The Dilemma of Keeping the Krona : Business Cycle Synchronisation and a Synthetic Control Analysis of Sweden's Euro Opt-out

Sammanfattning

This paper examines whether the adoption of the euro in 1999 would have altered Sweden's macroeconomic trajectory regarding output and price stability. Two complementary empirical strategies are employed: a business cycle synchronisation analysis using quarterly real GDP for Sweden and the euro area (EA-20) over 1995-2025, and the Synthetic Control Method (SCM) of Abadie and Gardeazabal (2003) and Abadie, Diamond, and Hainmueller (2010, 2015), applied to annual data over 1980-2023. Three detrending filters - Hodrick-Prescott, Christiano-Fitzgerald, and Hamilton - are used to verify robustness, and a counterfactual Sweden is constructed from the eleven founding eurozone members. The synchronisation analysis yields Pearson correlations of 0.769-0.782 and Harding-Pagan concordance indices of 0.73-0.78, all statistically significant at the 1% level under HAC-corrected inference, indicating that Sweden now satisfies the cyclical-alignment criterion of Optimum Currency Area (OCA) theory more clearly than at any earlier point in the Swedish euro debate. The SCM for GDP per capita yields a null treatment effect: Sweden's post/pre-treatment RMSPE ratio of 1.03 ranks eleventh out of twelve in the in-space placebo distribution (implied p-value ≈ 0.92), a result robust to the exclusion of Luxembourg and to an in-time placebo that reassigns treatment to 1990. The inflation model suggests a smoother counterfactual trajectory, but a poor pre-treatment fit and a Germany-dominated donor pool (75.4%) limit the credibility of inference. Taken together, the evidence points to broad macroeconomic indifference rather than a clear cost or benefit of EMU membership, weakening the pillow-effect argument of Calmfors et al. (1996) while providing no positive support for adoption. The case for or against the euro, therefore, rests increasingly on institutional and political-economy considerations that lie beyond the growth-and-stability dimensions examined here.