Euro disaster: Currency almost destroyed Sweden’s economy and political system

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Sweden’s gross domestic product (GDP) tumbled 8.6 percent in the second quarter of the year, according to an estimate by the country’s statistics office released on Wednesday. The record decline was significantly worse than even the fourth quarter of 2008 when Sweden recorded a fall of 3.8 percent during the global financial crisis. However, the economy of the Nordic country still outperformed many of its European counterparts over the three-month period through to the end of June.

It follows the government’s decision not to impose a full-scale lockdown to curb the spread of the coronavirus.

David Oxley, a senior Europe economist at Capital Economics, told CNBC that Sweden’s sharp GDP contraction “confirms that it has not been immune to COVID-19, despite the government’s well-documented light-touch lockdown.”

He added: “Nonetheless, the economic crunch over the first half of the year was in a different league entirely to the horror shows in southern Europe,” he added.

The eurozone’s economy contracted by 12.1 percent in the second quarter when compared to the previous quarter and by 11.9 percent across the broader EU.

The Spanish economy recorded the sharpest decline among member states when compared to the previous quarter, falling 18.5 percent.

Sweden could have found itself even in a worse situation, though; had the country joined the euro area.

In 1995 book “The Rotten Heart of Europe,” British economist Bernard Connolly recalled how the monetary union almost destroyed the nordic country in the Nineties.

He wrote: “Sweden had not joined the European Rate Mechanism (ERM), but foolishly pegged its currency to the European Currency Unit (ECU).”

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The ECU was the official monetary unit of the European Monetary System (EMS) before it was replaced by the euro.

The value of the ECU was used to determine the exchange rates and reserves among the members of the EMS, but it was always an accounting unit rather than a real currency.

Mr Connolly continued: “Sweden had undertaken a period of rapid financial liberalisation and credit expansion.

“When the country was hit by the perverse mechanism just related, it’s banking system foundered.

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“Indeed, it was the incipient collapse of the banking system that forced the country’s central bank to abandon its ‘shock-and-awe’ attempts (including raising overnight interest rates to 500 percent) to avoid being forced off the ECU beg.

“The decision to abandon the ECU peg saved Sweden’s financial system and its economy and arguably also saved its political system.

“It was only because Sweden could allow its currency to depreciate very sharply (much to the annoyance, and worse, of France in particular) that growth could resume, making it feasible for the government to recapitalise the banking system without bankrupting itself.”

Mr Connolly concluded: “At all events, Sweden has since never looked back.

“An attempt by the political class to do so and join the monetary union was resoundingly defeated by the Swedish people in the 2003 referendum.”

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