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Economic Insights, EU, Fiscal Policy, Global Finance, World Economic Outlook

With Most Of the world economy Still On Its Back, Sweden Tries Policies That Actually Work

Today, efter Dot-com bubble of the late 1990s and global recession that began in 2008 the United States and much of the world economy are still recovering from the devastating global recession in 2008. Sometimes crises happen that we cannot foresee or avoid.

But for the U.S. recovery continues to be tepid. At the same time, risks have intensified, including from the worsening of the euro area crisis as well as the uncertainty over domestic fiscal plans, says the IMF in its latest assessment of the world’s largest economy.

IMF expect the U.S. economy to recover at a tepid pace in 2012 and 2013—at about 2 and 2¼ percent. Unfortunately, IMF also see negative risks, in particular from a further deterioration of the euro debt crisis, as this would lower the demand for U.S. exports and hurt financial markets.

For the U.S. economy, serious risks could come at the end of this year from two potential self-inflicted wounds: the so-called fiscal cliffand the debt ceiling.The economy would also suffer if policymakers in the United States were unable to reach agreement on raising the debt ceiling and avoiding the so-called fiscal cliff—the spending cuts and large-scale expiration of tax breaks that will kick in on January 1, 2013 if nothing is done. According to iMFdirect the negative impact of the cliff could start materializing even sooner, as uncertainty about what is going to happen early in 2013 might lead consumers, businesses, and government agencies to hold back their spending already this year, in anticipation of the cuts.

Fiscal consolidation and household deleveraging are likely to continue to slow the U.S. recovery in the near future.Thereby, the U.S. contribution to global demand will be lower than what we saw before the financial crisis. But make no mistake: the American economy growth is increasing and the recent stream of improving US indicators is hard to ignore.

At the same time, U.S. banks have more substantial interconnections with the large banks from the core euro area countries and the United Kingdom. Stock markets rise and fall partially based on American investors’ confidence in EU crisis management, the US ambassador to the EU tells EUobserver. They could therefore be affected both by problems in core euro area banks, whether caused by a deteriorating situation in their countries or by the spillovers of problems in the euro area periphery to which such banks are exposed. Banking provides the most dramatic example. Deregulation and demutualisation, particularly in the USA and Britain, led to a near-meltdown of the financial system in 2008 and, in consequence, a major and on-going recession.

Austerity is more bearable when only one or a few countries embrace it and when devaluation can stimulate exports. In Europe, neither of these conditions now holds. Many countries – not just Greece, Ireland, Portugal, Spain and Italy – have adopted austerity policies. And all major debtor countries use the euro, making it impossible for any one to resort to a unilateral devaluation.

Austerity policy and banking conditions in most countries may be difficult, but the news is not all bad. While the rest of Europe and the United States have gone on massive spending sprees fueled by government borrowing and tax hikes, Sweden took a different approach. The European nation famously stereotyped for having aggressive taxation to fund an omnipresent state has actually decided that in response to the Eurozone crisis and the continued effects of the global economic downturn, or “Great Recession”, that it’s time to ease up on taxes and reduce the size of government. In the Spring 2012 Economic and Budget Policy Guidelines, the Swedish Government and its Finance Minister, Anders Borg, have laid out a plan that is focused on lowering taxes. Their rationale? “in which indviduals and families get to keep more their income, their independence and their opportunities to shape their own lives also increase.”  We expect these improvements to continue in the future.

Borg also wants to lower the corporate tax rate as a way of meeting the government’s goal of “full employment”. The government has already cut property taxes and other luxury taxes on the rich to lure investors and entrepreneurs back to Sweden. The government has also slashed spending across the board, including on the welfare programs that used to be Sweden’s claim to fame. They’ve also installed caps on annual government expenditures: real and enforceable limits that the Swedes believe are pivotal to economic stability. The simple truth is the Policy Guidelines  “the expenditure ceiling is the Government’s most important tool for meeting the surplus and stays within its limits. Look at Spain, Portugal or Italy, Spain’s 10-year bonds have been sold at a record-high interest rate of 7.6 percent, a level considered to be bailout territory. Italy’s already high debt is also ballooning due to rates above six percent.

The euro-crisis is accelerating as Spanish borrowing costs continue rising and Germany, Netherlands and Luxembourg on Monday (23 July) were warned they may lose their triple A rating due to ‘rising uncertainty.’ The only triple-A rated country not to face a downgrade in the following months is Finland, which has demanded collateral on bailouts in Spain and Greece, runs a fiscally conservative budget and has limited trade links with the rest of the eurozone. Sweden is not technically in the Eurozone, as it does not use the Euro as currency.

In the beginning of the 1990s, Sweden was struck by a severe financial crisis, much like what Spain and Ireland are experiencing today. After almost a decade of strong economic growth, fueled by cheap credit and rapidly rising housing prices, the market suddenly collapsed, which caused severe problems in the Swedish banking system. Sweden’s good fortune is that it had its crisis two decades ago. In the early 1990s, the rest of the world economy was relatively healthy. Sweden could offset the depressing effects of its domestic policies by exporting more and that’s what happened, aided by a huge devaluation of its currency, the krona. The devaluation made its exports more price-competitive.

Despite slow projected growth for 2012, Sweden is expecting annual GDP growth of over 3 percent starting next year, projected out through 2016 by which time their unemployment is expected to slide down to just about 5 percent. During this time the Swedish gross debt is expected to drop from 37.7 percent/GDP to 22.5 percent/GDP as a result of government surpluses. For comparison, US gross debt to GDP is well over 100 percent and climbing. All this success must be on the backs of the working class right? Wrong. Wages are slated to rise in Sweden by nearly 4 percent annually through 2016.

The recovery-by-stimulus model has failed across the board, and as Mr. Borg has pointed out, we are still stuck with the damage it has done. With the refusal of the Obama administration, Congress, and their European counterparts to accept serious spending cuts, maybe it’s time to try something that’s actually working.

Soruce: IMF Economic Health check  -IMF Survey online & U.S. Fiscal Policy: Avoiding Self-Inflicted Wounds
Forbes Article by Matt Kibbe
Euobserver
A Fistful of Kronor – By Peter Wolodarski | Foreign Policy

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About Issa Bloom

I´m Afrikan-Swedish, psychologist, and co-founder of Blue IBAnalytic.

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