View: Sweden Shows Europe How to Cut Debt

Sweden faces a difficult year, like every other European economy, but unlike the rest of the European Union, it’s equipped to cope. There are lessons here, especially for the EU’s other non-euro countries.

Scandinavia’s biggest economy will see growth slow to less than 1 percent in 2012, down from an impressive 4.5 percent in 2011, according to the National Institute of Economic Research. Sweden relies heavily on exports to the rest of Europe, and the EU’s protracted economic crisis will set it back.

Shortly before Christmas, the Riksbank cut its benchmark rate for the first time since 2009 to 1.75 percent. The NIER predicts further reductions this year in response to a weaker economy and slower inflation. This prospect underscores the seriousness of the situation -- and how valuable it is at such times to have an interest rate to change.

The value of monetary independence is the first and most important Swedish lesson. Sweden stayed out of the euro system when the currency was introduced in 1999, and in the past several years, the government has used this monetary flexibility to the full.

Firm Fiscal Hand

With most of the EU bound by the European Central Bank’s excessive monetary caution, the Riksbank cut interest rates more sharply than the ECB and (in real terms) the U.S. Federal Reserve from 2007 to 2009. Its inflation-adjusted interest rate fell from 2.25 percent to minus 1.5 percent. The central bank also devised new credit facilities and other unconventional measures to support the Swedish financial system.

Fiscal policy played a smaller role in steadying the economy. This, too, was a legacy of the 1990s, when budget deficits widened and a national consensus formed around the need to curb government spending and stabilize the public finances. Sweden’s subsequent success in doing that is nothing less than remarkable.

Hence Sweden’s second lesson: Fiscal stimulus isn’t a necessary condition for economic recovery. Through the course of the recent recession, the government’s cyclically adjusted budget stayed in surplus. As a result, Swedish government debt stands at less than 40 percent of gross domestic product, among the lowest of any rich country.

Fiscal policy still helped to cushion the recession and support a recovery -- not with discretionary stimulus, but through so-called automatic stabilizers, which are relatively strong in Sweden. (Measures such as consumption taxes and generous unemployment benefits relax fiscal policy in recessions and tighten it in booms, even if policy stands pat.)

In Sweden’s case, a firm fiscal hand, far from stifling the recovery, probably helped it along. Keeping the budget under control buoyed consumer and investor confidence. Surging demand for Swedish debt drove bond prices higher last year; indeed, Sweden’s government pays less to borrow than Germany’s.

Should others follow its example? For one group, the answer is plainly yes. Members of the EU that have not yet adopted the euro are nonetheless committed in principle to doing so. (This includes Sweden; the U.K. and Denmark are two exceptions.) Sweden proves, if further proof were needed, that euro membership is a mistake.

Lacking a currency to devalue and interest rates to cut, members of the euro system would only worsen their recessions if they squeezed fiscal policy as tightly as Sweden did. Beyond the EU, though, Sweden does suggest that sufficiently powerful monetary easing can carry most, if not all, of the burden of economic stabilization.

New Swedish Model

http://www.bloomberg.com/news/2012-01-05/view-sweden-shows-europe-how-to-cut-debt.html

Job Cuts in U.S. Jumped 31% From Prior Year’s Decade Low, Challenger Says

Job cuts announced by U.S. employers increased in December from the prior year’s decade low.

Planned firings (CHALTOTL) rose 31 percent to 41,785 last month from 32,004 in December 2010, which were the fewest since June 2000, according to Chicago-based Challenger, Gray & Christmas Inc. Job cuts totaled 606,082 for all of 2011, up 14 percent from the previous year, the report showed.

Government and financial services accounted for four of every 10 announcements last year, and the areas will probably struggle this year as federal agencies try to reduce budget deficits and the European debt crisis threatens to cut off credit, the report said. At the same time, the year’s total was less than half the recession peak of 1.29 million firings announced in 2009.

“While several other sectors saw increased job cuts, the pace of downsizing in most industries is still well below recession levels,” John A. Challenger, chief executive officer of Challenger, Gray & Christmas, said in a statement. “But even as job cuts remain low in most sectors, employers still appear reluctant to add jobs. Job creation is likely to remain slow and steady in 2012.”

Compared with November, job-cut announcements decreased 1.6 percent, dropping to the lowest level since June. Because the figures aren’t adjusted for seasonal effects, economists prefer to focus on year-over-year changes rather than monthly numbers.

Financial institutions led the December job cuts with 7,433 announced reductions, according to Challenger. Industrial goods producers followed with 6,621.

Go Banks

http://www.bloomberg.com/news/2012-01-05/job-cuts-in-u-s-jumped-31-from-prior-year-s-decade-low-challenger-says.htmlvernment,