The Wall Street Journal

May 23, 2002


Sweden's Euro Readiness
Is Given Mixed Reviews


FRANKFURT -- As Sweden considers holding a referendum on adopting the euro, European institutions are giving the Nordic nation mixed reviews on its readiness for the common currency.

In separate biennial reports published Wednesday, the European Central Bank and the European Union's executive arm awarded Sweden good marks for keeping public finances and inflation in line. But Sweden needs to work on stabilizing the krona's exchange rate and overhauling legislation to make its central bank fully independent, the ECB and commission said.

Sweden is an anomaly in the 15-member EU: It has neither taken on the euro, like 12 of its neighbors; nor has it fully opted out of currency union for now, as have the United Kingdom and Denmark.

In recent months, however, Sweden has come closer to shedding this limbo status. Prime Minister Goran Persson is talking about holding a referendum on entry in 2003, which could lead to membership in 2005. Support for the euro is growing, with a poll earlier this week by the SKOP research institute showing 52% of Swedes favoring the euro. And on Tuesday, the current central-bank governor announced he would resign at the end of this year -- two years before the end of the term. He wants to give a successor time to get settled in office before euro issues heat up.

The ECB and the commission are required every two years to issue reports on progress of euro candidates in meeting the euro entry rules detailed in the Maastricht Treaty. The reports are meant to help heads of state decide whether a country is eligible.

One rule is keeping inflation low, which Sweden has managed. During the two-year period under review, inflation averaged 2.9% and was under the 3.3% of Europe's best inflation performers and "consistent with price stability," the ECB said.

Public finances are also in order. Sweden posted a budget surplus in 2001 that was 4.8% of economic output, a far cry from the 3% deficit that is permitted and that some current euro-area countries are in danger of breaching this year.

Debt, at 55.9% of output in 2001, was also under the treaty's 60% limit, and is about half that of Italy and Belgium, current euro-zone members. The ECB did warn that Sweden should pare down debt before the population ages. Sweden also scored well for keeping long-term interest rates sufficiently low.

Sweden begins to run into problems with its exchange rate. The treaty requires applicants avoid exchange-rate fluctuations. Between May 2000 and September 2001, the krona lost 18% of its value, though it had recovered 8% by the end of last month. Also, Sweden doesn't belong to the exchange-rate mechanism, which stabilizes national currencies against the euro and the commission says is a requirement for joining the euro.

"I regret that Sweden is not yet in a position to participate fully in" economic and monetary union, Pedro Solbes, commissioner for European monetary affairs, said in a statement.

The ECB and the commission also said Swedish legislators must alter laws governing the national central bank to bring them in line with other central banks in the euro zone. One element requires how the bank distributes profit to safeguard its financial independence.

The Swedish government said it would continue to press for adoption of the euro in 2005, despite the warnings. "We should be able to join the euro by 2005," said Anders Ericson, spokesman for the Swedish delegation in Brussels.

-- Daniel Schwammenthal contributed to this article.

Write to G. Thomas Sims at tom.sims@wsj.com1

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Updated May 23, 2002

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