Lars Calmfors: A Danish solution is a half-measure when it comes to the euro

Adopting Denmark's model of a fixed exchange rate against the euro is a suboptimal solution for Sweden, argues Professor Lars Calmfors. He suggests that if Sweden is considering alternatives to full Eurozone membership, it would be better to "take the whole step in."

Calmfors, a professor emeritus of international economics, notes that the Danish model is sometimes presented as an alternative to full membership, allowing for trade benefits without the fiscal risks of the currency union. However, he contends that a common currency, unlike a fixed exchange rate, eliminates currency risk entirely and yields greater increases in trade and foreign direct investment, according to research.

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But then it is better to take the whole step in.

Sweden has a history of struggling with fixed exchange rates. From the post-war period until 1992, attempts to peg the krona against the dollar, a currency basket, or the D-mark ultimately failed due to rising labor costs. This led to a consensus that fixed rates were not viable for Sweden, leaving a flexible exchange rate with an inflation target or full Euro membership as the main alternatives.

While Denmark has successfully maintained a fixed exchange rate within the European Exchange Rate Mechanism (ERM) since 1987, Calmfors points out that this required stringent fiscal policies and government intervention in wage agreements. He believes Sweden, with its improved wage formation, a more credible Riksbank monetary policy, and greater confidence in responsible fiscal policy, could likely maintain a fixed exchange rate. The crucial question, however, remains whether this is a beneficial option compared to full membership.

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According to research, a common currency has much greater such effects.