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Sweden’s Budget Could Unsettle Slow Economy

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Sweden’s normally healthy economy slowed during the overall Great Recession, but rebounded in 2010 on strong exports and a profitable banking sector. However, the slowdown elsewhere—namely the EU, where Sweden sends most of its exports—caused its economy to drop again in 2013. And now a rejection of the government’s latest proposed budget by a minority anti-immigration party could bring turmoil to what’s normally a pretty organized government, and thus bring uncertainty to investments.

While the economy is still strong and basically stable, its unemployment rate is rising and hit 7.5% in October, up from 7.2% the month before. Sweden normally has a low average unemployment rate—it averaged 5.82% from 1980 to 2014, according to figures from Statistics Sweden—and has drawn numerous immigrants in search of jobs or asylum.

In fact, immigrants make up more than 10% of its population, and in November the Migration Board increased its estimate for 2015 of the number of asylum seekers arriving, after fleeing war zones from Iraq to Syria, at 95,000. The next highest number to arrive in a single year was 84,000 in 1992; they were seeking safety from the wars in the former Yugoslavia.

The proposed budget from the minority Social Democrats called for higher taxes to create jobs, beef up unemployment benefits, pay for infrastructure and lower climate impact. However, the Sweden Democrats, another minority party that won 13% of the vote in September, said they would oppose anything that supported increased immigration. They called for the current government to cut immigration by 50% and refused to support the proposed budget.

None of the other parties in the government have thus far been willing to work with the Sweden Democrats, amid accusations of racism leading the drive against immigration, but the rejection of the budget could lead to snap elections—something the Sweden Democrats would welcome. The other possibility is to scrap the existing budget and come up with a new one before the end of December. This is unlikely if all the political parties continue to refuse to work together.

The budget news sent the krona down as much as 0.76% against the euro in Stockholm, which could actually be good news on another problem front: the government is presently struggling with the threat of deflation. A weaker krona would help Swedish exporters, who are already fighting lowered demand in the EU—exports are up, by the way, with a third-quarter expansion that was greater than expected, although not yet enough to refloat the entire economy—and the krona had already fallen about 4.5% against the euro this year.

But currency alone won’t solve the problem of deflation, and with interest rates already at zero, through an action the Riksbank took in October, there’s nowhere to go but into negative territory, or into more direct action such as quantitative easing or even imposing a currency floor. However, that last could bring repercussions from Europe amid accusations of devaluating the currency to get the upper hand in export markets. And QE wouldn’t do much, either, with the yield on 10-year Swedish bonds, at only around 1%, setting record lows.

One area in which the Swedish economy has been notably successful of late is the effort to transition to a cashless society. Four out of every five transactions now are done electronically, according to Niklas Arvidsson, associate professor of industrial dynamics at Sweden’s Royal Institute of Technology, who pointed out in a report that crime is also down accordingly.

In fact, according to the Swedish Bankers’ Association, not only are armed robberies at a 30-year low, but there are other benefits as well. The Swedish financial sector has reaped the benefit of not having to deal with cash by becoming more cost efficient, with five out of Sweden’s six largest banks operating on a cash-free level whenever possible.

But household spending is down and unlikely to increase because the Swedish government raised interest rates prematurely over concerns about debt levels in the country, before it resorted to dropping them to zero. Therefore, it appears as if the government will have to resort to stronger measures to stimulate inflation and revive demand at home.