A Tale Of Two Scandinavian Countries

Today is election day in Denmark, and the polls all indicate that the government center-right coalition is likely to be defeated by the center-left opposition. This is good news for non-Danish people everywhere (which obviously is most of us) largely because the center-right coalition has been consistently dependent for support on the far-right Danish People’s Party which brandishes a fairly ugly form of populist nationalism. By contrast, the governing center-right coalition in Sweden cruised to re-election fairly recently. Not surprisingly, the contrast in Swedish and Danish economic trajectories matches this:

As you can see, the issue here isn’t that the labor market in Sweden is so much better than the labor market in Denmark. But Sweden’s recession was much milder than Denmark’s, and it seems to be on track for a faster recovery. What happened? Well, consider the exchange rates:

Pre-crisis, both Sweden and Denmark were pursuing de facto currency pegs to the Euro. Denmark and Sweden were also both prosperous high-tax high-spending countries. Denmark had, however, substantially less structural unemployment than Sweden. They have some different labor market policies and also very different immigration policies that I believe gave them a more favorable demographic. But whatever the reason, there’s a clear structural gap here. Then comes the crisis, and unemployment rises in both countries. Yet it more than doubles in Denmark, which sticks with the peg, while increasing by a smaller percentage in Sweden which ditches it. Then the recovery in Sweden is sufficiently more rapid to catch up with Danish unemployment for the first time since the Nordic Banking Crisis of the early 1990s. Resolving the sources of the underlying structural gap would be nice, but it was by no means necessary to weathering the crisis better. And unlike the Australia-America gap, I trust nobody’s going to try to tell me the Sweden-Denmark gap is all about Chinese demand for coal.