Former Swedish prime minister Göran Persson recalled the night in 1997 when the EU’s Stability and Growth pact was negotiated. His cabinet had already made the decision that Sweden would not join. “We had decided we were not mature enough to join this club, so we would wait. But even then, we were in much better shape than many of those who took it as a given that they should join the euro-zone.”
Three years before, Sweden had a budget deficit that stood at 11% GDP and debt was 83% of GDP, forecast to rise to 120%. Unemployment had rocketed and the spread to German 10-year bonds was 450bps. “Roughly the same situation we have seen in some European countries in the last year,” as the former premier put it. In a dramatic reversal of fortune, Swedish 10-year yields were some 40bps below Bunds at the beginning December 2011.
Persson, the keynote speaker at the recent IPE Awards event, was Sweden’s premier from 1996 until 2006, and served as finance minister (1994-96) in the aftermath of the country’s banking crisis.
He recalled a meeting on Wall Street in the 1990s to secure financing, where he was cross-questioned about almost every aspect of Sweden’s welfare model by “young boys” at investment banks. Riled by the seeming impertinence of it all, Persson nevertheless realised that Sweden needed the backing of the bankers.
“After a while I got a little bit angry and I almost said, ‘this is none of your business’. But if they hadn’t lent me the money we couldn’t have gone on with our welfare model.
“What was necessary to realise was that the power was in the hands of this group of young boys who had never been to Sweden, but nevertheless had the power to decide about our welfare model.” Indeed, this was arguably Persson’s central message: “If you lose grip on the public finances, democracy itself will be threatened.”
Persson enacted five major reforms to address the root causes of Sweden’s problems. First, an uncompetitive wage formation process was reformed by allowing the export sector to set wages and require domestic employers to adhere to their agreement. Sweden has done this for the last 17 years.
Second, the pension system was reformed. “It’s a huge part of the future economy,” Persson commented. “If you can’t tell the electorate about the pension system, if you can’t strike a deal that is bipartisan about the pension system, there will always be a fight about the pension system. Reform it, stick to it, defend it.
“To reform pensions is not so difficult, to be honest. You can calculate it. You know how many people are entitled to a retirement pension, you know how long they live, you know how big the economy is. The difficult thing is to stick to it.”
Third was to attack the laissez faire attitude of local authorities to finances by enacting a law requiring them to balance their budgets.
Fourth was to require parliamentary budget amendments to include a financial proposal covering the expenditure: “If you can’t finance it, you can’t put it forward,” Persson said, noting that Sweden’s budget has not been amended by Parliament in the last 12 years.
The fifth issue was to deal with a bankrupt financial sector. This was tackled by nationalising banks, enacting reforms and privatising them at a profit. “You can’t socialise the losses and then let the former owners continue as if nothing has happened. They need to act as other owners, to lose equity.”
Achieving all this was no easy task of course. The electorate had to be convinced to take the medicine even when the prognosis was for years of pain (six years, in the case of Sweden). Part of Persson’s advice to others in the same situation is to take political risks but never forget that communication is also essential.
“Put your position at stake: ‘If I fail, I resign. If I resign, someone else has to take on the task. I am convinced about this’. Everyone can become elected - we have seen that and will continue to see that - but to be re-elected: that is the masterpiece.”
Persson also reflected on the current crisis in an interview with IPE. He advocated Swedish membership of the euro at the country’s referendum in 2003 and still supports eventual accession (his countrymen voted against by 56.1% to 41.8%).
The current sovereign debt crisis, he pointed out, is directly attributable to the fact that, on joining the euro, peripheral European economies did not follow Germany in enacting widespread and painful economic reforms.
At the inception of the euro, Persson said, its members were more or less at the same starting point having negotiated to some extent their entry rate to the common currency. But while Germany put itself through years of pain, improving its competitiveness through the Hartz Programme, others did nothing.
We might also have experienced a southern European debt crisis even without the euro, Persson said. After all, the mismanagement of public finances in Italy would have taken place anyway. Without the euro, the deutschmark would probably have dominated Europe to a far greater extent than it did until the 1990s, and any insolvent country would have had to go to the Bundesbank to beg for money.
“And if Italy had been outside the euro, misbehaving, would that have had no impact on Germany? Of course not. We are integrated. Never pretend that it is in the interest of German exporters for these countries to leave the euro. They would lose the markets and create an extremely strong currency of the same problematic nature of the Swiss franc.”
Persson also drew in a wider perspective. “There was one more dimension to the euro and that was the reunification of Germany,” he recalled, noting that France’s condition for German unity was further European integration and a single currency. “[Reunification] was something Germany wanted so much that they were prepared to say farewell to their own currency.”
He added: “You must have the whole picture. We tend to forget it, both the starting line, the reunification, the need to protect the single market and the free flow of goods and services. Everything is forgotten, and we only talk about the Italian debt crisis.”
Persson is also pragmatic in his recollection. “You must remember that European co-operation has undergone such a dramatic development. The enlargement, a common security and foreign policy, the Schengen agreement, the euro and co-operation in legal affairs. It was such a tremendous development in such a short time.
“We need to digest it, and we must also realise that this is an historic process, not an ordinary political process. Building European institutions and co-operation must take several generations. Sometimes, I have the impression that most European politicians want everything to happen in a four-year term.”