Swedish vote on euro brings more questions to EU discussions

FRANKFURT, Germany -- Sweden's "no" to the euro dents the prestige of Europe's shared currency, already tarnished by powerhouses Germany and France ignoring rules on government spending and the public perception that the euro caused prices to rise.

Euro opponents in Britain and Denmark -- the two other European Union members not using the currency -- took courage from Sunday's vote, which comes as the monetary union struggles to overcome slow growth and lingering public rancor over inflation blamed, rightly or wrongly, on the new money.

The immediate impact of the vote on the existing union is slight, since Sweden would have increased the size of the euro economy by only 3.6 percent. But the refusal by a trade-dependent nation with strong public finances -- exactly the kind of country the euro's founders envisioned as ideal for the joint currency -- was seen by many as a sharp rebuff for the 4 1/2-year-old euro.

Coming after Denmark's 2000 vote against the euro and Britain's decision this year to postpone any referendum, it also sends a cautionary signal to the Eastern European countries slated to be admitted to the EU next year. The 10 eventually will have to decide whether to try to meet the strict economic criteria for joining the euro, or to keep their own currency.

Michael Howard, speaking for Britain's opposition Conservative Party, said Sweden's decision indicated that the euro was a "dead duck" in Britain. Even a euro supporter such as former Europe Minister Keith Vaz, a Labor Party member, called the 56-42 percent 'no' vote "a bitter blow to the pro-euro campaign in Britain."

At the center of the current tension among the 12 euro countries are budget deficits run up by France and Germany, above the agreed-upon 3 percent of gross national product limit -- a limit imposed to keep profligate state spending from boosting inflation and undermining the new currency.

"Getting large governments to stick to the rules they at one time subscribed to -- that's the issue," said economist Julian von Landesberger.

at HVB Group in Munich.

With apparently one rule book for big countries and another for small ones, Swedes feared being forced to cut government spending on their politically popular welfare state, with its extensive public agencies and workers.

"The Swedes are in a special situation," said Daniel Gros, director of the Brussels-based Center for European Policy Studies. "I think the 'no' vote reflects almost exactly the percentage of public sector employees in Sweden."

Gros said he didn't think the Swedish refusal was a major setback for the monetary union.

Beyond the rules controversy, more euro malaise has come from the sluggish economy among the 12 members, which showed zero growth in the second quarter.

Consumers in the euro countries persistently say the new currency caused price increases as merchants rounded up from the old money. Economists say there's some truth to it -- the cost of everyday items such as restaurant meals and haircuts did indeed shoot up, though overall inflation remains moderate at around 2 percent.

Nostalgia for the national currencies that were phased out in early 2002 remains strong, especially in Germany. There, the euro was dubbed the "teuro," a play on the German word "teuer," or expensive.

Advocates of the common currency say that in the long run, the euro will create more jobs and growth by making trade easier. It means travelers don't have to exchange money when crossing borders and companies no longer must deal with fluctuating rates when doing business in other euro countries.

Some supporters, such as former Swedish Prime Minister Carl Bildt, played down the setback to the cause of European integration.

"The damage is significant to Sweden. To the European integration project it's fairly limited," he said.

Romano Prodi, head of the European Commission, was more pessimistic among euro supporters, "It's not only we lost ... but the dimension of the defeat is very large."