Crisis and Exchange Rate

Via Brad DeLong, David Cameron teams up with Swedish Prime Minister Fredrik Reinfeldt to probably confuse people about fiscal policy in countries that aren’t Sweden:

Because Sweden has been living within its means it is one of the member states that has weathered the crisis best. In Britain, on the other hand, the new coalition government has inherited the largest budget deficit of any EU country.

Sort of. But as I’ve said before “My rule of thumb for thinking about the global recession is that whenever you hear claims that some country has weathered it unusually well because of Favored Policy Initiative A, you ought to first ask yourself if it’s not really just an exchange rate issue.”

And indeed we see that Sweden weathered the crisis in large part because its currency declined in value relative to major world currencies:

swedencurrency 1

That’s not to say that Reinfeldt is totally wrong. Running responsible budgets during non-crisis times, as Sweden did, is far superior to the way George W. Bush governed the USA. And Sweden’s crisis-time policies have in fact succeeded for Sweden. It’s just that these are not policies that can be adopted across the board. And the main thing Swedish people should probably be congratulating themselves over is that they rejected the euro in 2003 thus avoiding getting sucked into the mire of the European Central Bank’s misguided tightfistedness.