The 1970s brought many changes to international trade conditions which affected the Swedish economy negatively. Since the country’s domestic market is relatively small, many industries rely heavily on export for their survival.
Thus, the oil crises of 1973-74 and the subsequent decline in international business activities affected Sweden more drastically than many other countries. At that time, the list of problems the Swedish economy suffered from also included toughening competition from other regions of the world, a dysfunctional wage formation causing a high inflation rate, and an inhospitable business climate due to high taxes.
Subsidies and devaluations
The political answer to the problems was to grant extensive government subsidies to suffering industrial sectors, such as the steel and shipbuilding industries. These measures were not altogether successful, however, since they only turned out to be temporary solutions to keep up employment rates. In addition, they preserved structural problems in the economy which did not only cause inflation but later on would cause unemployment as well.
These measures were not altogether successful, however, since they only turned out to be temporary solutions to keep up employment rates.
High cost increases and weakening competitiveness forced several devaluations of the Swedish Krona during the 1970s and 80s. Although the devaluations temporarily restored the short-term competitiveness of for example the chemical, plastics, electronics and car industries, they worsened inflation problems in the Swedish economy in the long term.
During the 1980s, Swedish policymakers initiated deregulation of many market sectors with the intention of improving the functionality of the Swedish economy. Deregulations were initiated to dismantle the state-run transportation and electricity monopolies.
Between 1983 and 1990, several strategic deregulations of the financial market were undertaken, especially a liberalisation of loan restrictions. This deregulation contributed to a very rapid increase in lending, largely concentrated to the real estate sector. In retrospect, these regulations of the financial market were the main reasons behind an extensive and risky credit expansion.
Deregulations were initiated to dismantle the state-run transportation and electricity monopolies.
Due to the devaluations, the export sector was in possession of a large monetary surplus by the end of the 1980s. This liquidity problem was solved by investing the surplus in the stock market and in real estate, which contributed to a rapid growth in overall prices of assets.
A bursting financial bubble
The above mentioned course of events finally led to the burst of a fully developed banking and financial service bubble in the early 1990s. Due to massive credit losses, the effects of the subsequent economic crisis reached deep into the very foundations of the Swedish financial system. The bank and financial service sector nearly collapsed and the situation could only be stabilised by massive interventions by the government.
This crisis, in combination with an international economic slowdown, a governmental financial crisis, the subsequent currency crisis that eventually led to the abandonment of the fixed exchange rate, and the reconstruction of the Swedish tax system, became the starting point of the deepest economic crisis Sweden had seen since the 1930s.
Public finances under strain
The abandonment of the fixed exchange rate depreciated the Swedish Krona considerably. However, the positive effects for the export industry were not large enough to cover the losses in domestic demand, which in turn led to accelerating unemployment. Between 1990 and 1993, registered unemployment increased from about 1.5 per cent to 8.2 per cent and GDP fell by approximately 5 per cent.
The central government budget deficit exceeded 15 per cent of GDP in 1994 and the national debt climbed, peaking at around 80 per cent of GDP in 1998.
Falling GDP and lower employment rates soon resulted in a sharp deterioration in public sector finances. The rise in governmental expenditure coincided with falling tax revenues and led to great strains on public finances. The central government budget deficit exceeded 15 per cent of GDP in 1994 and the national debt climbed, peaking at around 80 per cent of GDP in 1998.
Due to the combination of two decades of weak economic growth and the severe economic crisis, Sweden slid in the prosperity league, measured as GDP per capita adjusted for purchasing power, from fourth place in 1970 to sixteenth place in 1998, which is the lowest ranking so far.
Reforms and the dot-com bubble
In the aftermath of the extraordinary economic problems of the early 1990s, a battery of structural reforms and austerity measures were launched. Important structural governmental reforms included for example the independence of the Swedish Central Bank, the Riksbank, from the Government, an inflation target and an expenditure ceiling for the public sector. Furthermore, the membership in the European Economic Area, EEA, from 1995 membership in the European Union, spelled stricter competition rules. The industry and business sectors in general implemented far-reaching efficiency measures.
After 1993, the growth rate of the Swedish economy was well in line with the average of the other member states of the OECD. After the severe economic crisis of the early 1990s, the economy stabilised. Improved efficiency along with the floating of the Swedish Krona laid the foundation for a rapid recovery of the output levels of the export industries during the latter part of the 1990s.
However, the rapid growth of the IT sector together with unrealistic prising of IT shares on the stock market created yet another bubble that burst in the early 21st century. This resulted in an economic slowdown and declining employment rates in the financial, telecom and IT sectors. Compared to the crisis in the early 1990s, however, this downturn was mild.