Swedish and Danish Kronas and Interest Rates

This is a partial translation of my original article in Swedish.

Sweden and Denmark have gone different ways when it comes to currencies. Both countries have kronas, as you probably know, and have not joined the euro. But while the Danish krona is pegged to the euro through the European Exchange Rate Mechanism ERM the Swedish krona has no peg. This can be seen from how the Swedish krona, being a small currency, fluctuates much more than the euro against the dollar.As you can see from the graph above one paid about 9.30-9.50 Swedish kronor for a euro until the beginning of September 2008. When the crisis then gained momentum the krona fell against the euro so that one at times had to pay more than 11 kronor for a euro (today we're at 10.76 kronor per euro). This means that the krona lost about 13% against the euro, just because we have a small currency, which is not attractive to investors in a crisis. Theoretically a weak currency should be good for our export industry (Sweden runs a current account surplus) but in a global crisis where world trade is generally diminishing one can question how much this is worth.

The Danish krona however has been stable around 7.45 DKK/EUR all the time - lucky them, one could believe. But the Danes have been hit by something else - look at the diagram below for the rates of the Danish central bank (red), the European Central Bank (blue) and the Swedish central bank (green):Danmarks nationalbank had to raise their rate at the beginning of October to defend the value of the Danish krona against the euro, when ECB and Sweden instead lowered their rates to cushion the effects of the financial crisis. Even though the Danish central bank rate has been lowered in three steps since then, it is still a good deal higher than the ECB rate, which has also been lowered during this period. The higher interest rate climate in Denmark can also be seen when you look at the interbank rates - Danish 3 month CIBOR was at 3.9317% today, while Swedish 3 month STIBOR was at 2.023%. A rather hefty difference, I would say. So this is the price Denmark pays for its stronger currency.

Now voices are being raised in Sweden for us to join the euro. The Swedish small enterprises association's leader Anna-Stina Nordmark Nilsson and professor of economics Harry Flam have written an article each in Sweden's two largest newspapers where they argue for joining the euro. Well, it might not be very good timing to join the euro now, when it seems the euro co-operation itself might break.

Anyway, Sweden cannot join the euro straight away, since a country's currency must be part of the ERM for two years first according to the rules. So the Swedish euro friends will have to wait for the continuing onslaught of the financial crisis before they get what they want.