The strong public finances to start with have helped Sweden to pursue an expansionary fiscal policy during the crisis without putting the long-term sustainability of public finances at risk, and to keep interest rates down at German levels. (Slide: Government bond rates of different countries). Important to have a surplus over the economic cycle One of the reasons why public finances in Sweden are so strong is that after the crisis of the 1990s the government and parliament formulated a surplus target for the public sector. Public finances were to show a surplus of 2 per cent of GDP over an economic cycle. This was in line with the growth and stability pact in the EU, which among other things meant that public finances should be in balance in the medium term, or show a surplus. This target was changed to 1 per cent of GDP when the definition of general government net lending was changed in the National Accounts. During the ten-year period prior to the most recent crisis, the surplus averaged 1.4 per cent of GDP and it was possible to reduce the gross public debt by almost half in this period. BIS Review 56/2010  5  The framework for fiscal policy also includes another essential part, the expenditure ceiling that prescribes an upper limit in Swedish kronor for general government expenditure over the coming three years.
However, the aid measures promised so far have not succeeded in reassuring the markets. 3  See Reinhart and Rogoff (2010). BIS Review 56/2010  3  Several other countries also have serious problems with their public finances Other countries are also experiencing serious problems. Among the euro countries, apart from Greece, these are mainly Portugal, Italy, Ireland and Spain. Critical conditions for assessing how these countries shall attain a sustainable development of their public finances in the future are the current size of the public sector debt in relation to GDP, the credibility of their future fiscal policy and the conditions for growth in domestic and external demand. The larger a country’s debt in relation to its GDP, the greater its interest expenditure and the closer it is to an untenable situation. Among the countries I just mentioned, Italy has the largest burden of debt, with a gross public debt similar to that of Greece at just over 100 per cent of GDP. The other countries are not quite so vulnerable, but their debts are rising rapidly. (Slide: Gross public debt in Portugal, Ireland, Italy and Spain). The credibility of their future fiscal policy is a decisive factor, not least for the rate of interest they are forced to pay on their public debt. Here, earlier patterns of balance or deficit play an important role, as does, of course, the content of their fiscal policy consolidation programme.