Why Sweden has had a good crisis

Stockholm University professor Lars Calmfors explains why Sweden has so far escaped relatively unscathed from the financial crisis.

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As the financial crisis continues to hold much of the world in a vice-like grip, Sweden has become one of few pockets of resistance, where the impact of the recession has been felt less than elsewhere, having learnt vital lessons from its own recent past.

However, although government bail-outs, high unemployment and irresponsible consumption have been more rare in Sweden than in many of its European counterparts, it doesn't mean there is room for complacency just yet, analysts warn.

The banking crisis of the early 90s would look familiar to many in Ireland, the UK and Spain. Sweden’s economy, up until then booming, was overstretched and fell into a downward spiral that only ended when the government stepped in to help out the banks, in return for a part share in the institutions themselves. It was an extreme measure, but one that paid off.

Crucially, the politicians acted swiftly and with the broad support of the electorate. This ongoing consensus, regardless of which party is in power has been a contributing factor in the stability of the economy ever since.

"The lesson from the crisis in the 1990s that the fiscal house must be kept in order is certainly one of the reasons why Sweden has been less badly hit this time round, but there are other factors," says Lars Calmfors, professor of economics at Stockholm University.

Referring to the role of the banks, Calmfors suggests that luck has played as a great a role in avoiding a serious financial crisis. Although the country has undergone a housing boom, the banks did not expose themselves to the same extent as, for example, in the US. That doesn’t mean that they have not taken risks though.

"We haven't had a crisis like those in Ireland, Spain or the UK, partly because the banks here acted more cautiously after the early 1990s crash. Swedish banks did lend recklessly in the Baltic economies, but they just managed to avoid a disaster, mainly because of the small size of those economies. Nobody really understood the risks the banks were taking there at the time and in hindsight there could have been much worse consequences for Swedish banks and thus for the Swedish economy," argues Calmfors.

If luck played its part in the banking sector, the way successive governments more recently have dealt with the issue of government debt is much more down to good management.

"The government has avoided a serious fiscal crisis which is very important. We went into the crisis in 2008 in a stable and reasonable shape with quite a large fiscal surplus and that has given room for manoeuvre. There has been no need for fiscal tightening during the crisis as in many of the Eurozone countries with high government debt," says Calmfors.

Sweden’s decision to stay out of the Eurozone and let the krona float freely has also contributed to the so-called soft landing.

In the 1990s crisis, politicians aiming for stability tried to keep the exchange rate steady. The attempt failed and the krona has been allowed to float ever since. During the recession in 2009-09, that came in handy. As demand for Swedish products fell, so did the demand for the Swedish krona. The exchange rate then depreciated heavily, making products cheaper for foreigners. That helped keep net exports, and thus aggregate demand, up.

"This helped to cushion the effect of the large downturn downturn in 2008-09," argues Calmfors.

However, it is not all bright news. Sweden is traditionally highly dependent on exports, leaving the economy at the mercy of the fluctuations in global markets.
"This time though it will be much tougher because the krona has not depreciated. Instead it has appreciated which will hurt the Swedish exports," says Calmfors.
So the warning signs are there and Sweden is nowhere near out of the woods yet as the economy struggles on several fronts.

"The labour market will be a problem looking ahead," says Calmfors.

"We already have an unemployment problem. Long-term unemployment, which is already high, will certainly rise even more now when output growth falls due to the downturn in the European economy.

It is less clear what will happen to long-term growth. Sweden had a long period of high growth since the crisis in the 1990s; between 1995 and 2006 GDP on average grow annually, by about 1% more each year than in the Eurozone.

"But it is very hard to predict whether we can achieve that kind of growth again after the current downturn. There are not, however, any clear signs that long-term growth will go down substantially, but we just don't know yet,” he adds.

There remains a sense of optimism though, largely down to a combination of people from bankers to politicians and the man and woman on the street, all of whom have contributed to Sweden’s current robust economy.

"What we all learnt in the 1990s is a crucial factor. We had a fiscal situation similar to what Spain, Portugal and the UK have now. We realised that in normal times if you can shore up your finances you have room for manoeuvre later during a recession," says Professor Calmfors.

"It looks like there will be a European downturn, which will inevitably affect Sweden, with unemployment set to go up and GDP will barely grow this year, so we are in recession, but hopefully it will not be that deep," he argues.

The economic crisis in Sweden in the early 1990s is looked back on by many as the cloud with a silver lining, acting, in the opinion of many analysts as a necessary wake-up call. It helped forge a broad political consensus on the need for fiscal discipline that has served Sweden well and which continues to draw admiring glances from abroad. 

Article sponsored by Stockholm University