Response to Malmberg

 

Bo Malmberg published an op-ed on August 2, 2003 in Dagens Nyheter which argued that “it is not credible to rely on Rose’s research when one argues that membership in the euro-zone will boost Swedish trade … one of the most important lines of reasoning adopted by the yes-campaign can thus be refuted.”  He argues that my study is misleading since most currency unions have been between small and distant countries, whereas Sweden’s potential partners in EMU would be large and near, so that transactions costs (such as those of having different monies) are unimportant.

 

The choice that Sweden faces is a real one.  My modest contribution to the debate is simply to point out that there is good reason to believe that the effect of joining EMU on Sweden’s trade may be surprisingly large.  Mr. Malmberg’s logic has two problems: it is wrong in theory, and wrong in practice.

 

Is it true that trade between small and distant economies is more affected by the costs of having different currencies than large economies that are close by?  Well, consider Nordmalm and Sodermalm, two adjacent suburbs of rich Stockholm.  Malmberg’s argument is that introducing separate currencies for these areas would have little effect, a conclusion that boggles my mind.  Indeed, trade between Nordmalm  and Sodermalm is easier in part because they both use the same money … just as trade between Sweden and EMU would become easier if Sweden joins.

 

Trade between two countries (or cities, or suburbs, or people …) is clearly easier if they use the same money.  The question is: how much?  Luckily the EMU experiment has been going on for four years, and the early results are already in.  Three economists from the Inter-American development bank (Micco, Stein, and Ordońez) have a widely-cited paper that examines the evidence from the first few years of EMU, and compared the trade for those inside EMU to those of outsiders, including Sweden, the UK and Denmark.  They find that those inside the Euro experienced an increase in trade of about 15% relative to outsiders.  Since most of that was before the euro was actually in circulation, and there may be plenty more to come, I conclude that joining would probably have a big long-term effect on Swedish trade.

 

Sweden has an open economy that already does a lot of trade with the Euro zone.  Thus, if accession has even a small effect on boosting Swedish trade with EMU  – as others, including me, believe, and the data bear out –  joining may have large positive effects.  It is also true that accession will have many other benefits and costs, both political and economic.  Still, after a 2500-page analysis even the euro-skeptical British government believes that joining EMU would have a large positive effect on trade.  It is unfair and unwise for the “No” side to ignore the potential benefit of EMU in terms of extra Swedish trade.