Waiting for the EMU to fly

Date: 26/06/1997

THE attitude of the Nordics to the euro must be a source of great bafflement to their southern cousins.

While French, Italian and Spanish politicians are pulling out every stop they can lay their hands on to qualify for the single currency bloc from January 1999, the Nordic countries are in an enviable position.

Sweden, Denmark and Finland could all join with ease. Nevertheless, two of them will choose to give it a miss, sit outside for a while and see if the EMU takes flight.

The Finns are unique. Unlike their neighbours, they are dead keen to sign along the euro's dotted line, although this is as much to do with abiding and understandable fears of Russia than any monetary ambitions.

As for the Danes and Swedes, they are simply in no hurry.

The attitude of Denmark's 5-million-member awkward squad is well known. Having all but sunk monetary union by their rejection of the Maastricht Treaty in 1992, a significant proportion of Danes are not interested in swapping the krone for the euro at its inception 18 months from now. The only hope for the partisans in favour of the single currency, led by Economic Affairs Minister Mariane Jelved and backed up by most of the economic and foreign policy establishment, is that everything will go well in the first three years of EMU.

Denmark will have no problem meeting the entry requirements if Jelved and her entourage are able to convince the sceptics to join the single currency zone in time for the arrival of euro notes and coins in January 2002.

Inflation is low and the country has been off the European Commission's 'excessive' budget deficit blacklist for two years.

Meeting the requirement that the deficit must be 3&percent; or less of gross domestic product - the dearest wish of so many EMU applicants - will be a breeze. Last year's deficit was worth a mere 1.6&percent; of GDP and, with reasonable economic growth of around 2.5&percent; this year, Copenhagen should quite easily manage to achieve a modest surplus in 1997.

This would not only make joining the euro-zone simple, but would also give the Danes room for fiscal manoeuvre within the fearsome 'stability pact'.

The Swedes have never been quite as Eurosceptical as the Danes, but they are getting there.

At the height of the fighting between Germany's government and its central bank over who had the right to profit from the revaluation of gold reserves, Sweden's ruling Social Democrats came out and said something they had been contemplating for a long time.

The national executive of the SDP issued a recommendation to a special autumn party conference that Sweden should not sign up to the euro in 1999 even if the country met all the required criteria.

Prime Minister Göran Persson claimed the decision had been taken because of the uncertainties surrounding the project thrown up by the election of a Socialist-led government in France and the gold squabble in Germany.

If he had taken a truth drug, he would have confessed that polls showing only 21&percent; of the population in favour of joining from day one were the decisive factor.

Persson faces an election next year and his is far from being the most popular party in the country. As finance minister and then premier, he has pursued an incredibly tight fiscal policy which has squeezed the budget deficit from 12.3&percent; of GDP in 1993 to 3.6&percent; last year.

Figures issued last week show the trend continuing. This year's central government borrowing requirement, which makes up the bulk of the overall budget deficit, is likely to shrink to 1 billion ecu or even to balance. As recently as December, the government had been expecting this account to show a deficit of 3.5 billion ecu.

Last week's forecasts from the Organisation for Economic Cooperation and Development (OECD) made pleasant reading for the Swedish authorities.

According to the OECD's economists, Sweden's public sector deficit will be worth 2.1&percent; of GDP this year and just 0.2&percent; in 1998, while inflation will be 2.0&percent;. Even that most inconvenient of Maastricht Treaty objectives - cutting public debt as a proportion of GDP to within shouting distance of 60&percent; - is within reach.

Unfortunately, fiscal squeezes on this scale (a contraction of the public sector worth 8&percent; of GDP over just three years) do not come free of charge. Unemployment, which accounted for just 3&percent; of the workforce in 1991, now stands at 8&percent;.

With an election approaching, Persson is discovering what Alain Juppé, John Major, George Bush and Paul Keating found out before him: winning the love of the bond markets is rather less important than garnering the affection of voters who fear for their jobs.

Realising this, the Swedish prime minister has put job creation at the forefront of his policy objectives.

Last spring, Persson pledged to halve the unemployment rate to 4&percent; by the end of the century and create 175,000 new jobs over the same period.

But forecasting, as forecasters never tire of telling us, is an inexact science. Since the job pledge was taken, employment has actually shrunk by 50,000 while the rate of unemployment has risen by one percentage point.

The effect on confidence of the frightening shake-out at Electrolux, the world's biggest manufacturer of vacuum cleaners and washing machines, cannot be exaggerated.

Last week, the Swedish company announced a programme to shed 12,000 of its 112,000 workers and close down half of its global production and storage facilities.

A continued problem in Sweden is the pace of wage growth, which rose 6&percent; last year while inflation dipped below 1&percent;. Unable to pass on these extra costs to consumers because of weak demand, companies

'downsize' their workforces.

On the plus side, many of these deals were concluded for three-year periods back in 1992 when the krona underwent a giant devaluation and inflation seemed set to climb. Settlements reached last year were much more modest, although still higher than inflation.

Against this background, the prospects for generating jobs are poor, although this is expected to turn around in 1998. Business confidence is starting to pick up, although manufacturers could hardly be said to be dancing in the streets since the demand is still coming from abroad.

Until the Swedish government - of whatever colour - is able to show evidence of new jobs combined with budgetary discipline, the political establishment will find it hard to sell EMU membership to the public.

Yet market analysts do expect Stockholm to take the plunge before euro notes and coins appear five years from now. Although opinion polls show that just a fifth of the population supports first-day membership, a further 35&percent; backs later entry, with only 30&percent; adamantly opposed.

The Finns take an entirely different view of monetary union, despite having an unemployment rate twice that in Sweden. For understandable historical reasons, they want to be tied hand and foot to western Europe and released forever from Russia's grip. Boasting inflation of around 1&percent;, largely as a result of double-digit unemployment rates, and a budget deficit of 2&percent; of GDP, Finland will have little trouble getting into the euro-zone.

The only problem could come from Sweden. So long as the Swedes stay out, the risk that the krona could depreciate precipitously against the euro and kill off Finnish forestry exports abides.

Nevertheless, the chances of a krona collapse are slim. Both the Danes and the Swedes are much more likely to keep the option of joining open by stabilising their currencies against that of their biggest trading partners rather than allowing them to devalue.