Print

Mail

wiki links

A healthy krona belies euro camp's worries

Defying gloomy predictions after voters rejected the euro two weeks ago, the krona has gone from strength to strength, reflecting Sweden's ruddy economic health, in stark contrast to the sluggish euro zone.

The "yes" camp ahead of the Sept. 14 single currency referendum had warned of capital flight, inflation and higher interest rates if Swedes rejected the euro, but none of this has happened after 56 percent of voters turned down the single currency.

The krona's surprising strength, which has taken it to a three-year high, could now give Swedes some of the key benefits of euro-zone membership, without any of the constraints, analysts said.

"Sweden may get the best of both worlds, keeping its independence and getting the economic benefits of joining the euro zone," James Knightley, European economist at ING Financial Markets, told reporters.

After shaking off a short-lived post-vote blues which took it to 9.20 against the euro, it quickly cut through the key 9.00 level in the days following the referendum, to trade near 8.90 throughout last week, a level not seen since September 2000.

This was all the more remarkable because the euro itself was strengthening against the dollar during the same period.

Analysts said krona-based assets were attractive because of much better growth prospects in Sweden than in the euro zone.

Swedish GDP, set to grow by 1.5 percent this year and by around 2.5 percent next year, easily outperforms the 12-nation zone, where growth will be more like 0.5 percent this year, and below 2.0 percent next year.

And as investors' money floods into Swedish assets, there is every chance interest rate parity between Sweden and the euro zone may be achieved years before anyone thought possible.

"We did not expect another rate cut in Sweden this year, but now that the krona has strengthened, the Swedish central bank may be a little nervous of what this means for the economic recovery which is only just beginning," Knightley said.

The Riksbank's key interest rate stands at 2.75 percent, compared with the European Central Bank's 2.00 percent, and euro supporters had argued the Swedish economy would receive a welcome boost from looser monetary conditions in the euro zone when it joined in 2006.

But ironically this boost could now come much earlier, and markets are abuzz with talk that the Riksbank will slash interest rates over the next few weeks.

Most say rates will come down to ECB levels, but others predict a much deeper cut, to 1.5 percent.

Euro opponents have argued that tying monetary policy into the euro zone would rob Sweden of the key interest rate and currency weapons flexibility needed to combat economic downturns.

Signs that Sweden looks set not only to hold on to its monetary independence, but also enjoy a thriving economy outside the euro zone will further strengthen opposition to the euro in Denmark and Britain, the only other EU members to have declined euro-zone membership so far.

"This shows that there is life outside the euro zone," said Knightley.
This story has been viewed 1997 times.