Sweden puts no comfort food on the austerity menu

30 Sep

So here’s the latest word on this from Martin Flodén, econ prof at Stockholm university who found the 1992 Swedish austerity package to be a great success. The problem is more complicated in this case (see Blyth’s Great Transformations) but even if one agrees with Floden one still has to face the fact that austerity in Europe today is unlikely to pull off a Swedish feat. Here’s professor Floden:

Fiscal austerity was effective during the Swedish economic crisis, but that insight is not particularly helpful today. Austerity would have been more complicated both economically and politically if it had not been supported by currency depreciation and strong external demand, and crisis countries today do not benefit from such developments. Attempts to consolidate before growth had resumed failed in Sweden. One possible interpretation of these observations is that prospects to consolidate are bleak until competitiveness has been restored in crisis economies.

The point is clear: fiscal austerity works in tightly specified conditions that are simply not there today.More specifically

First, and most importantly, the sharp depreciation of the Swedish exchange rate in combination with strong growth on export markets was a crucial aspect of the Swedish recovery. This resulted in an export-led recovery, which facilitated crisis management. If rapid economic growth had not resumed quickly:

… the general guarantee extended to the banking system could have turned out much more costly, as a similar guarantee did in Ireland more recently.
… the recapitalisation of the banking system in 1992 and 1993 would most likely have been insufficient.
… fiscal consolidation, in particular in 1995 and 1996, might not have been economically or politically feasible (there are clear indications, by the way, that the consolidation was contractionary).

Today’s crisis countries have problems restoring competitiveness, partly because of fixed exchange rates and partly because competitiveness is relative to other countries that now face similar challenges (see Figure 2, and note that Krugman 2011 and others argue that the Irish data are misleading). And in this global recession, they cannot benefit from benign world market developments as Sweden did. The successful Swedish austerity program in the mid-1990s does not, therefore, provide many insights to the ongoing debate on austerity versus stimulus (see for example Alesina and Giavazzi 2012, Corsetti 2012, and DeLong 2012).

Source: http://www.voxeu.org/article/fiscal-consolidation-sweden-role-model


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