Trapped in the SEK-Zone

This book (technically it’s not a book, it’s a blog post but I could make a pdf and then it’s a book right?) deals with the economic problems Sweden is facing due to its membership in the SEK-Zone. It is inspired by Hans -Werner Sinns upcoming book “Gefangen im Euro” (which from the look of it will be x pages of whining about foreigners). All numbers are taken either from the Swedish statistics agency or IMF.

A textbook case

Sweden has:

  • High unemployment: 8.5% in February 2014.
  • Strong public finances: The decifit 2013 was 1.1% of GDP and general government debt at the end of the year was 41% of GDP.
  • Deflation: Inflation rate of -0.2% in February 2014.
  • A monstrously large current account surplus: 5.7% of GDP in 2013.

If ever there was a textbook case for fiscal and monetary expansion, this is it. Yet the political parties all agree that doing nothing is the best course of action, except a small xenophobe party that wants to do nothing and blame the immigrants when it doesn’t work. Why is that? The explanation lies in the strict rules imposed by Sweden due to its membership of the SEK currency region.

20 years of failure

Sweden has been a member of the SEK-Zone since 1873 and the first 120 years it seemed to work relatively well. However, in the early 90s the country was hit by a severe banking crisis. The crisis was solved by letting the SEK float so that Sweden could export itself out of rescession. The crisis also led to treaty change in the SEK-Zone with members agreeing to:

  • An independent central bank with an inflation target of 2%.
  • A budget surplus goal of 1% over a budget cycle.

So have these policies been succesful? The short answer is no. The figure below shows unemployment in Sweden. One can see that unemployment recovered immediately following the crisis but then got stuck at a high level.


One explanation for the failure is that the central bank has been completely ignoring its mandate. Since the inflation target was introduced in 1995 average inflation has been 1.2%. Another explation is that the surplus rule means that the goverment sector will be a drag on the economy.

A bleak future

The future looks bleak for Sweden. With a gigantic current account surplus it can’t export itself out of the mess. Actually it’s more likely that Sweden will eventually have to stop being a drag on the global economy. Possible ways out could be:

  •  Euro membership: This would have the advantage of a more active central bank and free Sweden from the current “one size doesn’t fit one” regime. It would also give room for a substantial fiscal boost: Government expenses could have been 1.5% of GDP higher in 2013 and still fit within the Maastricht criteria.
  • Treaty change: In principle Sweden could dump its budget surplus goal and demand that the central bank explains what the hell it is doing. The problem here is that a treaty change would have to be approved by one parliament and there is little apetite for that, especially in an election year.

The only hope left is a global economic recovery. Sweden is, as usual, hoping that other countries will solve it’s problems.

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