Sweden and Minister of Labor, Johan Pehrson, have defended the need to accept community money despite 20 years since a referendum where citizens voted against it. The latest Ipsos survey shows that supporters of the Euro have increased from 19% to over 30%. While those in favor of maintaining the Swedish crown range from 54% to less than 46%. The Swedish Statistics Institute shows that opposition to the euro is at its lowest point since the 2008 crisis. The Swedish krona is at historic lows despite a slight rebound in September. The Riksbank's ability to suppress inflation is limited by concerns about domestic growth and financial stability, according to Monex Europe. However, raising interest rates to combat inflation can hinder domestic growth, and lead to a vicious cycle of further currency weakening.
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“The longer we wait to introduce the euro, the poorer Sweden will be.” Johan Pehrson, leader of the Liberal Party of Sweden and Minister of Labor, defended in this way the need to accept community money when 20 years have passed since the referendum where citizens voted against it. This party is one of the smallest in the entire parliamentary arc, with only 298,000 votes (16 seats) in the last election, but this discourse has spread in recent months throughout Sweden, becoming one of the national debates due to the constant fall of the Swedish crown, the stability of inflation and fears of a more aggressive crisis for the Nordic economy.
In one year, the latest Ipsos survey shows how the supporters of the euro went from 19% to more than 30%. For their part, those in favor of maintaining the Swedish crown range from 54% to less than 46% (some have no opinion on the subject, or prefer not to answer). For the first time in a long time, the Swedish crown has lost the support of more than half of the population and Ipsos is clear why. “Inflation is affecting households and the fact that some of that inflation is imported (due to the weakness of the krona) is affecting the Swedish voters very much.”
For its part, the Swedish Statistics Institute shows what the opposition to the euro is at its lowest point since the crisis of 2008. “The current weakness of the krona is causing increasing problems,” said SEB economist Robert Bergqvist. “Among other things, it lowers the purchasing power of households in Sweden and abroad, while raising interest rates and bond yields.”
The Swedish krona is at historic lows despite a slight rebound in September. Since their peak in October 2021, the exchange rate of the European currency has fallen by more than 15% and, today, one crown is exchanged for 0.085 euros. In addition, experts believe that this is a trend, because the economic challenges that grip Stockholm are different from a Europe that is threatened by an economic slowdown, but there is a lot of room to maintain high interest rates.
“The Riksbank faces the same challenges as other central banks, but more acutely, adding more uncertainty,” explained James Pomeroy, economist at HSBC in his latest report. In this sense, the expert points out that “inflation remains above its target, the currency remains weak and the economy hardly grows in general, with a sharp decrease in consumer spending recently which are quarters.”
Monex Europe also clarified that its currency has a significant impact on the current situation. “The Riksbank’s ability to suppress inflation is largely limited by concerns about domestic growth and financial stability, stemming from the property market and the deteriorating profiles of some of its largest property lenders. It also have a role. in the confidence of investors ” . In that sense, the company that specializes in currencies explains that “the continued weakening has become a problem for the Riksbank, which worsens the inflation rate by making imports, especially energy imports, which more expensive.” However, “raising rates to combat prices hinders domestic growth and increases concerns about financial stability, leading to a vicious cycle of further currency weakening.”
In that sense, the Quant experts explain that “the fact of having your own money and being able to manage your monetary policies in a simpler way is a plus if the policies made create competition .” However, “once you stop being competitive, the currency devalues, imports become more expensive, inflation rises and if you don’t solve these problems, you may enter an unattractive vicious circle, this is what happened. in Sweden. In addition, Quant added that “a country with a deficit in its trade balance and where its main imports are from the countries of the euro zone (Germany and the Netherlands) means that, at the very least, it creates doubts about what is more valuable for. them and In fact, the majority of companies in the country want this change.
Sweden is one of the countries where inflation is the worst. Reaching a ceiling of 12.3% in December 2023, inflation finally seemed to contain itself after the summer, when it finally managed to reduce it to 6.5% in September, compared to 4.3% in the eurozone . Of course, this fall is strongly supported by the general decrease in the prices of energy and fresh food, because the underlying price, which does not take into account these factors, is still at 7.2%.
In this sense, the central bank of the country takes all kinds of measures to fight this inflationary wave and prevent it from continuing. Like the ECB, the Riksbank has made a record increase in interest rates to 4%. In addition to the rise, the monetary institution has taken all kinds of measures to prevent the fluctuations of the Swedish Krona and cut the bleeding in the bud. Just last week, the institution announced the sale of $1.34 billion in hedging operations. Looking to the future in the coming months, it plans to sell 8,000 million dollars and 2,000 million euros. However, the Dutch bank believes that the central bank’s ability to support the currency is limited and it cannot expand the currency itself.
Although they do not officially say that they are ‘intervening’ in the money market, ING explained that “we suspect that it is acting in this way to support its currency in operations that seem less sustainable” and, it which moves “more and more like intervention”. And this is not the only measure, because in recent years they have withdrawn almost all their currency swap positions, from 2,000 million euros in 2021 to 111 million in 2023.
The predictions for the medium term are that the currency will end up hitting the floor, but the economic outlook is not helping. Estimates from Stockholm point to a decline of 0.8% in its GDP for this 2023 and a rebound of 0.6% for 2024. But the truth is that these estimates will be complicated because so far this year its economy has contracted by more than 1.5%. In addition, the latest manufacturing PMI data for the country is at 45 points, in contraction territory, a place where it has been installed since mid-2022.
DanskeBank disagrees with the estimates of other banks, believing that they are too pessimistic and believes that it will achieve a 1.9% rebound in its GDP next year after a decline of only 0.5% in 2023. In addition, They believe that they will be able to return the inflation to the 2% target in the same year. For her part, the Minister of Finance, Elisabeth Svantesson said that “We are suffering an economic winter” after announcing her predictions. Regardless of GDP, the government believes that the CPI will not return below 2% until 2025 and that in 2024 it will be above 3.6%.
In addition, the country encountered an unexpected problem. A real estate crisis due to rising interest rates. The brick sector encountered a change in the ‘price of money’ faster than expected and needed to refinance the billions, which are very vulnerable in a very restrictive environment. Real estate represents a fifth of all loans in the Swedish economy and house prices have fallen by almost 20% since March 2022, at the pace of mortgage increases.
All these problems disturb the price of a currency and, thus, accelerate its fall. In that sense, the transition to the euro will give the country a greater guarantee in the face of situations like the current one and greater stability. The defenders of accepting a currency point out that the countries of the ‘club of 27’ are with them their main commercial relations, representing 63% of all their exports and 69% of their exports.
The problem with the euro
But not everyone agrees with the implementation of the euro. The main unions of the country have bowed themselves categorically in recent days. Some of its experts, such as Daniel Suhonen or Max Jerneck, argue that “the surrender of the Swedish crown gives the freedom to choose our fiscal policy.” The experts continued by adding that “we may be forced to use destructive austerity at a time when more public investment and efforts against unemployment are needed.”
And, although this is suggested as an easy solution, it is a much more complicated path than it seems. “It is true that entering the euro will reduce imported inflation, but it has considerable costs, namely monetary sovereignty and the maintenance of a temporary peg, and, in any case, it will take some time to adoptable.” They explained from Monex Europe. “The sacrifice of monetary sovereignty is likely to result in weaker economic growth,” added, “a currency is not an immediate solution to the current inflation problem. currency to maintain a relationship” .
At the moment the debate seems to be open in Sweden. As long as inflation lasts, at least, more and more Swedes are betting on proclaiming the end of a 150-year-old currency to leave the legal limbo in which it finds itself in Europe. It remains to be seen if Sweden will finally be able to weather the storm of an economic slowdown and, as happened in 2008, buried again in the currency debate between solid economic data and a rebound of the krone.
Konular: Inflation, Sweden