All these preconditions were weaker in the United States and the euro area. Lastly, Sweden does not have the major structural problems that have arisen in the economies of those countries hit by a “boom-bust” cycle on the housing market – problems that have been reflected in a substantial weakening of public finances. House prices recovered after a slight turndown in connection with the crisis and are now at a higher level than before the crisis began. While we continue to follow developments in the Swedish housing market, structural factors, such as a low level of construction and traditionally low levels of credit losses on Swedish mortgages, reduce the likelihood of major price falls in the near future. What have we learnt from the crisis? It would be wrong to focus solely on the factors that explain Sweden’s relatively strong recovery. There were also a number of vulnerabilities in the Swedish institutional set up and banking system which threatened to increase the severity and length of the downturn. The major Swedish banks are heavily reliant on international funding and liquidity in these markets fell sharply following the collapse of Lehman Brothers. To protect the banking system, the Riksbank provided general liquidity assistance in the form of loans in SEK and USD at long maturities. This liquidity assistance was substantial: it peaked at around 15 per cent of GDP and lasted for over two years. Some Swedish banks were also exposed to significant risks through their operations in the Baltic countries.
Stefan Ingves: Coming stronger out of a crisis – lessons from Sweden Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank, at the Brussels Economic Forum, Brussels, 18 May 2011. *  *  *  “If in debt, you are not free.” This expression was widely used by Göran Persson, Sweden’s former prime minister, to explain the need for the extensive fiscal consolidation process that Sweden underwent after the crisis in the 1990s.1 In 1997, a three-year nominal expenditure ceiling was introduced. This was an important step towards increasing budgetary discipline and strengthening the long-term perspective of the budget process. In addition, as part of this fiscal consolidation process, a new fiscal policy framework that included a budget surplus target of 1 per cent over the business cycle was introduced in the year 2000. With these instruments in place the debt to GDP ratio fell from 56 per cent in the year 2000 to 35 per cent today. Recent developments in many European countries remind us of Göran Persson’s words: small, open economies are vulnerable to crises of confidence when financial markets are in turmoil. They need to stand on very solid economic foundations and be supported by a credible and sound fiscal-policy framework. Sweden was lucky enough to be in this position when the recent crisis struck. This was indeed fortunate as the crisis had a major impact on the Swedish economy. GDP fell by more than 5 per cent in 2009 – the largest fall since the 1930s.