Wikipedia on Economic Crash of the 1990s

From Wikipedia

“Sweden has had a unique economic model in the post-World War II era, characterized by close cooperation between the government, labour unions and corporations. The Swedish economy has extensive and universal social benefits funded by high taxes, close to 50% of GDP.[4] In the 1980s, a real estate and financial bubble formed, driven by a rapid increase in lending. A restructuring of the tax system, in order to emphasize low inflation combined with an international economic slowdown in the early 1990s, caused the bubble to burst. Between 1990 and 1993 GDP went down by 5% and unemployment skyrocketed, causing the worst economic crisis in Sweden since the 1930s. In 1992 there was a run on the currency, the central bank briefly jacking up interest to 500% in an unsuccessful effort to defend the currency’s fixed exchange rate.[5] Total employment fell by almost 10% during the crisis.

A real estate boom ended in a bust. The government took over nearly a quarter of banking assets at a cost of about 4% of the nations GDP. This was known colloquially, as the “Stockholm Solution.” The United States Federal Reserve remarked in 2007, that “In the early 1970s, Sweden had one of the highest income levels in Europe; today, its lead has all but disappeared….So, even well-managed financial crises don’t really have a happy ending.”[6]

The welfare system that had been growing rapidly since the 1970s couldn’t be sustained with a falling GDP, lower employment and larger welfare payments. In 1994 the government budget deficit exceeded 15% of GDP. The response of the government was to cut spending and institute a multitude of reforms to improve Sweden’s competitiveness. When the international economic outlook improved combined with a rapid growth in the IT sector, which Sweden was able to capitalize from, the country was able to emerge from the crisis.[7][8]

The crisis of the 1990s was by some viewed as the end of the much buzzed welfare model called “Svenska modellen”, literally The Swedish Model, as it proved that governmental spending at the levels previouly experienced in Sweden was not long term sustainable.[9]Much of the Swedish Model’s acclaimed advantages actually had to be viewed as a result of the post WWII special situation, which left Sweden untouched when competitors’ economies was in pieces.[10]

However, the reforms enacted during the 1990s seem to have created a model in which extensive welfare benefits can be maintained in a global economy.[4]

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~ by swedishzine on September 22, 2009.

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