Sweden — running a deficit doesn’t hurt

http://www.presseurop.eu/en/content/article/2253411-sweden-running-deficit-doesn-t-hurt

In 1990, the Swedish economy was working like a charm, with a budget surplus that amounted to 4% of GDP. Then events took an unexpected turn. In just three years, the state’s finances ran aground. By 1993, the spending deficit had ballooned to 13% – a level unheard-of in the current eurozone crisis in which none of the countries has such a huge hole in its accounts.

An understanding of the Swedish crisis is a good starting point for the analysis of the turmoil that is now affecting Europe. At the time, many specialists concluded that the welfare state was responsible for the state going bust. They were wrong, although it is true that a number of state systems had to be upgraded and opened to competition.

The fact is that Sweden, like all of the countries of the eurozone that are now in trouble, had experienced a serious financial crisis. Starting in the mid-1980s, the banks went on a lending spree which resulted in the formation of a bubble in the property market. After a few years, this bubble burst and the lenders were suddenly in serious trouble.

Debt not increased but collectivised

Before the crisis, economist Hans Tson Söderström was one of the people who criticised the weaknesses of the welfare state and argued for rigourous regulation of the economy, tight control of inflation, balanced budgets and fixed exchange rates. But the turmoil of the 1990s led him to switch sides in the debate. At the time, Hans Tson Söderström was conducting a study for the central bank of Finland, a country which was in a similar financial situation to Sweden.