Five economic lessons from Sweden, the rock star of the recovery
By Neil Irwin,
STOCKHOLM — Almost every developed nation in the world was walloped by the financial crisis, their economies paralyzed, their prospects for the future muddied.
And then there’s Sweden, the rock star of the recovery.
This Scandinavian nation of 9 million people has accomplished what the United States, Britain and Japan can only dream of: Growing rapidly, creating jobs and gaining a competitive edge. The banks are lending, the housing market booming. The budget is balanced.
Sweden was far from immune to the global downturn of 2008-09. But unlike other countries, it is bouncing back. Its 5.5 percent growth rate last year trounces the 2.8 percent expansion in the United States and was stronger than any other developed nation in Europe. And compared with the United States, unemployment peaked lower (around 9 percent, compared with 10 percent) and has come down faster (it now stands near 7 percent, compared with 9 percent in the U.S.).
Some of the reasons for the Swedish success are as unique to the nation as its citizens’ predilection for Abba, pickled herring and minimalist furniture. But there are plenty of lessons for other countries as they struggle to find a pathway toward prosperity.
The overarching lesson the Swedes offer is this: When you have a financial crisis, and Sweden had a nasty one in the early 1990s, learn from it. Don’t simply muddle through and hope that growth will eventually return. Rather, address the underlying causes of the crisis to create an economic and financial system that will be more resilient when bad times return.
Here is what that means in practice. Call them Sweden’s five lessons for a crisis-stricken nation.
1. Keep your fiscal house in order when times are good, so you will have more room to maneuver when things are bad.
In 2007, before the recession, the U.S. government had a budget deficit equivalent to 3 percent of its economy, as did Britain. Sweden, meanwhile, had a 3.6 percent surplus.
So when the recession hit, that surplus gave its government a cushion in the downturn and it didn’t run up the huge debts that in other advanced nations have now created the risk of a future crisis. Sweden’s gross debt is set to reach 45 percent of the size of its economy this year, as the United States closes in on 100 percent.
This was a lesson Sweden learned from its early 1990s crisis, in which a collapse in commercial real estate and the banking sector was exacerbated when the budget deficit rose to such high levels that the country had trouble borrowing money and the value of its currency collapsed.
The nation set a goal of averaging a 1 percent budget surplus over time and held to it — which left the government with lots of flexibility to engage in deficit spending when the economy went south.
“If you don’t have a fiscal problem, you have more degree of freedom,” said Stefan Ingves, governor of Sweden’s central bank, the Riksbank, in an interview. “This time around, the issue was not ever even close to being about solvency.”
2. Fiscal stimulus can be more effective when it is automatic.
Sweden didn’t do much in terms of special, one-off efforts to spend money to combat the downturn. There was some extra infrastructure spending and a well-timed cut to income tax rates, but the most basic response to the government was to do what the nation’s social welfare system — lavish by American standards — always does: Provide income, health care and other services to people who are unemployed.
In the United States, the battle over whether to use government spending to cushion the blow of the downturn became a divisive one. Whether to try to stabilize the economy became one more battle in the longer term war over the proper role of government.
And because the $800 billion fiscal stimulus that Congress and the Obama administration enacted in early 2009 consisted mostly of special, one-time programs, it took months for many of them to begin pumping money into the economy, thus kicking in months or even years after the economy had collapsed, and the spending expired without regard to whether the need remained.
When spending to cushion economic blows happens as part of a more carefully designed set of programs established during good times, it can be ready to go quickly right when the economy turns, and can be designed to taper off when it makes sense economically, such as when the jobless rate has fallen, rather than on some arbitrary date. And that can be true even for a safety net that is smaller than Sweden’s.
3. Use monetary policy aggressively
The Federal Reserve has won both plaudits and criticism for responding aggressively to the financial crisis, pumping money into the financial system in epic fashion. But by one key measure, the Swedish central bank was even more aggressive.
Like the Fed, the Riksbank lowered its target short-term interest rate nearly to zero. But it also expanded the size of its balance sheet more than the Fed did relative to the size of its economy, flooding the financial system with even more cash during the height of the crisis.
In summer 2009, the Riksbank had assets on its balance sheet equivalent to more than 25 percent of the nation’s gross domestic product. For the Fed, that level never got much over 15 percent.
In 2009, the Riksbank even moved one key interest rate it manages below zero. Under this negative interest rate, banks that parked money at the central bank actually had to pay 0.25 percent for the privilege. That made them all the more eager to lend the money to one another rather than park it at the central bank, though in practice, Swedish officials and bankers said that the negative rate had more symbolic consequences than practical ones.
The impact of low rates on the economy, however, are clear.
“Interest rates fell very low, and households had more money available for consumption because their mortgage payments dropped,” said Lena Hagman, chief economist of Almega, an association of major employers in Sweden’s services sector.
The Riksbank had the flexibility to move so aggressively in large part because of changes it made in the wake of the early 1990s crisis. At the time, the nation had experienced years of double-digit inflation and the central bank lacked credibility on financial markets. At one point, it raised its target interest rate to a stunning 500 percent in a futile effort to maintain the value of the Swedish currency, the krona.
But after that episode, the Riksbank set an explicit target of 2 percent annual inflation, and stuck to it, and over the next 15 years attained enough credibility on global markets that it could respond as aggressively as it did to the financial panic without sparking another krona collapse.
In other words, a central bank that has credibility can do more to support an economy than one that is less trusted by markets to be responsible.
Speaking of credibility, the Riksbank hasn’t left its ultra-low interest rate policy and large balance sheet in place forever; with its economy recovering nicely, the Swedish central bank has already raised rates, helping maintain its credibility for the next time the economy goes soft.
4. Keep the value of your currency flexible.
Sweden has declined to adopt the euro currency, and in hindsight that looks wise. The changing value of the Swedish krona was a helpful buffer against the economic downdraft of the past few years.
In the depths of the financial crisis, the krona fell in value against both the dollar and the euro, as global investors sought the safety of putting their money in the most widely circulated currencies. That helped make Swedish exporters more competitive at a time when global demand was collapsing, working as a sort of pressure valve.
And now that the Swedish economy is looking up, the free-floating nature of the Swedish krona could hold a different advantage: Neighbor Finland, which also is experiencing solid economic growth, uses the euro. With other parts of Europe in deeper economic distress, it could face inflation, because the European Central Bank sets policy based on the whole of the 17 nation currency zone. By contrast, Sweden’s monetary policy is based only on Swedish economic conditions.
There is a lesson here for the United States as well: Maybe being the global reserve currency isn’t all it’s cracked up to be. During the crisis, the value of the dollar skyrocketed as world investors sought a safe place to put their cash.
That put American exporters at a distinct disadvantage in the global marketplace at the very moment the economy was at its weakest.
5. Bankers will always make blunders; just make sure they don’t doom the economy.
Swedish banks didn’t make it through the 2008 crisis without major losses. To the contrary, they had lent heavily in the Baltic nations of Lithuania, Latvia and Estonia, which suffered an economic collapse.
The banks relied on funding in dollars that they borrowed from other banks — and during the crisis that funding all but disappeared as banks hoarded dollars. Had the Federal Reserve not made billions of dollars available to the Riksbank through “swap lines,” which were then lent to Swedish banks, there surely would have been a devastating collapse of the banking system.
So it’s not that the Swedish banks managed things perfectly. But they experienced more manageable losses than did their counterparts in the United States and much of Europe, and are now back to playing their normal role of making loans and supporting growth.
Swedish financial officials don’t point to any single magic bullet in their regulatory approach. Rather, the Swedish banking system seems to have held up okay because the pain of the early 1990s was severe enough as to scar both bank executives and regulators, leaving them with little temptation to go into risky real estate lending in the mid-2000s, even when the rest of the world was doing just that.
“After the crisis in the ’90s, it was clear we needed to be more conservative and careful,” said Cecilia Hermansson, chief economist of Swedbank. An aphorism often cited, she adds, has been “burn your tongue once on hot milk and you will start blowing on yogurt.”
In other words, although bank bailouts might be necessary to save an economy, it’s also important that bankers not be so cushioned from the consequences of their unwise decisions as to go straight back to the old ways as soon as it’s over. They need to at least have their mouths burned.
5.5% Growth rate of Sweden’s GDP in 2010 2.9% Growth rate of U.S. GDP in 2010 1.8% Growth rate of the EU GDP in 2010