Investors looking for opportunities in Sweden should stay hopeful. It seems that Sweden will cope well with the economic downturn. According to several economists, the national currency and a sound financial system suggest a relatively short recession.
Minister for finance Anders Borg is optimistic about Sweden's future financial situation. Photo: Marc Femenia/Scanpix
Sweden’s minister for finance Anders Borg told the Parliament in April 2008 that he was not concerned by events abroad.
“I’m relatively optimistic about our economic future,” he said. “Sweden will manage this recession better than most other countries, primarily thanks to our large budget surplus.”
Borg hasn’t changed his opinion since, at least not officially. Is he right not to? Most analysts think so. Hans Tson Söderström, professor of political economics at the prestigious Stockholm School of Economics (Handelshögskolan), is pessimistic about Europe's economic prospects, but optimistic about Sweden's.
“Sweden actually enjoys a few advantages,” Tson Söderström says. “Our public finances and our financial system are sound, and the existence of the floating national currency, the krona, helps too.”
No sub-prime mortgages in Sweden
In many respects, Sweden's economic health is the opposite to that of the United States. The US economy is failing, taking the world down with it. For several years US politicians encouraged banks to grant housing mortgages to low-income families, so-called sub-prime lending. Things started spiraling out of control when tens of thousands of families defaulted on their loans, causing huge losses for many banks. Meanwhile, the US government has stacked up large budget deficits and a growing national debt.
Professor of political economics Hans Tson Söderström agrees with Borg that Sweden's financial system is sound. Photo: Elisabeth Ohlsson Wallin/www.hhs.se
In contrast, Sweden now benefits from some valuable lessons it learned the hard way during a similar, but local, financial crisis in the early 1990s, which nearly crushed all large banks but one. First, banks here have not exposed themselves to sub-prime housing mortgages. True, two of the larger banks have lent substantial sums to risky clients abroad, primarily in the Baltic states. But at home there is no sign of any mortgage crisis.
Decreasing debt
Second, successive governments have struggled to reduce Sweden’s national debt by maintaining annual budget surpluses for 15 years. The national debt peaked in 1994 at over 60 percent of gross domestic product (GDP) — roughly equivalent to the present US figure — but has since been halved. Such long-term fiscal discipline means that the ruling center-right coalition now can afford to stimulate the economy by giving consumers tax cuts or subsidies, without being afraid of mounting national debt.
Professor Richard Friberg of the Stockholm School of Economics wants to flag for a potential risk, though:
“There is always a risk, of course, that politicians spend money on the wrong measures or at the wrong time,” he says. “But all in all, it is good that politicians are not forced to worsen the crisis by increasing taxes or cutting subsidies, as other countries with weaker public finances may have to.”
Euro, no thank you
Third, Sweden has not joined the euro, but has stuck to its national currency, krona. In the 1990s crisis, politicians aimed for stability and therefore tried to keep the exchange rate steady. The attempt failed miserably, and the krona has been allowed to float ever since. In the current crisis, that comes in handy. As demand for Swedish products falls, so will demand for the Swedish krona. The price of the krona, the exchange rate, then drops, making products cheaper for foreigners. And that brings demand back up. This automatic exchange rate cushion helps soften blows from abroad.
Sweden's national currency, the krona, acts as the country's exchange rate cushion. Photo: Elias Larsson/Folio
In the United States, however, the dollar has actually strengthened in the past few months, mainly because foreigners tend to buy relatively safe US government bonds in uncertain times. This increases the demand for the US dollar, making the dollar, and thereby US products, more expensive to the rest of the world — thus worsening the economic crisis.
Tough, but under control
But this recession will hit all countries hard. In Sweden, unemployment is expected to grow to about 7 percent, and growth will slow to about zero in 2009. But relatively speaking, the country will hold up well, according to most economists.
The biggest asset is priceless: Swedes trust their governments, regardless of political color, to stick to basically the same, steady economic course. Growth has been quite high for more than a decade, inflation has been kept low, and the public finances kept under control. Therefore, most Swedes, though worried right now, are confident in the longer run. Most will not hesitate to invest, employ or consume once the recession bottoms out, and the crisis therefore looks set to blow over faster in Sweden than in many other countries.
Thus, the EU economic forecast for Sweden is gloomy for 2009, but points to a 2 percent growth in 2010. EU giants such as the United Kingdom, Germany or Spain cannot hope for even half that. In the next few years then, Sweden looks set to continue its decade-long climb in the ranking of the world’s richest countries.
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Jonas Fredén
Jonas Fredén is a freelance journalist. He has a bachelor of political science and has reported on economic affairs for Finanstidningen (Finance news), Sveriges Radio, Sweden’s public service radio broadcaster, and the daily Dagens Nyheter.
The author alone is responsible for the opinions expressed in this article.
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