Sweden’s Budget Could Unsettle Slow Economy

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.