Five economic lessons from Sweden, the rock star of the recovery

By Neil Irwin, Published: June 2 , 2!"" STOCKHOLM Almost every developed nation in the world was walloped by the financial crisis, their economies paraly ed, their prospects for the f!t!re m!ddied" And then there#s Sweden, the roc$ star of the recovery" This Scandinavian nation of % million people has accomplished what the &nited States, 'ritain and (apan can only dream of) *rowin+ rapidly, creatin+ ,obs and +ainin+ a competitive ed+e" The ban$s are lendin+, the ho!sin+ mar$et boomin+" The b!d+et is balanced" Sweden was far from imm!ne to the +lobal downt!rn of -../0.%" '!t !nli$e other co!ntries, it is bo!ncin+ bac$" 1ts 2"2 percent +rowth rate last year tro!nces the -"/ percent e3pansion in the &nited States and was stron+er than any other developed nation in 4!rope" And compared with the &nited States, !nemployment pea$ed lower 5aro!nd % percent, compared with 6. percent7 and has come down faster 5it now stands near 8 percent, compared with % percent in the &"S"7" Some of the reasons for the Swedish s!ccess are as !ni9!e to the nation as its citi ens# predilection for Abba, pic$led herrin+ and minimalist f!rnit!re" '!t there are plenty of lessons for other co!ntries as they str!++le to find a pathway toward prosperity" The overarchin+ lesson the Swedes offer is this) :hen yo! have a financial crisis, and Sweden had a nasty one in the early 6%%.s, learn from it" ;on#t simply m!ddle thro!+h and hope that +rowth will event!ally ret!rn" <ather, address the !nderlyin+ ca!ses of the crisis to create an economic and financial system that will be more resilient when bad times ret!rn" Here is what that means in practice" Call them Sweden#s five lessons for a crisis0stric$en nation"

"# $ee% your fiscal house in order when times are &ood, so you will have more room to maneuver when thin&s are bad# 1n -..8, before the recession, the &"S" +overnment had a b!d+et deficit e9!ivalent to = percent of its economy, as did 'ritain" Sweden, meanwhile, had a ="> percent s!rpl!s" So when the recession hit, that s!rpl!s +ave its +overnment a c!shion in the downt!rn and it didn#t r!n !p the h!+e debts that in other advanced nations have now created the ris$ of a f!t!re crisis" Sweden#s +ross debt is set to reach ?2 percent of the si e of its economy this year, as the &nited States closes in on 6.. percent" This was a lesson Sweden learned from its early 6%%.s crisis, in which a collapse in commercial real estate and the ban$in+ sector was e3acerbated when the b!d+et deficit rose to s!ch hi+h levels that the co!ntry had tro!ble borrowin+ money and the val!e of its c!rrency collapsed" The nation set a +oal of avera+in+ a 6 percent b!d+et s!rpl!s over time and held to it which left the +overnment with lots of fle3ibility to en+a+e in deficit spendin+ when the economy went so!th" @1f yo! don#t have a fiscal problem, yo! have more de+ree of freedom,A said Stefan 1n+ves, +overnor of Sweden#s central ban$, the <i$sban$, in an interview" @This time aro!nd, the iss!e was not ever even close to bein+ abo!t solvency"A 2# Fiscal stimulus can be more effective when it is automatic# Sweden didn#t do m!ch in terms of special, one0off efforts to spend money to combat the downt!rn" There was some e3tra infrastr!ct!re spendin+ and a well0 timed c!t to income ta3 rates, b!t the most basic response to the +overnment was to do what the nation#s social welfare system lavish by American standards always does) Brovide income, health care and other services to people who are !nemployed" 1n the &nited States, the battle over whether to !se +overnment spendin+ to c!shion the blow of the downt!rn became a divisive one" :hether to try to stabili e the economy became one more battle in the lon+er term war over the proper role of +overnment"

And beca!se the C/.. billion fiscal stim!l!s that Con+ress and the Obama administration enacted in early -..% consisted mostly of special, one0time pro+rams, it too$ months for many of them to be+in p!mpin+ money into the economy, th!s $ic$in+ in months or even years after the economy had collapsed, and the spendin+ e3pired witho!t re+ard to whether the need remained" :hen spendin+ to c!shion economic blows happens as part of a more caref!lly desi+ned set of pro+rams established d!rin+ +ood times, it can be ready to +o 9!ic$ly ri+ht when the economy t!rns, and can be desi+ned to taper off when it ma$es sense economically, s!ch as when the ,obless rate has fallen, rather than on some arbitrary date" And that can be tr!e even for a safety net that is smaller than Sweden#s" '# (se monetary %olicy a&&ressively The Dederal <eserve has won both pla!dits and criticism for respondin+ a++ressively to the financial crisis, p!mpin+ money into the financial system in epic fashion" '!t by one $ey meas!re, the Swedish central ban$ was even more a++ressive" Li$e the Ded, the <i$sban$ lowered its tar+et short0term interest rate nearly to ero" '!t it also e3panded the si e of its balance sheet more than the Ded did relative to the si e of its economy, floodin+ the financial system with even more cash d!rin+ the hei+ht of the crisis" 1n s!mmer -..%, the <i$sban$ had assets on its balance sheet e9!ivalent to more than -2 percent of the nation#s +ross domestic prod!ct" Dor the Ded, that level never +ot m!ch over 62 percent" 1n -..%, the <i$sban$ even moved one $ey interest rate it mana+es below ero" &nder this ne+ative interest rate, ban$s that par$ed money at the central ban$ act!ally had to pay ."-2 percent for the privile+e" That made them all the more ea+er to lend the money to one another rather than par$ it at the central ban$, tho!+h in practice, Swedish officials and ban$ers said that the ne+ative rate had more symbolic conse9!ences than practical ones" The impact of low rates on the economy, however, are clear" @1nterest rates fell very low, and ho!seholds had more money available for cons!mption beca!se their mort+a+e payments dropped,A said Lena Ha+man,

chief economist of Alme+a, an association of ma,or employers in Sweden#s services sector" The <i$sban$ had the fle3ibility to move so a++ressively in lar+e part beca!se of chan+es it made in the wa$e of the early 6%%.s crisis" At the time, the nation had e3perienced years of do!ble0di+it inflation and the central ban$ lac$ed credibility on financial mar$ets" At one point, it raised its tar+et interest rate to a st!nnin+ 2.. percent in a f!tile effort to maintain the val!e of the Swedish c!rrency, the $rona" '!t after that episode, the <i$sban$ set an e3plicit tar+et of - percent ann!al inflation, and st!c$ to it, and over the ne3t 62 years attained eno!+h credibility on +lobal mar$ets that it co!ld respond as a++ressively as it did to the financial panic witho!t spar$in+ another $rona collapse" 1n other words, a central ban$ that has credibility can do more to s!pport an economy than one that is less tr!sted by mar$ets to be responsible" Spea$in+ of credibility, the <i$sban$ hasn#t left its !ltra0low interest rate policy and lar+e balance sheet in place foreverE with its economy recoverin+ nicely, the Swedish central ban$ has already raised rates, helpin+ maintain its credibility for the ne3t time the economy +oes soft" # $ee% the value of your currency fle)ible# Sweden has declined to adopt the e!ro c!rrency, and in hindsi+ht that loo$s wise" The chan+in+ val!e of the Swedish $rona was a helpf!l b!ffer a+ainst the economic downdraft of the past few years" 1n the depths of the financial crisis, the $rona fell in val!e a+ainst both the dollar and the e!ro, as +lobal investors so!+ht the safety of p!ttin+ their money in the most widely circ!lated c!rrencies" That helped ma$e Swedish e3porters more competitive at a time when +lobal demand was collapsin+, wor$in+ as a sort of press!re valve" And now that the Swedish economy is loo$in+ !p, the free0floatin+ nat!re of the Swedish $rona co!ld hold a different advanta+e) Fei+hbor Dinland, which also is e3periencin+ solid economic +rowth, !ses the e!ro" :ith other parts of 4!rope in deeper economic distress, it co!ld face inflation, beca!se the 4!ropean Central 'an$ sets policy based on the whole of the 68 nation c!rrency one" 'y contrast, Sweden#s monetary policy is based only on Swedish economic conditions"
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There is a lesson here for the &nited States as well) Maybe bein+ the +lobal reserve c!rrency isn#t all it#s crac$ed !p to be" ;!rin+ the crisis, the val!e of the dollar s$yroc$eted as world investors so!+ht a safe place to p!t their cash" That p!t American e3porters at a distinct disadvanta+e in the +lobal mar$etplace at the very moment the economy was at its wea$est" *# Bankers will always make blunders+ ,ust make sure they don-t doom the economy# Swedish ban$s didn#t ma$e it thro!+h the -../ crisis witho!t ma,or losses" To the contrary, they had lent heavily in the 'altic nations of Lith!ania, Latvia and 4stonia, which s!ffered an economic collapse" The ban$s relied on f!ndin+ in dollars that they borrowed from other ban$s and d!rin+ the crisis that f!ndin+ all b!t disappeared as ban$s hoarded dollars" Had the Dederal <eserve not made billions of dollars available to the <i$sban$ thro!+h @swap lines,A which were then lent to Swedish ban$s, there s!rely wo!ld have been a devastatin+ collapse of the ban$in+ system" So it#s not that the Swedish ban$s mana+ed thin+s perfectly" '!t they e3perienced more mana+eable losses than did their co!nterparts in the &nited States and m!ch of 4!rope, and are now bac$ to playin+ their normal role of ma$in+ loans and s!pportin+ +rowth" Swedish financial officials don#t point to any sin+le ma+ic b!llet in their re+!latory approach" <ather, the Swedish ban$in+ system seems to have held !p o$ay beca!se the pain of the early 6%%.s was severe eno!+h as to scar both ban$ e3ec!tives and re+!lators, leavin+ them with little temptation to +o into ris$y real estate lendin+ in the mid0-...s, even when the rest of the world was doin+ ,!st that" @After the crisis in the #%.s, it was clear we needed to be more conservative and caref!l,A said Cecilia Hermansson, chief economist of Swedban$" An aphorism often cited, she adds, has been @b!rn yo!r ton+!e once on hot mil$ and yo! will start blowin+ on yo+!rt"A 1n other words, altho!+h ban$ bailo!ts mi+ht be necessary to save an economy, it#s also important that ban$ers not be so c!shioned from the conse9!ences of their !nwise decisions as to +o strai+ht bac$ to the old ways as soon as it#s over" They need to at least have their mo!ths b!rned"

G The :ashin+ton Bost Company

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