Lundensaren_juni19_dyrsommar

An expensive summer awaits Swedes travelling abroad

Holidays are approaching and for many Swedes a trip abroad awaits. However, they may feel the pinch with the Swedish currency at such a low rate.
“It is probably something we need to get used to”, says Fredrik NG Andersson, economist at the School of Economics and Management at Lund University who believes the issue with the currency lies both with the politicians and a rigid management at the Central Bank.

Image: Roland Magnusson/Mostphotos.
By Jonas Andersson – published on 6 May 2019

At the beginning of May, 100 Danish kronor cost around 143 Swedish kronor and the Euro is at 10.70. It is significantly more expensive to shop abroad compared with just a few years ago. In the longer term, the difference is even greater. Fredrik NG Andersson provides two main explanations for the present currency situation:

1.Riksbanken, Sweden’s central bank, has conducted an extremely expansionary monetary policy with low interest rates. This means foreign and Swedish investors want to keep their capital in Sweden. Riksbanken recently informed that they are going to postpone the coming interest rate increases and the SEK immediately fell 15 öre against the Euro.

2.The different trade conflicts that Donald Trump has created with Europe and China, among others, have had an impact. Brexit likewise. Sweden is a small country and half of the production is exported so we are heavily affected by conflicts as they make people worry about poor economic returns and lead to them not wanting to keep money here. There are many things simultaneously working against the krona.

There is a risk it will be permanent

In the short term, he does not see any significant change to the weak Swedish currency. The Euro may fall to 10.25, but we can probably forget about it ever getting to 9.25 again.

“The market has grown accustomed to this and this makes it hard to recover. There is a risk it will be permanent. The monetary policy has made us poorer and, to be cynical, we will have to travel to poorer countries if we are going to get much for our Swedish kronor”, says Fredrik NG Andersson.

A country that is geographically close and also has its own, small currency is Denmark. In the 1980s it was cheap for Swedes to travel to Denmark to shop, 100 Danish kronor cost just 80 Swedish kronor at the time. It has been the opposite for a long time but now there is a record-high difference between the two countries.
What is the difference between the Swedish and Danish currencies that results in the differences being so significant?

“Denmark has a fixed exchange rate, which means that the value against the Euro is fixed. 100 euro shall always cost 746 Danish kronor, plus or minus 1 per cent. The monetary policy is adapted so that the Danish krona maintains its value. Sweden has a flexible exchange rate, so the market determines what the Swedish krona will be worth.

Sweden had a fixed exchange rate for a long time; however, as many will remember, it was abandoned during the 1992 financial crisis when the interest rate rose to 500 per cent for a short period. Fredrik NG Andersson believes Swedish politicians have conducted an irresponsible policy for 20 years more or less, which has led to this acute situation. Instead of a fixed exchange rate, an inflation target of 2 per cent was introduced, something that Riksbanken has followed ever since.

“The issue is that times were different, the inflation target is no longer a responsible policy – time has run away from it”, says Fredrik NG Andersson.

What is needed is new management at Riksbanken

“Following the crisis in the 1990s, the government assumed economic responsibility and many uncomfortable decisions were made and austerity measures put in place. However, now the direction is not nearly as clear and there are no coherent prioritisations”, he says.

It has become particularly serious since 2013 given that the monetary policy has been very expansionary in relation to the euro zone.
As a matter of fact, Riksbanken could itself change its direction to strictly follow the inflation target; it is allowed by legislation and not something that requires a decision by the government or in parliament.

Two per cent plucked from thin air

“Riksbanken has continued to maintain the 2 per cent target, but that figure was plucked from thin air. There is no research that states that this is better than, for example, 1 per cent. Riksbanken has committed itself to this and ended up down a dead-end street, with no possibility of getting out. What is needed is new management at Riksbanken”, says Fredrik NG Andersson.

When it comes to fixed or flexible exchange rates there are both pros and cons. A fixed rate is stable, which is good to be able to predict what is going to happen. At the same time, it can be extremely costly during financial crises. Sweden, for example, survived the 2008-2009 crisis quite well thanks to its flexible exchange rate.

More flexible labour market

According to Fredrik NG Andersson, to be able to maintain a fixed exchange rate like in Denmark, Sweden will require a flexible labour market and clear political will and ability to make uncomfortable decisions to defend the monetary policy.

“In Denmark, the labour market is much more flexible than in Sweden. The politicians have intervened to maintain the fixed exchange rate. Difficult decisions across party boundaries have been made many times.”

Many highlight the advantage of a low krona exchange rate as it favours the export industry.

“That is true in the short term. However, in the long term, it is simply cheap and you do not need to be good to compete. That is not something that favours long-term prosperity”, says Fredrik NG Andersson.