Why Sweden does not join ERM II?

Sweden and the Euro

Why Sweden does not join ERM II?

Postby Miguel.mateo on 26 Dec 2008, 08:03

This time I have a question, and I do not know the answer (yet).

It is obvious that once a convergence criteria is met, a country can join the Eurzone and adopt the euro like Slovakia is going to do soon. There could be economic and political reasons why a country does not want to adopt the euro after joining the Eurozone, but in theory they are all pushed to join.

I was wondering about cases like Sweden, that it seems they meet all the convergence criteria, but they still do not want to be part of ERM II; hence they can not adopt the euro (since one of the conditions is to be at least in the ERM II for two years). Is there anything in the Eurozone laws and regulations that forces a country to join ERM II and eventually the Eurozone if all the criteria is met? I know that Denmark and UK have opt-outs clauses because of the moment they joined, but what about all the other countries?

I am just curious how far can we go with the Sweden and Czech cases for example ...

Thanks,
Miguel
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Re: Why Sweden does not join ERM II?

Postby theeuro on 26 Dec 2008, 19:00

Miguel.mateo wrote:This time I have a question, and I do not know the answer (yet).

It is obvious that once a convergence criteria is met, a country can join the Eurzone and adopt the euro like Slovakia is going to do soon. There could be economic and political reasons why a country does not want to adopt the euro after joining the Eurozone, but in theory they are all pushed to join.

I was wondering about cases like Sweden, that it seems they meet all the convergence criteria, but they still do not want to be part of ERM II; hence they can not adopt the euro (since one of the conditions is to be at least in the ERM II for two years). Is there anything in the Eurozone laws and regulations that forces a country to join ERM II and eventually the Eurozone if all the criteria is met? I know that Denmark and UK have opt-outs clauses because of the moment they joined, but what about all the other countries?

I am just curious how far can we go with the Sweden and Czech cases for example ...

Thanks,
Miguel


This is a complicated issue. Sweden is obliged to join EMU at some point in the future unless it withdraws from the EU altogether. There is a scenario which would allow the EU to take Sweden to court for not adopting the Euro, since that is part of the ascension treaty. Similar to the British pound sterling (although under different circumstances, since as you say the UK has an opt out and Sweden does not), the Swedish krona once belonged to the original ERM, but withdrew because the criteria was considered too restrictive. When ERMII was enacted, everyone expected Sweden to re-join, but that never happened.

As of right now, Sweden is acting under the results of a domestic referendum that resulted in a majority rejecting Euro adoption. However, that referendum has no basis in the legal framework of the EU, since the initial referendum concerning EU membership included EMU membership as well (in other words, the Swedish voters said yes to EU membership [i]and[i] EMU membership). Sweden is considered a very special circumstance and has been repeatedly pointed out as an example of what NOT to do with EU membership- especially to the new 2004 EU expansion members.

For having not adopted the Euro with the rest of the EU in 2002, Sweden pays a father large fee to the ECB in order to cover the costs associated with having an additional currency to monitor, since Sweden is a part of the ESCB. ERMII participants do not pay a similar fee, since there is a clear intention of EMU membership- so Denmark, Estonia, Latvia, Lithuania and Slovakia, while still without the Euro (Slovakia until 2009), have said 'yes' to EMU membership and are working to maintain the criteria, thus leaving the ECB without cause to strictly monitor these currencies.

If for any reason ERMII criteria are broken by any of the current ERMII members, the currencies will be thrown out of ERMII and fees will be levied for the necessity of having to effect monetary policy on these currencies by the ECB.

Sweden can skip the ERMII requirement of two years if it can prove that their currency did maintain the convergence criteria for the two years and that all other criteria were maintained for at least 4 years prior to that. With the current economic crisis, it will be difficult even one year from now to say that Sweden had done this consistently and the general feeling is that Sweden should have joined when it had the chance- both inside and outside of Sweden. The regrets are already piling up.

As for Czechia, there are other more fundamental economic reasons that ERMII has not yet been actively pursued. First and foremost ERMII is not viable right now. Inflation is high and rising and with the economic crisis, the timeline from just a year ago for many new EU members could be delayed by up to four or even six years, depending on the time it takes for Europe as a whole to recover from this mess.

Hungary, on the other hand has large portions of its holdings insulated from the economic crisis, so it stands a better chance of ERMII membership sometime in the next year or so.

Iceland was having an economic crisis long before the rest of us were, but their economy will likely be the first to recover since it was the first to go and began the rebuilding and healing process even before the first rumblings of crisis hit the rest of Europe. With their EU membership application expected by June 2009, and their status of candidate country not expected to last that long, we could see Euro adoption by Iceland as soon as 2013- that is of course if all goes well... and we all know that these things very, very rarely go well. The only scenario which went better than expected was that of Slovenia- they worked very hard for it, too.
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Re: Why Sweden does not join ERM II?

Postby Miguel.mateo on 26 Dec 2008, 19:49

As always, very informative and quite interesting, thanks!

Allow me to use your last paragraph to open a new thread, I would like to hear more about Iceland.

Thanks,
Miguel
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