07-02-2024 15:03

Nordea On Your Mind: The euro in the Nordics 2.0

The Nordea On Your Mind team revisits the merits of the euro in the Nordics, which are currently split between the euro and floating currencies. While the original case for having a floating currency has been for a country to be able to use monetary policy to soften the blow from macro shocks, globalisation appears to have changed the equation.
Hands holding a folded euro note

The Nordic countries are currently split between the euro and floating currencies

Finland has used the euro since 1999, and Denmark de facto does as well, through its bilateral peg with the ECB for the Danish krone. Norway and Sweden have had floating currencies since the early 1990s. For small, open economies, exchange rates are a risk on top of their vulnerability to the global macro cycle. Since the 1870s, the Nordic countries have sought to mitigate this through various fixed exchange rate regimes, which since the 1970s have proved increasingly difficult to maintain. Amid the European currency turmoil of 1992-93, they split into two camps: either betting on the euro or letting their currency float.

Nordic attitudes to the euro vary by country and have evolved

The euro is a young currency, introduced in 1999, but is the world's second-biggest and second most traded currency after the US dollar. Support for the euro has been broadly stable in Finland. Denmark has been content with its peg to the euro and the country has nudged closer to the EU by abandoning two of its four Maastricht Treaty opt-outs. Norway enjoys the benefits of the EU common market as an EEA member, and remains opposed to EU membership (which would be a requirement for even considering the euro). Sweden rejected the euro in a 2003 referendum, but has seen public opinion shift after recent Swedish krona weakness.

Globalisation has meant that currency affects economies differently compared with in the past

The classic case for having a floating currency has typically been based on having your own monetary policy, and the currency softening the blow from macro shocks. We note that globalisation seems to have changed the equation. Both exports and imports have soared, with the value of trade flow in each direction now at a level corresponding to ~50% of Nordic GDP, versus ~20-30% in 1990. Trying to have a very different monetary policy from your key trading partners is futile. And we see no compelling evidence that the floating SEK or NOK gave major or lasting support during shocks such as the 2008-09 financial crisis or the COVID pandemic. There is also no clear connection between currency and long-term growth or employment performance, where Norway and Sweden diverge, despite a similar trade-weighted FX impact on their respective economies.

Trade-weighted FX rates, indexed to 1999-01-01 = 100

Source: Macrobond

Trade-weighted FX rate volatility over time (annual vol)

Source: Macrobond

No compelling case for the euro in Norway, but Denmark and Sweden may go for it – in the long term

There is no compelling evidence that currency is a huge factor for macro performance. But it is a risk factor for corporates, and there is both greater visibility and convenience from reducing or eliminating it. We find it hard to imagine Norway abandoning its krone, as its economy is asynchronous with the EU, and eurozone monetary policy accordingly is often unsuitable. Finnish support for the euro is strong, and should in the absence of any extraordinary shocks stay robust. Denmark is unlikely to reconsider the euro in the short term, but may potentially do so in the 2030s. Sweden should fit well into the euro as an Optimal Currency Area. Public opinion has become more supportive of the euro, but it is not an obvious vote magnet in the domestic political arena. It could take a new deep plunge in the Swedish krona before serious consideration is given to introducing the euro from a medium-term perspective.

The corporate perspective and views from Nordea's economists

We wanted to explore how large corporates perceive currency risks both from the euro and the floating currency sides, so we interviewed Tomi Hintikka from Finland's Konecranes, and Daniel Aspenberg and Marcus Alfredson from Volvo Cars in Sweden.

"I think it is fair to say that there has been more focus and attention on FX risk in Volvo Cars because of our Swedish origin, footprint and reporting currency, compared with if we had been based in Continental Europe and reported in euros," said Volvo Cars' Aspenberg.

For the macro perspective on the history and potential currency paths going forward, we interviewed Nordea's economists Helge Pedersen in Denmark, Kjetil Olsen in Norway, Juho Kostiainen in Finland, and Annika Winsth in Sweden.

"There are pros and cons with a floating currency. Being able to conduct your own monetary policy, and having flexibility in terms of wages and prices, can be very helpful for the economy. And on the other hand, a stable exchange rate versus your key trading partners is a major benefit," said Winsth.

About Nordea On Your Mind

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

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