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Sweden's Next Top (Economic) Model

By Andreas Norlén

Adapted from Norlén’s “Sweden and the Eurozone Crisis” speech presented to the Rotary Club of Capitol Hill in September 2012.

Starting in the 1950s, Europe established international organizations intended to prevent war by increasing economic integration. If countries grew intertwined through trade and economic interaction, the reasoning went, it would be far too costly for any state to wage war against another. Over decades, the cooperation facilitated by these organizations has expanded dramatically to include many areas beyond trade and economic matters, eventually resulting in the creation of the European Union in 1993.

The idea of a single European currency has existed since at least the 1970s, but the euro was not created until the year 2000. Today, 17 out of the 27 EU member states have replaced their national currency with the euro. But like the United Kingdom, Sweden is not a part of the eurozone; in a 2003 referendum, nearly 60 percent of Swedes voted to keep our national currency, the krona.

In order to have a common currency for such a disparate area as the Eurozone, there must be stronger coordination of the fiscal policies of member states, tough monitoring, and automatic sanctions if anyone breaks the rules. Today, it is apparent that the mechanisms for monitoring states’ adherence to deficit and debt limits were too weak. These limits were weakened years ago, when Germany and France violated them but did not want to be fined.

Following the financial crisis, many countries in the EU tried to combat high unemployment by rapidly increasing public spending to stimulate the economy. Some also saved their banks by lending them immense amounts of public money. The problem, however, was that this led to huge public deficits and debt. 

I am not dead set against using stimulus to increase domestic demand if economies are deteriorating rapidly. I can even accept that such stimulus might cause controllable deficits for a year or two. But I think it has proven counterproductive and dangerous to have a deficit for years, only to further increase spending during times of crisis. The only country that can get away with this without shaking market confidence and sending interest rates through the ceiling is the United States. For any other country, interest rates spike and negate most of the intended effect of the stimulus.

Italy has not seen a balanced budget on this side of the millennium, and France has not had a balanced budget since the 1970s. Many countries were ill prepared to handle a crisis using stimulus, because after years and years of borrowing, lenders were already worried they would never get their money back. And just when confidence in European economies and their ability to recover was starting to diminish the most, just as people began questioning whether some government bonds were really safe investments after all, a flashlight was aimed at the weakest countries like Greece.

When Greece was scrutinized more carefully, it turned out that it did not have its books in order. Its deficit was significantly higher than officially reported. The interest rates at which Greece could borrow rose sharply, and it became clear the country could not handle the situation without outside help. This help has consisted of a series of bailout packages with loans linked to reform demands. Trust has also been shaken in other countries such as Ireland, Portugal, Italy, and Spain, resulting in increased interest rates, political turbulence and even more bailouts.

Many politicians in Europe tend to blame the crisis on outside factors. They blame the U.S., for one, for causing a global financial crisis that also hit Europe. Politicians in Greece and other recipient countries excoriate donor states, particularly Germany, for imposing unpopular and unnecessary reforms. But one should take one step back and survey the situation holistically.

The financial crisis, which originated in the United States, hit Europe in the fall of 2008 and caused major problems. It became hard for people and businesses to borrow money, as domestic sales and exports fell and unemployment rose. Some countries were hit particularly hard, like Latvia and Iceland (both non-Eurozone countries). Latvia had a real estate bubble that burst, and Iceland had a financial sector with banks whose balance sheets were a lot larger that the country’s GDP. In response, their governments received help from the IMF and bilateral loans from their neighbors, including Sweden. They quickly implemented very tough programs to get their public finances under control. Salaries and wages in the public sector were cut, at least in Latvia, and painful cuts were made in the budget. These measures were harsh, but they paid off, and these countries are now back on track.

At the root of the deficits, unemployment, and other problems in many European countries is the fact that productivity has not increased alongside wages, and governments have not enacted reforms to handle the increased competition brought by globalization. The regulatory burden on business is also often heavy, and inefficient government monopolies and government-owned companies abound.

None of these problems stem from the United States or other alien forces; rather, they are “home cooked” and can only be solved if politicians in all European countries face the facts and act accordingly. Sweden now has arguably one of the strongest economies of the 27 EU states. We project a very small deficit for 2013 (0.6 percent of GDP), along with a falling public debt (around 37 percent of GDP), and a growing economy. We will, of course, not remain unaffected if the crisis deepens in the Eurozone, given that 50 percent of our GDP consists of export revenue, but our sound fiscal situation does allow us to meet falling exports with limited stimulus.

In the early 1990s, Sweden experienced a severe economic crisis, but followed it with 15 years of reform. Today, we have a law stating that the entire budget must be decided at one time and that it is not possible to make new spending decisions during the fiscal year. We also have a pension system that is autonomous from the budget, and which cannot have a deficit—if fees do not cover costs, pensions are automatically reduced. We reformed social security benefits and increased mechanisms to help people get back to work quickly. We cut income taxes, primarily for people with low or middle incomes, to create stronger incentives for work. We sold government-owned companies, abolished monopolies, and improved incentives for starting businesses and for investing. These policies continue. Next year, we will reduce the corporate tax rate from 26.3 to 22 percent.

The future economic stability of Europe depends on its willingness to make the kind of tough and broad reforms Sweden has made. Many countries still have a long way to go, but I firmly believe that Europe has a bright future ahead, even if the road to wealth and success is long and hard.

*****

*****

Andreas Norlén is a member of the Moderate Party in the Swedish Parliament from Östergötland.

Photo courtesy of Håkan Dahlström.

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