Northern European deflation hits Sweden

Deflation is looming in northern Europe, with Sweden joining the 7 other EU member states that reported lower prices in March. Prices fell by 4% in Sweden, 0.1% in Croatia, 0.2% in Slovakia and Spain, 0.4% in Portugal, 0.9% in Cyprus, 1.5% in Greece and 2.0% in Bulgaria.

Up until now, northern Europe has been relatively free of the economic ills that have affected the "peripheral" countries of the European Union (EU). Now that Sweden, a northern European country, is sliding into serious deflation, economists are worried.

A number of analysts, prominent economists and Swedish politicians are now openly criticising the Riksbank's monetary policy. The Sveriges Riksbank is Sweden's central bank and a state body under the Swedish parliament (Riksdag).

The Swedish authorities were caught off guard when consumer prices fell by 0.4% in March. Immediate action must be taken to prevent a Japanese-style deflationary trap that has dragged on for decades.
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Too bad, some would say, it is unfathomable how Sweden, which initially survived the financial crisis relatively well and faced none of the Eurozone's coercive restrictions, managed to fall into a deflationary trap completely unaffected .

Prominent economist has criticised Sweden's central bank

Lars Svensson, the former deputy governor of the Riksbank and a professor at Princeton University, criticized the central bank for four years of "very sharp monetary tightening," which he believes has caused a slide into deflation.

Professor Svensson has published numerous papers on deflation and is considered a world authority on the subject. Ben Bernanke, Chairman of the US Federal Reserve, turned to him for advice during the financial crisis.

Extensive quantitative easing is needed

Interest rates should be lowered immediately from 0.75% to (minus) -0.25%, Professor Svensson said. He called on Sweden's central bank to prepare for "large-scale" QE (quantitative easing).

According to Svensson, Sweden fell into a liquidity trap in the 1930s when prices fell, leading to an increase in the debt burden in real terms. He added that Sweden is currently knocking on the door of this liquidity trap. Since Swedish household debt is one of the highest in Europe at 170% of disposable income, the growing debt burden could lead to the bankruptcy of a large number of Swedes.

The Riksbank has admitted that something unexpected has gone wrong. The central bank wrote: "Low inflation has for some time now been unable to fully explain the normal correlation between price changes and company costs. Companies have found it difficult to pass on cost increases to consumers. This, in turn, can be attributed to the fact that demand has been weaker than normal."

Historically, it is not usual for the Riksbank to be overly hawkish. Over the past 100 years, Swedish economists have generally been ahead of their time. In fact, John Keynes took many of his most avant-garde ideas from the Stockholm school of the 1920s.

In the Netherlands, another northern European country, consumer prices rose by just 0.1% in March. Inflation in the Netherlands has fallen month on month. Many predict a fall in prices in the coming months. A large part of the Dutch population is currently struggling to cope with loans close to 250% of disposable income. A quarter of Dutch mortgages have negative equity and house prices continue to fall. And then there's Denmark with a March (annual) inflation rate of just 0.2%....

Why does the debt burden rise during prolonged deflation?

When consumers know that prices will fall (deflation), they postpone their purchases, waiting for better prices. Lower consumer spending means that companies sell less and make less money. If companies sell less, they start lowering prices to increase sales, and a vicious cycle ensues. Eventually, as prices continue to fall, so do wages.

During a prolonged period of deflation, wages continue to fall, but the monthly installments of credit remain the same and make up a higher percentage of people's wages, i.e. an increased debt load.It has also been noticed that casino without Swedish license with Zimpler has become very popular

Fortunately, the Bank of England has taken a different path.

The Bank of England has chosen the path of quantitative easing and low interest rates, measures that allow most Britons to avoid negative equity. While house prices in the UK have fallen in real terms since the financial crisis, the real debt burden has also decreased.

The UK inflation rate of 1.6% is the highest in the EU, but still below the Bank of England's target of 2%. The UK is one of the very few European countries with a large margin of safety against external shocks.

Inflation in the EU as a whole fell to 0.5% in March which is well below the ECB (European Central Bank) target of 2%. After excluding the sales tax (VAT) increase, the inflation rate is down to 0.3% in March.

The Telegraph quotes Andrew Roberts of the Royal Bank of Scotland (RBS) as saying: "The RBS deflation vulnerability score rose to 80% for Spain, 64% for Ireland, 55% for the Netherlands and 52% for Portugal. "
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Written by Julian Anderson

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