One foot in, one foot out-Sweden's EU role under scrutiny
STOCKHOLM, Dec 19 (Reuters) - Sweden's decision to stay out of an EU banking union has raised concerns that one of Europe's most dynamic economies will be pushed further to the side as euro zone countries forge closer ties.
Situated at Europe's northern edge and having rejected the euro in a 2003 referendum, Sweden is already a marginal player whose currency is seen as a safe haven from troubles elsewhere in the region.
But it is also appreciated as the EU's seventh largest economy, known for innovation, fiscal prudence and free trade. It has an important financial centre and a respected finance minister who influences Europe's policy debates.
Sweden is now redefining its relationship with Europe, seeking to keep this influence but also take on board domestic euro scepticism that is growing in the face of fast-moving EU integration such as banking union.
"Its political commitment to the EU is being tested," said one senior EU diplomat. "Sweden needs to rethink its relations with the EU, otherwise it risks being more side lined."
Sweden joined the EU in 1995 and has had a comfortable position at Europe's edge. Growth in trade over the last decade has been similar to euro zone insider and neighbour Finland and Finance Minister Anders Borg is a respected shrewd negotiator.
But Sweden has started to find itself increasingly at odds with core euro zone members.
It opted out of the banking union because it feared it would lose control of top banks and its taxpayers would foot the bill of bank rescues elsewhere. It has also criticised the EU budget and plans for a financial transaction tax.
"The euro zone is starting to expand in sectors like banking and financial regulation," said Fredrik Erixon, director of European Centre for International Political Economy in Brussels.
"Sweden is caught between a rock and a hard place," he said.
As the euro zone moves to greater integration, the consequences for countries like Sweden whose ties are loosening could be its marginalisation from having a say in new regulations, from banking issues to debt and fiscal policies.
"On the one hand, it is not prepared to join the euro, but on the other hand the consequences of not joining are being felt as they have not been felt before," Erixon added.
NOT THE UK
Sweden and Britain are increasingly lumped together in headlines as euro sceptics within the EU, helped by the political closeness between Prime Ministers David Cameron and Fredrick Reinfeldt.
Sweden was a vocal hawk along with Britain on EU long term budget negotiations and the two countries are seen pushing Europe on free trade policies rather than regulation.
But the comparison frustrates Swedish government officials, and European integration ideals still run deep in Sweden.
"There's big differences between Sweden and Britain. Reinfeldt wants a deeper relation with the EU countries," said Knut Hallberg, an analyst at Swedbank.
Indeed, the government likes to point to its achievements in pro-European policies over issues like the environment, foreign policy and free trade. It also, unlike Britain, signed up to the fiscal compact adopted by 25 EU countries earlier this year.
Some analysts have noted signs of scepticism about Europe within Sweden. It may be low compared with British levels, but enough to make the EU an increasing focus of political debate.
In July, Borg told Reuters "Europe is becoming less important for us, and we must consciously redirect ourselves."
And he suggested Greece should leave the eurozone, leading to criticism he was playing up to Swedish voters and also poured scorn over Portugal for failing to seek prompt aid.
"Maybe he wanted to make himself popular in domestic politics," s aid Magdalena Andersson, economic policy spokesperson for the opposition Social Democrats and tipped as finance minister if the centre-left wins elections in 2014.
"But getting respect within Sweden may risk losing respect within the EU," Andersson added. "It is not all that obvious what the Swedish vision on EU cooperation is."
Participation in the euro and in the banking union are likely to return as major questions for Sweden.
Swedish government officials are adamant that they are keen to play a constructive role in Europe but just could not yet stomach a banking union.
The government was worried about jurisdiction over the country's banks - Nordea, Handelsbanken, Swedbank and SEB - some of which have large operations in euro zone countries.
"With the banking union we believe a wait-and-see attitude makes sense," said one senior government official, who asked to remain anonymous.
"Sweden is concerned that integration may be moving too fast."
Some observers believe Sweden will one day revisit euro membership despite a November poll showing 82 percent of Swedes would vote no to adopting the euro - an historic low. The poll also showed a decline in support for EU membership to 45 percent, the lowest level since 2006.
"In the grand scheme of things, it is not feasible to stay with one foot in and one foot out," said the EU diplomat. "It does not mean that they have to adopt the euro immediately, but on the Swedish side they need to show a more constructive role."
"The situation of the eurozone is too unstable for them to think of joining. But once stability returns, the debate in Sweden about joining the euro will return."