Northern Light: Does Optimal Currency Area Criteria Explain Nordic Reluctance to Join EMU?

Abstract:     
Finland was the only Nordic country to join the European Monetary Union (EMU) when it began on January 1, 1999. In the autumn of 1994, the voters of Sweden and Finland decided to join the European Union (EU), while those in Norway decided to remain outside. In Denmark, the voters had earlier decided not to join the single currency area but otherwise remain a fully-integrated member of the EU. Denmark, however, maintains the option of having another voter referendum. The government of Sweden decided on a similar course, in essence reneging on the commitment made when voters accepted the Maastricht Treaty, by announcing in Spring 1997 that it would not be among the first group of EU countries forming monetary union.

The article is structured in the following manner. Section 2 critically evaluates the optimal currency literature as a political economy guide to drawing practical inferences about the desirability of joining EMU. Section 3 presents empirical evidence demonstrating that the Nordic countries, with the exception of Denmark, are not as strongly tied to the Germany economy as many other small European nations. Section 4 considers the argument that the ECB structure may be too conservative for the Nordic countries given their policy preferences. Section 5 concludes the paper.

Number of Pages in PDF File: 24

Keywords: European Monetary Union, Macroeconomic policy, Scandinavia

JEL Classification: E42, E44, F33, F36

working papers series