David McKay

David McKay:

Federalism and European Union, Oxford University Press
Sid. 116-117

In May 1991 Ingvar Carlsson, the Social Democratic Prime Minister, announced that the Swedish krona would be pegged to the ECU (in effect to the Deutschmark). This was the first step in a campaign to control inflation as a prelude to full EU membership. It had become increasingly obvious during the 1980s that Sweden could not maintain its industrial competitiveness, continue to finance an enormous public sector (over 60 per cent of GDP), and enjoy full employment all at the same time. The result was a rapidly increasing budget deficit and rising inflation.

To make matters worse, deregulation during the 1980s had led to a speculative boom in property prices which came to an end following a sharp increase in interest rates in 1991. The resulting crash in values placed the whole banking system in jeopardy and threatened an effective collapse of the country's financial infrastructure.

By 1992 the Social Democrats bad been replaced by a centre-right minority government led by Premier Carl Bildt. Faced with deepening economic crisis, Bildt declared that the only solution to the country's ills was a tight money policy, further cuts in government expenditure, and membership of the EMS. Devaluation was regarded as unacceptable because of its inflationary consequences.

In this context it is not surprising that the Swedish krona came under sustained attack during the currency turmoil of September 1992. Following the first wave of selling, the Swedish central bank raised its marginal lending rate (the overnight rate charged to banks) to 75 per cent and on 16 September to a staggering 500 per cent. For most longer-term-borrowers this translated into an average of around 38 per cent.

This drastic measure was followed by a further austerity package agreed by all the political parties involving expenditure cuts and tax increases equivalent to around 2 per cent of GDP. The agreement also transferred the funding of Sweden's enormously expensive health insurance system from the state to both sides of industry. Parliament approved the package on 30 September by which time the marginal interest rates had fallen to 24 per cent.

In spite of all these efforts, renewed speculation against the krona later in the autumn forced the Bank of Sweden to float the currency on 19 November. This move surprised even the Prime Minister who declared:

“You cannot run an economic policy with a floating exchange rate. European countries cannot be floated against each other. It won't work. I do not believe in this policy.”
(Source: "Sweden Admits Defeat in Battle for Krona", Financial Times, November, 20, 1992)

Capitulation to the markets followed the failure to win all party support for yet a third austerity package presenting the Prime Minister with a choice of devaluing or losing a vote of no confidence in Parliament.

What is interesting about the Swedish case was that at 2 per cent inflation was already very low in 1992. This had been won at a considerable price - industrial production had fallen 15 per cent in three years and unemployment was rising very rapidly.

It is also significant that no change of policy direction accompanied the floating of the krona.

Membership of the EMS and support for Swedish participation in a single currency remained the objectives of all the leading political parties. Near consensus on the restructuring of the Swedish welfare state and of the economy remained. By early 1994 Swedish unemployment had reached 9 per cent - higher even than during the 1930s.

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