Sweden has joined the club of runaway monetary policy. From Reuters:
Sweden shocked markets on Thursday by introducing negative interest rates, launching bond purchases and saying it could take further steps to battle falling prices. The central bank joins a list of those including the European Central Bank, the U.S. Federal Reserve and the Bank of England, to resort to unconventional monetary policy steps to confront an unusual combination of economic problems.
No. The Federal Reserve has reversed course. And together with The Bank of England the Fed has been helped by the fact that it is operating in an economy with moderate taxes and relatively relaxed fiscal policy. The ECB has opened the monetary flood gates in an economy that is plagued by statist austerity and more or less zero growth.
In fact, the slight uptick in economic activity in the third quarter of 2014 that I reported on earlier this week is closely correlated to the all-out liquidity bombardment that the ECB began early summer last year. On the margin there are those who will take advantage of declining interest rates. According to data from the ECB, euro-denominated loans to non-financial corporations declined noticeably in 2014. In the group of loans with a 5-10 year rate fixation, the interest on loans above 1 million euros fell by more than one percentage point, from 2.9 percent to 1.73 percent. Other collateral loan categories saw smaller declines, but the downward trend is unmistakable.
It is likely that the same thing will happen in Sweden; the question is what effect lower interest rates will have on economic activity. In the EU, gross fixed capital formation – a.k.a., business investments – did actually increase in 2014. However, broken down by quarter, the annual growth rate (i.e., over the same quarter the previous year) looks much different:
- Q1 2014 up 3.78 percent;
- Q2 2014 up 2.35 percent;
- Q3 2014 up 1.86 percent.
In other words, the largest annual increase was recorded before the ECB declared a negative interest rate. It remains to be seen what happened in the fourth quarter, but even if there was an increase somewhere in the same territory as earlier in 2014, the big question is what the lasting impact is going to be on GDP growth and employment. One indicator of this is private consumption, which seems to have benefited a bit more from the ECB’s desperate interest rate cuts. Again measured as annual increases by quarter:
- Q1 2014 up 0.68 percent;
- Q2 2014 up 1.27 percent;
- Q3 2014 up 1.4 percent.
For the two years Q3 2012 to Q3 2014 the annual increase was, on average, 0.3 percent. Nothing to be jubilant about, but the modestly accelerating trend during 2014 indicates a stabilization (rather than some sort of genuine recovery).
What does this mean for Sweden? The problem with that particular country is that its private-consumption increase is inflated by recklessly high household debt levels. These levels, in turn, are held up by mortgage loans with absolutely irresponsible terms, such as interest-only payments or basically life-long maturity periods. As I explained in my book Industrial Poverty, if Swedish household debt had remained a constant share of disposable income from 2000 and on, its private-consumption growth rate would almost have stalled.
Put bluntly: Sweden appears to be in reasonable economic shape only because households have increased their debt as share of disposable income from 90 percent 15 years ago to 180 percent today.
What this means is, plain and simple, that it is exceptionally irresponsible to make more credit available at even lower costs. But it also means that on the margin, the Swedish Riksbank will get less new economic activity out of every negative interest point than the ECB gets; the higher the household debt, the less inclined banks are to let people pile on new debt.
Unfortunately, the Riksbank president, Mr. Stefan Ingves, does not see this problem. Reuters again:
“Should this not be enough, we want to be very clear that we are ready to do more,” said Central bank governor Stefan Ingves. “If more is needed, we are ready to make monetary policy even more expansionary.” The central bank said this would mean further repo-rate cuts, pushing out future rate hikes and increasing the purchases of government bonds or loans to companies via banks.
As the Reuters story also explains, the Riksbank is ready to move into debt monetization – unthinkable only a year ago:
The Riksbank said it would “soon” make purchases of nominal government bonds with maturities from 1 year up to around 5 years for a sum of 10 billion Swedish crowns ($1.17 billion). But with the ECB printing 60 billion euros a month in new money the Riksbank’s much more limited program may have little effect on bond yields – already at record lows. “In terms of GDP, the mini-QE program amounts to about 0.25 percent,” banking group Morgan Stanley said in a note. “Therefore, this measure should be seen more as a signal that the Riksbank is ready to do more and remain dovish for the foreseeable time.”
In other words, here again the marginal payoff is going to be small. The only exception would be if the Swedish government decides to throw out its balanced-budget rules and start a major spending drive funded by the Riksbank. This seems unthinkable today – just like negative interest rates and a QE program seemed unthinkable a year ago.
Quantitative Easing is not a recession remedy. It is a defensive monetary strategy. So is the negative interest rate. Together, these two measures declare that a government and its central bank has reached the end of the road in trying to get their economy moving again. The big problem for Europe, Sweden included, is that they have come to this point almost seven years after the Great Recession started. With a recovery being half-a-decade overdue, with tapped-out monetary policy and fiscal policies restrained by ill-designed balanced-budget measures, Europe is firmly planted on the road straight into industrial poverty.
Sweden, with its imbalanced real estate market and very deeply indebted households, is on the same road, only with a more volatile ride.
The new Swedish prime minister who took office after the September elections announced on Wednesday that he is calling extra elections. They will be held in March, as early as the constitution allows. This will be the first time in more than half a century that Sweden has held an extra-ordinary general election, and the announcement has caused quite a bit of political turmoil.
This is a dramatic situation, and yet another sign that Sweden is in some relatively deep trouble. As a background, let me explain the two reasons why the extra-ordinary election will be held.
The first is superficially a constitutional rule de facto forcing an incumbent prime minister to resign if he cannot win parliamentary support for his annual budget. However, underneath the rule was a clash between two different approaches to economic policy. On the one hand, the incumbent prime minister’s green-socialist coalition wanted to raise a number of taxes; on the other hand the opposition alliance, consisting of four center-right parties that governed Sweden up to the September elections, wanted a continuation of their moderately better tax and spending policies. The parliamentary majority lined up behind the center-right alliance budget bill.
One ingredient in this was that the green-socialist coalition wanted to raise payroll taxes on workers below the age of 25. While technically a “return” of the rate to where it was before the alliance government cut it, there have been credible estimates that this increase would cost tens of thousands of young people their jobs. More importantly, it would bar hundreds of thousands of them from finding jobs in the future.
On top of this tax increase the green-socialist coalition wanted to open a new “trainee” program for young people in the nation’s socialized health care system. In short, their plan was to tax away private-sector jobs for young men and women and then, by means of conditioned unemployment benefits, coerce them into the “trainee” program.
In short, the difference between the center-right alliance and the green-socialist coalition was a difference between a modestly market-oriented approach to fiscal policy and a doubling down on heavy-handed statism. The parliamentary came down in favor of the former, leading the prime minister to give up hopes on pushing his cabinet’s budget through the Riksdag.
The second reason for the new election has to do with the Swedish Democrats, a “third party” in the parliament. With 13 percent of the votes in September, the SD became the third largest party in the Riksdag. The green-socialist coalition has sternly declared that they do not want to engage in any talks whatsoever with the SD, the reason being the SD’s more restrictive policies on immigration. Beyond that issue, though, the SD is essentially a traditional European social-democrat party, which should appeal both to the green-socialist coalition and the center-right alliance (which is basically as committed to defending the Swedish welfare state as the socialists are).
Because of their refusal to even talk to the SD, the green-socialist coalition turned the SD into a political enemy. When the SD found that there were only moderate differences between the green-socialist coalition’s budget and the bill put forward by the center-right alliance, they decided to let their disdain for the green party (a sentiment that the greens have carefully reciprocated) become the deciding factor when they came to the budget vote in the Riksdag. Determined to put an end to a coalition where the greens had a lot of influence, the SD cast their votes for the budget bill from the center-right alliance.
The prime minister, himself a social democrat, responded as many had predicted, namely by calling an extra-ordinary election.
There is no doubt that Sweden is politically less stable now than it did a couple of days ago, and there are some reasons to see it that way. The Riksdag, the parliament, is essentially in legislative deadlock after the budget vote. Even though the alliance alternative won the vote and its budget became the law of the land, they cannot actually implement their policies until they have parliamentary majority. By contrast, the green-socialist coalition can no longer seek parliamentary approval of their policies without risking yet another embarrassing defeat.
It is too early to predict what the March election will bring. But don’t be surprised if the biggest party of the center-right alliance reaches out to the Swedish Democrats. The SD has a potential of 15-18 percent in the new election and could therefore become so big that the moderates could form a government with them alone. Today, many commentators and analysts would consider this unthinkable, but as I will explain in a later article, there are several reasons why this is actually one of the most probable outcomes of the March elections.
Until then, Sweden will be in a state of uncertainty. Keep your money out of that country but do keep your eyes on it.
Four months ago the European Central Bank officially kicked the euro zone into the liquidity trap with its zero interest rate. Non-euro members of the EU have been resisting – or pretending to resist – the temptation of going all the way out with their central banks. But now Sweden has succumbed to the temptation. The Telegraph reports:
The world’s oldest central bank has slashed interest rates to a record low of 0pc as it battles to ward off deflation. Sweden’s Riksbank decided to cut its benchmark “repo rate” by 25 basis points from 0.25pc at this month’s monetary policy meeting, following three previous rate cuts this year. The decision was not expected by polled analysts who forecast the benchmark rate to be lowered to 0.1pc. The move is designed to increase lending and push up prices and reflects worries about the real threat of deflation which have now gripped the economy.
The Swedish central bank is foolish. The ECB has already proven that you cannot fend off deflation with massive money printing. The ECB has also demonstrated that zero interest rates do not bring about the recovery that almost-zero interest rates did not bring about. In other words, the marginal policy effects of going to a zero interest rate are just that – zero.
While there are no benefits from the zero rate, there are certainly costs and risks associated with it.
To begin with, the zero rate opens the last floodgates of liquidity supply. Banks can borrow money from the central bank at practically no cost. This pushes even more money out to the supply side of the credit markets, primarily for mortgages. With an already overheated real estate market, Sweden will now see further injections of virtually cost-free lending to home buyers and speculators.
At the same time, private consumption has been driven in good part by virtually cost-free access to credit. Swedish families are among the most indebted in Europe, with a household debt-to-income ratio far higher than it was here in the United States – even if we go back to right before the recession.
Loans are collateralized against real estate, which essentially means that most of the growth in private consumption in Sweden is directly related to the easy access to mortgages. The situation is increasingly unsustainable, and it is only a matter of time before the national legislature either puts an end to the debt fest by reintroducing amortization requirements for mortgages (yes, interest-only loans are very popular in Sweden) or the market puts an end to the endless upward price trend as banks run their balance sheets to the end.
The former is a distinct possibility – the latter is increasingly plausible as shareholders begin to worry about if mortgage-happy banks will ever get their money back…
The latter could actually happen simply by means of growing loan defaults. Yes, a lot of home owners do not even pay on their loan principals, but a notable tightening of fiscal policy could send many of them out in unemployment. The new green-socialist coalition government has just presented a budget filled to the brim with tax increases. Among them is a restoration of a higher level of payroll taxes for young employees, which will very likely wipe out tens of thousands of jobs for individuals and couples just getting started with their lives. Many of them have bought their first, tiny little apartment and now risk being hurled out in joblessness – and homelessness.
A wave of loan defaults would quickly gain the critical mass needed to send a shockwave through the entire Swedish mortgage industry. That will shut the door for one investment opportunity for the mass of liquidity floating around in the banking system. Banks will have to go find another place to turn their liquidity into revenue.
And here is where the zero-interest central bank policy gets in the way: by dropping their key interest rate to zero, the price of treasury bonds has by definition reached its expectational maximum. The only way for bond prices to go now is down. Therefore, the only place to go is to the stock market.
The problem with the Swedish stock market is that it operates in an economy that is stuck in a long, irritating recession. There are profitable corporations to invest in, but those are of limited supply – especially when the supply of liquidity on the stock market increases rapidly as the real-estate market grinds to a halt. This will push investors out from the low-risk, safe stocks toward stocks that carry increasing rates of risk. As investors go after increasingly risky stocks they will demand speculative returns to match that risk. This exacerbates risk taking, putting the market at risk for self-magnifying destabilization.
It is no longer impossible that Sweden could end up in a situation where both the real estate market and the stock market destabilize at the same time. I would consider this risk theoretical at this point – the stock market is sophisticated and operated with both derivatives and other stabilizing instruments. However, so long as the Riksbank’s monetary policy had some restraints on it, there was not even a theoretical possibility of two-market instability.
Many economists dismiss this scenario by saying that Sweden has performed spectacularly from a macroeconomic viewpoint. However, the seven-year average, inflation-adjusted GDP growth rate covering the entirety of the Great Recession (2007-2013) is a not-so-impressive 1.39 percent. If you deduct the effect from exports and from debt-driven consumption, there is nothing left. In fact, private consumption including that paid for with second and third mortgage loans has averaged 1.1 percent since 2007.
It is therefore irresponsible, not to say reckless, to suggest that Sweden can handle zero interest rates because of some underlying macroeconomic strength. That strength does not exist. The slightest aberration in real estate price trends could eradicate the domestic source of GDP growth.
Sweden has made the same mistake as the rest of Europe: they combined tight fiscal policy with very lax monetary policy. This is a recipe for liquidity-trap stagnation – just as Lord Keynes explained some 80 years ago. Students of Austrian economics have also reached this conclusion, especially through the analysis of the role that lax monetary policy plays in a modern economy.
Sadly, both Keynesian and Austrian economics are left out of the curriculum when modern graduate schools train tomorrow’s generation of economists. Advanced econometrics is passed off as the fix-it-all for our profession. Yet as Paul Ormerod and others have explained so elegantly, econometricians get it right so long as nothing is happening in the economy. Once the economy starts moving like it did in 2008-2009, prediction models based on stability rapidly become useless.
But that is a topic we will have to return to later.
The political momentum has definitely turned against a unified Europe. Exhibit #1 is the referendum in Scotland:
Travelers to Scotland, beware. In buses, pubs and street rallies, people have only one thing on their mind these days: Scottish independence. They wear bumper stickers with “Yes” or “No thanks”, dye their hair white and blue, sing folk songs and hand out leaflets. Posters are everywhere. For the yes camp, it is about a nation going its own way, breaking away from a political elite in Westminister. To “naysayers”, it is a foolish decision instigated by populists, that will ruin two nations for generations to come. Both camps are virtually equal, with pollsters saying the referendum on Thursday (18 September) can go either way. The referendum will also have an impact on other independence-minded regions in the EU, such as Catalonia in Spain and Flanders in Belgium. Scotland will set a precedent for how Brussels deals with territories breaking off from an EU member state.
Alas, Exhibit #2, the independence movement in Catalonia:
Around 1.8 million Catalans took to the streets of Barcelona on Thursday (12 September) calling for the right to vote on independence. The demonstration marks the beginning of a critical period in Barcelona-Madrid relations. Dressed in red and yellow – the national colours – people shouted “in-inde-indepedencia!” and “volem votar!” (we want to vote) while waving the Catalan independence flag. Almost a quarter of the 7.5 million Catalans celebrated Catalan National Day – La Diada – in the streets of Barcelona, according to the local police forces. The day commemorates Catalonia’s loss of independence in the War of the Spanish Succession in 1714, exactly 300 years ago. Earlier this year, the Catalan Parliament voted two-thirds in favour for a consultative referendum to be held on 9 November, asking the Catalans “whether Catalonia is a state” and “if yes, whether that state should be independent”. The central government in Madrid, however, has said that it has ”all the mechanisms in place” to prevent such a vote.
Catalonia is the most prosperous region in Spain, having paid a big price for the country’s ill-designed austerity measures. It would be foolish of the Madrid government to try to suppress the Catalonian independence movement. A much better way forward is to recognize the undercurrent of anti-EU sentiments that also fuel this independence movement. The harsh austerity policies over the past couple of years where imposed on Spain by Brussels; if Spain was independent of the EU or at least had the backbone to stand up to their mad policy ideas the Catalonians would have much less of a reason to want to secede.
Anti-EU sentiments also played a major role in Sweden, our Exhibit #3. Last Sunday’s election sent nationalist Swedish Democrats skyrocketing to a position as the nation’s third largest party. In addition to their criticism of the current immigration policies in Sweden, the SD party is the only outspoken party against Swedish EU membership. They loosely resemble other EU-critical parties, such as Exhibit #4 in Germany:
Germany’s anti-euro party Alternative for Germany (AfD) got a further boost on Sunday (14 September) entering two more state parliaments following regional votes. “We are a party that is renewing the political landscape in Germany where people turn their back to traditional parties that have lost their profile,” said AfD party head Bernd Lucke. “One can’t deny it anymore: the citizens are thirsting for political change,” he added. Preliminary results suggest the right-wing party secured around 10.6 percent of the vote in Thuringia state and 12.2 percent in Brandenburg. The two states are traditionally seen as a power base of support for Chancellor Angela Merkel’s Christian Democrats. Founded 19 months ago, the AfD manifesto calls for a scrapping of the euro in favour of the German Deutsche Mark. The eurosceptic party has strongly criticised the eurozone bailouts and opposes the concentrated power base of the EU institutions in Brussels.
So long as the economic crisis continues it will be close to impossible for pro-EU politicians to gain back the momentum. And, as I have repeated ad nauseam, the crisis will not end until they structurally reform away the welfare state. Which, again, won’t happen.
The sad part of this is that the movements trying to roll back the EU for the most part want to do it to protect their national welfare states from EU-imposed austerity. The only real exception is UKIP which fundamentally is a libertarian party. But everywhere else the goal is to localize control over fiscal policy so that they can perpetuate their own version of the standard, redistributive welfare state.
In short: the way things are going now it is a safe bet that the EU will be history long before the European welfare state.
Sweden holds a national election on Sunday, September 14. The current parliamentary majority, a center-right coalition called The Alliance, is set to lose its majority. A three-party group of red-and-green socialists is expected to come in a few parliamentary seats short of majority, leaving the next prime minister and his cabinet dependent on nationalist, self-proclaimed “socially conservative” Swedish Democrats.
Not a lot has been said about the election outside of Sweden. This is unfortunate, because the country that American liberals used to tout as their role-model society is on the brink of a social and economic disaster up and above what any European country has experienced since the military coups in Greece and Portugal in 1967 (not counting the Balkan War).
I have covered Sweden in scattered articles, and my new book Industrial Poverty has an entire chapter on the crisis of the Swedish welfare state. However, time constraints have precluded me from analyzing the situation there in more detail on this blog. Therefore, I am grateful that the Economist reports on the pending election and its consequences. Unfortunately, the reporting is not entirely accurate:
For a decade Sweden could plausibly claim to be Europe’s most successful economy. Anders Borg, the (formerly pony-tailed) centre-right finance minister since 2006, likes to trot out numbers for his time in office: GDP growth of 12.6%, a rise in gross disposable incomes of almost 20%, a budget moving into surplus and a public debt barely above 40% of GDP.
I have no idea where they get these numbers from. But I also do not see what is so impressive with them. A GDP growth of 12.6 percent in eight years is less than 1.5 percent per year if you factor in the compounded growth effect. According to Eurostat National Accounts data, GDP growth has averaged just over 1.3 percent per year since the center-right government won the 2006 election. Private consumption has increased a bit faster, but only at the expense of a doubled debt-to-income ratio for Swedish families. In 2000 the debt-to-income ratio was approximately 90 percent; ten years later it had doubled. (By comparison, the U.S. debt-to-income ratio topped out at 140 percent before the Great Recession began.) In my new book Industrial Poverty, which has an entire chapter on Sweden, I adjust consumption growth for a constant debt ratio. The result is a staggering loss of spending (you will have to buy the book to get the details…) which shows that the only reason why the Swedish economy has grown a bit faster than the EU average over the past decade is that Swedish families have accumulated a lot more debt.
In fact, from 2006 to 2012 household debt as share of GDP grew by 22 percent, faster than in two thirds of EU countries. By 2012 Swedish households are the seventh most indebted in the EU; an extrapolation of the 2006-2012 trend would place Sweden among the top five in 2013 (for which no complete data has been reported yet).
Debt-driven growth is not the way forward, especially since the debt drive is based on an out-of-control real estate market. Swedes have access to mortgage loans that only cost them interest payments, and the Swedish central bank has the most aggressive in the EU – after the ECB – in pushing more cash out into the economy. Long story short: there is nothing to brag about in the Swedish economy.
The only sector that is thriving in Sweden is the exports industry. They, on the other hand, are increasingly operating as an isolated sector from which little more than tax revenue trickle down.
The Economist again:
[The center-right government] has overturned Sweden’s old image as a high-tax, high-spending Socialist nirvana. Twenty years ago public spending took an eye-watering 68% of GDP; today the figure is heading to 50%. Although the tax burden remains high by international standards, top rates have been cut, as have corporate taxes. Taxes on gifts, inheritance, wealth and most property have been scrapped.
This is a bad case of statistical trickery. The reason why government spending reached two thirds of GDP in 1994 is that the country’s GDP had been contracting for three years at that time, that unemployment exceeded 15 percent and that there had been no major cuts in income security programs. During the three years that followed that 1994 figure government spending was cut by an equivalent of five percent of GDP. That would be $850 billion here in the United States. Later, the Swedish government laid off one fifth of the employees in its socialized health care system. Replacement ratios in income security systems were pushed down from 90 percent of your current income to 50 percent in the worst case and nowhere more than 80 percent. Student-to-teacher ratios grew in public schools and the number of hospital beds per 100,000 citizens was reduced to the lowest level in the European Union.
If you make such heavy spending cuts you will no doubt see a decline in the ratio of government spending to GDP.
On the tax side, the Economist perpetuates the mythology that Sweden has cut its top income tax rates. In 2013 the top rate was still 60 percent, a figure that anyone can find who is willing to examine Swedish tax tables. What has been cut is the tax burden at the lower end: Sweden now has its own version of the American Earned Income Tax Credit. However, its effect has been the same as the EITC, namely to increase the discouraging marginal effect in the income tax system. While it is cheaper to live on a low income, the price tag on a promotion or an education has risen significantly.
Ignoring reality on the ground in Sweden, the Economist is surprised that Swedish voters seem ready to hand government over to the green-socialist left. Needless to say, the magazine struggles to explain the predicted election outcome:
Although the polls have narrowed sharply in the closing days before the September 14th election, all the signs are that Swedes will toss out the centre-right alliance in favour of a centre-left government led by the Social Democrats. … Inequality has risen fast, as almost everywhere—but Swedes care about this more than most. Mr Reinfeldt boasts of the creation of 300,000 private-sector jobs, yet unemployment is stubbornly high at almost 8%, and far worse among immigrants and the young.
The number for job creation is flat wrong. According to Statistics Sweden, quarterly workforce data, a total of 227,000 jobs have been added to the Swedish economy from first quarter of 2007 to first quarter of 2014. Of those jobs, only 47 percent are full-time permanent positions. The rest are temporary, primarily low-wage service jobs. Furthermore, youth unemployment – which government has tried to manipulate down – persists around 25 percent, which is close to the EU average.
With all this in mind, there is no doubt that Sweden is better off today than it would have been under a left-wing government over the past eight years. The social democrats and their prospective coalition partners – the greens and an unapologetic communist party – have promised to raise a slew of taxes as soon as they get into office. Among the more controversial proposals is to return the payroll tax for young workers from its current rate of ten percent to the normal rate three times higher. It is difficult to estimate what the actual effect of this would be on the Swedish labor market, but the attempts made thus far point to 10-20,000 lost jobs for people between high-school age and 25.
Again, Sweden would be better off under the current Alliance government, but it is, frankly, not very difficult to provide better policy than socialists whose idea of growth and prosperity is a higher tax bill. What Sweden truly needs is a turn in the libertarian direction, with major reforms to dismantle the welfare state. Such reforms would start with privatization of the country’s anorectic health care system, proceed with a strengthened – and truly private – school choice system, then privatize the country’s costly and inefficient income security system, and top it all off with a major tax reform that would cut the current world’s-highest tax burden in half.
Such reforms, however, will have to wait until there are true libertarians in Sweden’s parliament. And that won’t happen over night.
Click on Page 7 about Sweden for an article on how Nazis in Sweden are consolidating and gaining strength. A scary story, but very important.
Recent unemployment data from Eurostat gives yet another grim picture of the European economic landscape. The EU Observer reports:
Over two-dozen regions throughout the Union have an unemployment rate twice the EU average. The data, published on Wednesday (16 April), by the EU’s statistical office Eurostat, says the jobless rate in 27 regions in 2013 was higher than 21.6 percent. Thirteen are found in Spain, 10 in Greece, three in the French Overseas Departments, and one in Italy. Five of the worst affected are found in Spain alone.
There is a strong relationship between unemployment and growth. In fact, over time the only way that the private sector can create jobs is if the economy as a whole is growing. With GDP growth at deplorable levels in the EU, there simply is no way for the economy to solve the unemployment problem.
The EU Observer again:
At 36.3 percent, Spain’s Andalucia tops the overall unemployment regional figures, followed closely by Ceuta, Melilla, Canarias, and Extremadura. Youth employment is worse. Young people are twice as likely to be unemployed, when compared to the average unemployment rate, in more than three quarters of all the EU’s 272 regions. Ceuta tops the list of youth unemployment with a 72.7 percentage, followed by Greece’s Dytiki Makedonia at 70.6 percent and Ipeiros at 67.0 percent.
These regions are nothing short of economic disaster zones. As I explain in the linked growth article above, there is very little economic value being created in the European economy that can translate into new jobs. At best, the unemployment situation is not getting worse – it is the herald of Europe’s new era of economic stagnation.
Back to the EU Observer:
The data also showed that over 47 percent of people without work have been unable to find a new job after a year. … Around 75 percent of the unemployed in Slovakia’s Vychodne Slovensko region are also unable to find a job after a year.
In fairness, as the EU Observer notes there are some islands in this sea of economic depression where conditions are a bit more normal:
At the other end of the spectrum are Germany, Austria and Sweden. At 2.6 percent, Germany’s Oberbayern region had the overall lowest unemployment rate. Both Freiburg in Germany and Salzburg in Austria tied at 2.9 percent. Oberbayern, along with Tubingen, also ranks as having the lowest youth unemployment rate at 4.4 percent with Freiburg coming in at a close second. Long-term jobless rates are the lowest in six Swedish regions, which includes Stockholm.
In January I explained that the German economy is on the downslope, with key GDP components gross exports and private consumption coming to a standstill last year.
As for Sweden, nationwide unemployment is a hair below eight percent, with youth unemployment at three times that rate. Recently there have been microscopic changes for the better, but that is coming to an abrupt end with the new fiscal policy plan that Treasury secretary Anders Borg announced back in February: tax hikes, tax hikes and tax hikes.
There is one more caveat with the low unemployment numbers in, primarily, Sweden. Government has a large share of the workforce on its payroll.
The Swedish Treasury secretary, Anders Borg, has been in office now for seven years. He is one of the longest lasting masters of government funds in the free world. I’ve had a lot of criticism for him over the years, but I also want to acknowledge that he has done some things right, at least given the circumstances.
Mr. Borg came into office after the 2006 parliamentary election, and was very soon hurled into the Great Recession. I really don’t envy his job: Swedish law mandates that the government prioritizes a balanced budget, annually, above all other economic policy goals. This is an easy priority to comply with in good times, but once a recession strikes government revenue takes a nose dive. In the elaborate European welfare states, government spending increases precisely when revenue declines. In other words, government budgets are built to open major deficits in recessions.
Like all other Treasury secretaries in a similar situation, Mr. Borg chose to fight the deficit. Early on, his fiscal policy was clumsy and came with ill-conceived spending cuts. His budgets were poorly written, sometimes with outright embarrassing analytical flaws. Over time, though, things got better on the analytical side and Mr. Borg persisted in pushing for a Swedish version of the Earned Income Tax Credit. As I explain at length in a chapter in my book Ending the Welfare State, the EITC is an inefficient way of cutting people’s tax burdens, primarily because it creates very steep marginal tax effects for low-income families. That said, in a country that has a history of having the world’s highest taxes it is better to introduce an EITC of sorts than to do nothing.
In the last year or two Mr. Borg has taken yet another step toward a more comprehensive fiscal policy. He has cited Keynesian theory as the source of inspiration for his fiscal policy. Last year he emphasized, several times, the need for fiscal stimulus to get the Swedish economy going. He pointed to a further expansion of the Swedish EITC as an example.
Today Mr. Borg still abides by a crude, textbook version of the Keynesian-Neoclassical synthesis. He still wants to counter swings in the business cycle with active, stabilizing fiscal policy. There is nothing wrong in this, except for two things: Mr. Borg is still determined to defend the indefensible welfare state – and you would have to accept the fact that Sweden is now out of its recession and heading for some kind of macroeconomic over-heating.
Leaving the indefensibility of the welfare state aside for now, the notion that Sweden is in a growth period is of bigger interest than it might seem at first. In claiming that he sees a recovery in the economy, Mr. Borg echoes similar sentiments from Eurocrats in Brussels. But just as it is wrong to say that Greece is on a macroeconomic rebound, it is simply bizarre to say that Sweden is out of the recession.
Let us look at some data from Eurostat to see where Sweden really is today:
- The Swedish unemployment rate is currently reported by Swedish statistical agencies as 7.7 percent. According to Eurostat it has been at eight percent since 2010 with no real trend in either direction.
- Youth unemployment is also trendless. After topping out at 26.7 percent during the crisis it is now steady around 24 percent.
- GDP growth is equally unimpressive. In the third quarter of 2013 the Swedish economy grew by 0.7 percent over the same quarter in 2012. The average annual growth rate for the last four quarters is 0.8 percent.
These are not numbers that indicate any kind of over-heating in an economy. There is not even a hint of recovery here. Okun’s law says that an economy needs to grow at more than two percent per year to bring down unemployment; so far, the Swedish economy cannot even get to half that rate.
The only variable with any kind of positive trend is private consumption. In the third quarter of 2013 Swedish households increased their spending by 2.1 percent, adjusted for inflation, over the same quarter in 2012. This was the fifth quarter in a row with accelerating consumption growth, which could be taken as a sign of economic recovery. However, if we remove spending on housing from these numbers the average growth rate declines to approximately European average. The reason why we need to make this adjustment is that Swedish households are spending exceptional amounts on housing: there is practically no production of new homes, and population growth is among the highest in the industrialized world (due to large immigration from non-Western countries). As a result, Swedish households have been forced to basically mortgage the rest of their lives, with debt-to-disposable-income ratios in excess of 180 percent. By comparison, when the American housing bubble burst in 2008, the average U.S. household had a debt of 130 percent of their disposable income.
In short: what seems like a trend of recovery in Sweden’s private consumption is in reality a debt-driven housing spending spree. It cannot and will not bring the economy back to growth.
The saddest part of this is that Mr. Borg wants to quell an overheated economy that does not exist, by raising taxes. All that this will do is perpetuate the current situation with high unemployment, almost no growth – and dangerously indebted households. In fact, by raising taxes Mr. Borg could provoke an acute debt crisis: by taking more from the private sector he raises the likelihood that private disposable income will cease to grow in the next year or two. As this happens, the ratio of household debt to disposable income will rise again, but since it is now the denominator that is stagnating, the risk of bank panic is higher than if the numerator was accelerating.
In short: Mr. Borg could provoke a meltdown on the Swedish real estate market.
Again, I applaud Mr. Borg for wanting to build his fiscal policy on an analytical foundation. His problem is that he does not give himself enough time to do the analysis (and he certainly does not have access to adequate brainpower at the Treasury Department in Stockholm…). A growth period in need of any kind of fiscal-policy moderation would look more like the Swedish economy in the 1980s when unemployment was at two percent.
Yes, two percent.
In a way, the fact that Mr. Borg does not want to wait for full employment before he takes to growth-quelling policy measures is an indication of how the past couple of decades have changed people’s perception of the macroeconomic normal. This is not just the case in Sweden, but in Europe in general.
We have to watch out here in the United States so we don’t fall for the same illusion.
I recently got pulled into a debate on Facebook over health reform, and encountered yet another American liberal who still thinks Sweden is the perfect role model for the United States. I offered him to help him emigrate to Sweden, including setting up job interviews, contacting the embassy for a work visa and finding a place to live. He dropped out of the conversation somewhere between the job interview and the embassy.
Today’s article is a tribute to him and all the people around the world how believe that Sweden is the epitome of a happy society where all social and economic problems are solved. The Local reports on the state of the socialized Swedish single-payer health care system:
One in ten Swedes now has private health insurance, often through their employers, with some recipients stating it makes business sense to be seen quickly rather than languish in national health care queues. More than half a million Swedes now have private health insurance, showed a new review from industry organization Swedish Insurance (Svensk Försäkring). In eight out of ten cases, the person’s employer had offered them the private insurance deal. “It’s quicker to get a colleague back to work if you have an operation in two weeks’ time rather than having to wait for a year,” privately insured Anna Norlander told Sveriges Radio on Friday. “It’s terrible that I, as a young person, don’t feel I can trust the health care system to take care of me.”
That would be the tax-funded, government-run health care system, the performance of which I have chronicled in my book Remaking America.
Back to The Local:
The insurance plan guarantees that she can see a specialist within four working days, and get a time for surgery, if needed, within 15. In December, the queues in the Swedish health care system pushed the country down a European ranking of healthcare. “Why can Albania operate its healthcare services with practically zero waiting times, and Sweden cannot?” the report authors from the Health Consumer Powerhouse (HCP) organization in Brussels asked
Ironically, the Albanian health care system beats the Swedish system because the Albanian government has failed on the health care front even more than the Swedish government has. Here is one description of it, from a source that generally seems to be reliable but which I have not explored in depth yet:
All citizens are entitled by law to equal access to healthcare. Healthcare is funded by the state and private practice is limited to a small niche sector. The state system is supposed to be funded through insurance contributions from those employed and their employers, but poverty in Albania is rife and few can afford to pay. The net result is that many people fail to get much needed medicine and medical care to treat their ailments. The failure to collect a substantial amount of contributions means that healthcare system is strongly reliant on charitable aid for medical supplies and drugs.
If this is a correct assessment of the problems in the Albanian system, the charitable contributions are what make the system work. An increased penetration of private initiatives helps circumvent rigid, centralized bureaucracies. While, again, I am not entirely sure of the source, the explanation of how the Albanian system apparently works has many resemblances to how Polish health care worked in the early post-Communist days. Since the Albanian system originally is of the same nature as the one Poland used to have, it is reasonable to assume that europe-cities.com got this one right.
Given that Albania’s health care works as described, it is startling to see how the Swedes continue to maintain their rigid single-payer system. The Local again:
Sweden aims to make sure people can see their general practitioner within one week, which the organization said was a modest goal in and of itself. “The target for maximum wait in Sweden to see your primary care doctor (no more than seven days) is underachieved only by Portugal, where the corresponding figure is 15 days,” the report stated. Health system wait times in Sweden were deemed so lengthy that they pulled Sweden down the European ranking despite the country having technically advanced healthcare at its disposal. “The Swedish score for technically excellent healthcare services is, as ever, dragged down by the seemingly never-ending story of access/waiting time problems,” the reported noted, underlining that the national efforts to guarantee patient care had not helped to cut the delays significantly.
There is a very good reason for this. The “efforts” to reduce waiting lists have primarily been concentrated on passing bills in the national legislature that basically says “you have the right to health care, and if you don’t get health care before you die of your illness, then you really have the right to health care.” In addition to such decisive, world-changing legislative action, there has been a whisking-around of existing health care funding. One day more money is use to treat heart patients, another day it is removed from there and allocated to treat children with cancer. Etc.
This is the of one of the world’s most rigid, most socialized health care systems. Not only do cancer patients often have to wait more than 100 days for treatment, but nobody keeps track of all those who die waiting. There are indirect measures of the wait-list mortality rate, but so far I have not found any comprehensive, internationally established measurements. Regardless, when opportunity arises I will return to this issue even if it is concentrated to Sweden. A high mortality rate among patients waiting for treatment in a socialized system is a clear indicator of an ideological choice: the principle of single payer is put above the life and wellness of the individual patient.
The liberal welfare-state paradise is crumbling. My Fox New York has yet another glimpse of the destruction under way:
Swedish police detained 28 people Sunday after a group of neo-Nazis attacked an anti-Nazism demonstration in a Stockholm suburb by hurling bottles, torches and firecrackers. Two people were hospitalized and a policeman was injured in the back after being hit by a heavy object, police spokesman Sven-Erik Olsson said. Olsson said around 200 people participated in the planned, peaceful demonstration in the suburb of Karrtorp when they were attacked by a smaller group of about 40.
The “smaller group” consisted entirely of members of an openly Nazi group called Swedish Resistance Movement. It is a dangerous, militant organization that does not shy away from violence. On the contrary, they have demonstrated on many occasions that they are not only ready to use violence but also train for violence-based tactics. On previous occasions when they have resorted to violence, it has been at their own public rallies, in response to provocations from radical leftists, and their response has always been well coordinated and intimidating.
However, this is the first time they have actively sought out their opponents’ public event and launched an attack. My Fox NY again:
Those detained are suspected of rioting and various assault charges. The demonstration was organized by a local citizen group as a protest against increased neo-Nazi campaigning in the area. Video footage published by state broadcaster SVT showed families with baby carriages escaping the scene as firecrackers exploded in the middle of the crowd and people were heard screaming. Later, the crowd moved toward the attackers chanting anti-Nazism slogans and forcing them to retreat. A neo-Nazi group called the Swedish Resistance Movement claimed responsibility for the attack on its website.