Sweden’s Lessons for Managing Financial Crisis

Although Sweden is a small country, its experiences managing its financial crisis of the early 1990’s may provide valuable lessons for others. Most importantly, adopting protectionist measures would merely increase fiscal problems, ultimately deepenening the international downturn and delaying recovery.

STOCKHOLM – Although Sweden is a small country, its experiences managing its financial crisis of the early 1990’s may provide valuable lessons for others.

The Swedish crisis began in 1991 with the first major insolvency in the financial market. A number of damaging developments followed:

  • Most of the banking system fell into deep crisis. One bank went into liquidation, while the rest of the system required extensive governmental emergency aid.
  • Property values fell by approximately 35% over four years. Equities fell by 55% over a three-year period.
  • Despite the central bank’s 500% interest rate, it was impossible to defend the Swedish krona, which was pegged to the euro’s forerunner, the European Currency Unit or Ecu. The krona depreciated by around 25% in the autumn of 1992, a year after the crisis began.
  • The crisis triggered a sharp economic downturn. GDP fell by 7% over three years, and unemployment rose by 7% over five years.
  • During a three-year period, government debt increased by about 50%, with the public deficit reaching 12% of GDP. Falling GDP led to declining tax revenues, while rising unemployment led to an automatic increase in public expenditure.

Although the crisis that began in the United States in 2007 has since spread worldwide, the outlook for the US economy is clearly crucial to eventual global recovery. If we assume that the US is experiencing a typical financial crisis, GDP will fall this year as well. Unemployment can be expected to peak around 12%, and gross public debt will have increased by 50%, which corresponds to around 90% of GDP.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

or

Register for FREE to access two premium articles per month.

Register

Support High-Quality Commentary

For more than 25 years, Project Syndicate has been guided by a simple credo: All people deserve access to a broad range of views by the world's foremost leaders and thinkers on the issues, events, and forces shaping their lives. At a time of unprecedented uncertainty, that mission is more important than ever – and we remain committed to fulfilling it.

But there is no doubt that we, like so many other media organizations nowadays, are under growing strain. If you are in a position to support us, please subscribe now.

As a subscriber, you will enjoy unlimited access to our On Point suite of long reads, book reviews, and insider interviews; Big Picture topical collections; Say More contributor interviews; Opinion Has It podcast features; The Year Ahead magazine, the full PS archive, and much more. You will also directly support our mission of delivering the highest-quality commentary on the world's most pressing issues to as wide an audience as possible.

By helping us to build a truly open world of ideas, every PS subscriber makes a real difference. Thank you.

Subscribe Now

https://prosyn.org/And2haO