By Simon Johnson
STOCKHOLM (Reuters) -When Sweden’s then-finance minister Goran Persson dashed to New York during the country’s early 1990s financial crisis to plead with Wall Street investors to keep buying its debt, he stayed in a budget hotel infested with cockroaches.
That reflected the Finance Ministry’s strict “absolutely no extravagance” policy, Persson, who later became prime minister, wrote in his 1997 book “Those Who Are in Debt Are Not Free”.
Penny-pinching on ministerial travel was one small part of a decades-long austerity drive, which has created fiscal leeway much of the belt-tightening Europe is lacking, allowing Sweden this year to pledge billions for defence, energy and tax cuts in its largest public spending package in decades.
The lessons for other countries, especially France, deep in its own budget crisis, are simple, if not easy:
First, things may need to get really bad before politicians are ready to act.
Secondly, buy-in from voters, unions and opposition parties is crucial for long-term success.
Finally, a strong global economy and a slice of luck on timing really help.
LIVING BEYOND THEIR MEANS
After decades of living beyond its means, Sweden’s debt had by 1994 roughly doubled to around 80% of gross domestic product from 44% in 1990. At worst, the budget deficit hit 12% and investor confidence collapsed, and the Riksbank briefly hiked interest rates to 500%.
The government responded with cuts in spending on welfare, defence and education worth 8% of GDP. The economy shrank more than 1% three years in a row, unemployment soared and bank credit losses piled up in Sweden’s worst downturn since the 1930s Great Depression.
“We had a banking crisis, a foreign exchange crisis and a debt crisis,” said Stefan Ingves, a former central bank governor who oversaw the cleanup of Sweden’s “bad banks” after the crash.
“In some sense, we were at the end of the road,” he told Reuters.
The government set a spending ceiling and budgeted for surpluses over the economic cycle. Pensions were reformed to encourage private savings and deepen capital markets, while labour unions and employers agreed to limit wage growth.
Gradually those reforms, helped by the fact that a weakened currency was boosting exports, started to work: the economy grew 4.1% in 1994, and debt fell below 50% of GDP within a decade.
“In an open economy, structural change pays,” Ingves said.
Among the most critical changes was a shift to a pension system where payments are adjusted for market returns and life expectancy, easing the pressure on the budget from the aging population and passing the shortfall risk onto individuals.
France, where the retirement age remains a hot-button issue, spends just over 13% of its GDP on pensions compared with 10.7% in Sweden, according to Eurostat data, and the gap gets bigger when healthcare and other social benefits are included.
NO FREE LUNCH
To be sure, it came at a price: thousands of public employees lost their jobs and Sweden was left with a legacy of underinvestment in infrastructure, from energy and transport networks to hospital beds.
But painful memories of the crisis have ensured there has been no backsliding.
“Government after government has held the line,” Finance Minister Elisabeth Svantesson told Reuters. “There is a consensus, which is a strength for Sweden.”
Decades of frugality are now paying dividends.
With public debt now at just over a third of GDP, Sweden was able to hike defence spending to 3.5% of GDP, pump up to 440 billion crowns ($46.73 billion) into nuclear power expansion and provide 105 billion crowns to support Ukraine.
At the same time, the government cut income taxes and VAT on food and raised spending on job measures and yet its borrowing costs remain lower than Germany’s.
Unlike many other developed nations, Sweden also managed to ride out the financial crisis of 2008-2009 and the COVID pandemic without piling on much new debt.
Replicating Sweden’s path, however, will be hard for France and other euro zone countries faced with rising debt.
Sweden’s exporters operated in a buoyant 1990s world economy fuelled by an IT boom and rapid globalisation – a far cry from the protectionist tilt seen from Washington to Beijing now.
“Sweden was not okay, but the rest of the world was reasonably okay,” noted Ingves.
Moreover, since the 1990s the political landscape has become more fragmented with the rise of far-right parties across Europe – including in Sweden – making it much harder to build consensus on unpopular measures, such as tax hikes or welfare cuts.
Ultimately, some argue, France has not yet reached a tipping point like Sweden did in the 1990s and Ireland, Portugal, Italy and Greece two decades later during the euro zone sovereign debt crisis, which forced them to repair their public finances.
Despite all its woes, France still has access to borrowing at a reasonably affordable 3.35%, allowing it to muddle through.
“Things will need to get a lot worse before France is forced to confront its fiscal problems in the same way other European countries have,” said Adrian Prettejohn, European economist at Capital Economics.
($1 = 9.4155 Swedish crowns)
(Writing by Simon JohnsonEditing by Mark John and Tomasz Janowski)
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