Can fiscal austerity be expansionary in present Europe? The lessons from Sweden

In the mid-1990s, a Social Democratic government pursued an ambitious fiscal austerity policy in Sweden in the aftermath of a deep recession and public budget crisis. Economic advisors were guided by the idea that fiscal austerity would have neutral or expansionary effects on output and employment. In order to avoid large public deficits in the future the government also introduced radical fiscal rules. The main conclusion in this article is that the fiscal austerity measures in the mid-1990s delayed the Swedish economic recovery and that neither these measures nor the fiscal rules were responsible for the impressive Swedish macroeconomic performance in the following period. The positive economic development in Sweden was driven by export, profit and technology, reflecting an international upswing and the country’s flexible exchange rates and industrial composition. Similar beneficial conditions for expansion are not present in the EMU countries suffering from a budget and debt crisis today.