Should Sweden join the European banking union?

A planned move by the Nordic region's biggest bank from Sweden to Finland has sparked much soul-searching among Swedes about the wisdom of trying to protect its banks from future crises without eurozone help.

Should Sweden join the European banking union?
The European Central Bank in Frankfurt. Photo: AP Photo/Michael Probst/TT

Although an EU member, Sweden has always declined membership in the eurozone, instead keeping its own currency, running its own monetary policy and its own banking system — which have all been humming along smoothly.

But Nordea's decision to relocate its headquarters to neighbouring Finland, which is in the eurozone, is suddenly raising the pressure on Sweden to join the European banking union which provides a big cushion to member states' banks in case of failures.

READ MORE: Nordea moves headquarters from Sweden to Finland

Such a move would have many advantages and one big downside: Control of Sweden's big banks would shift from Stockholm to the European Central Bank (ECB), a move Swedes have so far rejected because they fear a loss of national sovereignty.

'On a par' with the competition

Nordea is fleeing Stockholm after the government raised by almost 40 percent a special bank tax designed to shield the country from a future financial crisis.

The bank wants to put itself “on a par with its European peers”, Nordea's chairman of the board, Bjorn Wahlroos, argued in announcing the move. Since the 2008 financial crisis, Swedish banks have been required to contribute to a specially-created fund to be used to bail out a bank or financial institution in the event of a collapse.

Meanwhile, the European banking union was created in the wake of the 2010 eurozone crisis. The top banks of its member states are placed under the supervision of the European Central Bank, and the banks pay into a joint fund to cover the cost of a potential bailout.

In July, two months after Nordea announced that it would be moving, Sweden's Financial Markets Minister Per Bolund raised the question of Swedish membership in the banking union, which is open to all European Union members — including those not in the eurozone, like Sweden.

READ ALSO: Swedes don't want to join the euro – now or ever

“If the study we are carrying out clearly indicates that becoming a member would bring great advantages to a country like Sweden, then it would not be excluded” for the country to sign up, he told news agency TT.

Johan Javeus, chief strategist at Swedish bank SEB, said he believed Nordea's move “has increased the likelihood of Sweden eventually deciding to join the banking union”.

“Nordea is also big in Denmark and the Danish government may also decide to join the banking union as a result of Nordea. If so the Swedish branch of Danske Bank will also come under EU supervision, increasing the pressure on Sweden to join the banking union even more,” he told AFP.

Denmark is currently evaluating possible membership in the banking union and is expected to announce its decision in the next two years.

Risk sharing

At a seminar in Stockholm in September, the European Commissioner for Economic and Financial Affairs Pierre Moscovici encouraged Sweden to join the union, which has been operational since 2013.

“You will find greater security, but also greater market access,” he said. “The banking union is a debate you have to have, but no one should force you to join the eurozone institutions,” he said.

But, he added, “you should ask yourself why this happened,” he said, referring to Nordea's decision.

For Per Bolund, one of the advantages of joining the banking union would be sharing the risk of managing “big banks if they run into financial difficulty”. Sweden is expected to study the issue for the next few years.

First step towards the euro ?

When an EU country joins the banking union, supervision of that country's big banks passes from its national authorities to the Frankfurt-based European Central Bank.

“If the Swedish national supervisory authority, or the Swedish government for that matter, has any concerns, it will not be able to take direct action without consulting the European authorities,” explained Aneta Spendzharova, assistant professor at the University of Maastricht.

This loss of independence over its banking institutions is what has so far halted Sweden from joining, as non-eurozone countries have no voice and no vote at the ECB.

READ ALSO: Sweden's economic growth is 'crazy strong': analysts

“You can't ignore the fact that the decision-making can be a little problematic for countries not in the eurozone,” Swedish Finance Minister Madgalena Andersson noted during the seminar with Moscovici.

Spendzharova said meanwhile that if Sweden joins the banking union, “this will create pressure to consider once again joining the eurozone, so that Sweden can have a full seat in the ECB”.

Sweden, which has enjoyed a stable economy and growth for a number of years, has long refused to join the eurozone, primarily because of the heavy influence Germany and other heavyweights have on the ECB.

“The eurozone is an inclusive area, this is an open door,” Moscovici insisted.

By Helene Dauschy

For members


EXPLAINED: What can foreigners in Sweden do about the weak krona?

The Swedish Krona last week hit a record low against the dollar, hammering the international buying power of anyone earning their salaries or holding assets in the currency. We asked Johan Löf at Handelsbanken what they can do.

EXPLAINED: What can foreigners in Sweden do about the weak krona?

How low is the krona right now? 

On Tuesday, September 27th, the krona to dollar exchange rate hit an all-time-low of 11.37, easily beating the previous record low for the currency of 11.04, which it reached at the nadir of the dot com bust back in 2001. At the time of the financial crisis in 2008, a dollar would have got you less than 6 kronor, meaning the currency has almost halved in value in less than 15 years. 

A euro now gets you 10.9 kronor, which is not quite a record, with it briefly topping 11.4 in 2009, but more than it has been for most of the past decade. 

The only major currency which is more or less stable against the krona is the pound, which will now buy about 12.39 kronor, down from 13 in February, but above the levels of around 10.5 the pound hit shortly after the UK voted to leave the European Union. 

Why is the krona worth so little? 

Johan Löf, the head of forecasting at the Handelsbanken bank, told The Local, that the krona always tended to take a hit at times of financial uncertainty. 

“The krona is a relatively small currency much like the Swedish economy is a relatively small economy,” he said. “You could compare it to a small boat sailing the big ocean, so when you don’t go on the course that you thought you were going, it can be a bit of a shaky ride,” he said.

“Right now with financial market conditions being volatile, with a lot of uncertainty and risks, the Swedish krona takes a hit. Investors and various agents of the economy don’t want to hold so much of this smaller currency. Instead, they they go to safe havens like the US dollar.

“So even though there are fundamentals that would suggest that the Swedish kroner will strengthen again over time, for the time being and for some foreseeable future, we think that the krona will remain quite weak.”

How are foreigners living in Sweden affected? 

It very much depends on their individual financial situation: which currency they earn their salary in, which currency they hold assets in, and which currencies they have the highest outgoings in. 

People who live and earn in Sweden, but travel regularly to countries with stronger currencies, or perhaps send remittances back to family at home, are likely be negatively affected, Löf said. 

“It makes you lose purchasing power in these other countries: you get fewer goods and less services for the money that you have in the Swedish currency.”

It’s a similar situation for people or small businesses based in Sweden, who need to, or perhaps only want to, buy goods outside of Sweden. 

On the other hand, for people who have substantial savings abroad in dollars or euros, this might be an opportunity to convert them into kronor for use in Sweden.  

“If you have savings abroad, and you feel the need to use some of those savings, when you then sell your foreign currency to buy Swedish kronor, then you will get more Swedish kronor,” Löf explained. 

What can foreigners living in Sweden do to lessen the impact of a weak krona? 

Change the currency in which you get paid 

The best way to protect against currency exchange shocks is to make sure that you’re paid in the same currency that you spend in, so if you live in Sweden but have a lot of your outgoings abroad, it’s an advantage to be paid in dollars or euros. 

If you’re considering getting a new job, perhaps favour international employers that can pay you in one of the major currencies, or if you work for a big international company, perhaps you can ask to be paid in a different currency. 

Get freelance or part-time work outside of Sweden

If you work as a freelancer, or have some spare time for additional work, consider getting part-time freelance gigs with companies abroad that pay in euros or dollars. The lower the krona sinks, the higher your real wage when you spend in Sweden. 

Time major spending for the best point in the market 

If you have savings in kronor and are considering, for instance, buying a holiday house abroad, it is probably worth waiting until the kronor has strengthened and the Swedish economy is back growing strongly. 

Similarly, if you have savings outside of Sweden in euros or in dollars, and have been planning on buying a property in Sweden, now might be a good time to consider doing so (although it may be worth waiting a few months until interest rate rises have been fully reflected in reduced Swedish property prices).

Get a multiple currency account 

It can be helpful to have an account in multiple currencies, such as those provided by banks such as Wise and Revolut. Keeping any cash in a combination of dollars, euros and kronor can reduce your exposure to any single currency. 

The advantage for foreigners living in Sweden is that you can set up US dollar, Euro and Pound accounts, each with their own local bank number, which you can use to receive and make payments domestically in each country. 

With the krona so low right now, it may not be a good idea to convert all your assets from krona to euros or dollars right now, as the currency is probably more likely to strengthen than weaken over the coming year.