The Vikings Win Again

The Washington Post ran a story on how Sweden has had the best recovery from the 2008 recession of any Western nation:



(Photo by Carl Lindquist, Isle of Ven, 2005)

 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. ).

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. Here are 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. The nation [had in the1990s] 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.

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.

3. Use monetary policy aggressively.  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.

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.

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.

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.”

I especially loved that last line!! Gotta love them Swedes!