Aug 5, 2013 | 10:53 GMT

8 mins read

The European Crisis Catches Up to Nordic Europe

The European Crisis Catches Up to Nordic Europe

The Nordic members of the European Union — Sweden, Denmark and Finland — are succumbing to the effects of the European crisis. In all three countries, declining exports and contracting domestic consumption are weakening economic activity, but each country has its own problems and challenges. The Swedish statistics office recently announced that Sweden's economy is slowing down. But because of its relatively big consumer base and solid fiscal position, Sweden is likely to have modest growth in the next two years. For its part, Denmark will struggle with the consequences of its real estate bubble. And the economic outlook looks particularly fragile for Finland, the only Nordic member of the eurozone.

Sweden, Denmark and Finland all depend heavily on foreign trade. Exports account for roughly 40 percent of Finland's gross domestic product and more than 50 percent of Sweden's and Denmark's respective GDPs. Some two-thirds of their exports go to the European Union.

The European crisis has hurt their export sectors — export value decreased for each country between 2011 and 2012. In 2012, Finland, Denmark and Sweden saw their exports to Germany, the largest economy in the European Union and a key trading partner for Nordic countries, fall — Finland's by 14 percent, Denmark's by 9.5 percent and Sweden's by 8.1 percent. Exports to such eurozone countries as the Netherlands and France likewise fell.

Exports to non-eurozone countries such as the United Kingdom decreased for Finland and Denmark, though they remained stable for Sweden. Bilateral trade among Nordic countries also decreased.

Optimism in Sweden

Sweden, the largest Nordic economy, was adversely affected by the first wave of the financial crisis in 2008 and 2009, but it rebounded in 2010-2011. In 2012, Sweden saw weak economic growth that has since decelerated even further. According to Sweden's official statistics institute, the Swedish GDP contracted by 0.1 percent in the second quarter of 2013 after having expanded by 0.6 percent in the first quarter.

Sweden's weak economic performance in the second quarter was mostly the result of declining exports. Exports of goods and services have been falling for the past four quarters, while household consumption expenditure has remained relatively stable.

But Sweden will be the Nordic member of the European Union least affected by the economic crisis in 2013 and 2014. Sweden's exports are more diversified and less dependent on struggling eurozone countries than its Nordic neighbors. And Swedish exports to Norway, its main destination market, remained stable in 2011 and 2012, while exports to the United Kingdom (its third-largest export partner) grew by 2.1 percent.

Notably, unemployment has remained relatively stable since the beginning of the crisis. According to Eurostat, Sweden's unemployment rate reached 8 percent in the second quarter of 2013, slightly up from 7.9 percent in the same quarter of 2012.

Moreover, Sweden's finances are in relatively good shape. Its debt accounts for roughly 38 percent of its GDP — the EU average is 85 percent — while its deficit was the second-lowest of all EU members at 0.5 percent. This gives Sweden more room to increase spending and borrowing if need be.

In September 2012, the Swedish government announced a stimulus package of $3.5 billion for 2013, and it cut the corporate tax rate for the second time since 2009 — this time from 26.3 percent to 22 percent. In its spring report, the European Commission gave Sweden a more optimistic growth forecast for 2013, estimating 1.5 percent growth instead of its original forecast of 1.3 percent. Sweden's economy is expected to grow by 2.5 percent in 2014, higher than all but four other EU countries.

A Finnish Crisis

The European crisis hurt Finland much more deeply. The last time its economy grew was the first quarter of 2012; it has been in recession ever since.  

In the first quarter of 2013, the volume of value added generated by Finnish industries decreased by 0.6 percent from the previous quarter and by 1.8 percent from the first quarter of 2012. While exports grew by 0.9 percent in the first quarter from the previous quarter, they fell by 4 percent compared to the first quarter of 2012.

According to Eurostat, unemployment was 8.1 percent during the first quarter of 2013, up from 7.7 percent in the same period of 2012. Domestic demand in Finland is also weak, with consumer spending contracting by 0.5 percent year-on-year in the first quarter.

Other factors, including the difficulties of traditional industries to adapt to globalization and technological change, explain the weak performance of the Finnish economy. Nokia, Finland's second-largest company in terms of market value, exemplifies this trend. Over the past decade, the company has struggled to keep up with competition from U.S. and Asian companies in the smartphones sector. In late 2012, Nokia closed a factory in Finland and said it would cut 10,000 jobs around the world (equal to 19 percent of its workforce) by the end of 2013. The company has reduced its employees in Finland by a third since 2009 and has relocated to South America, Russia and China in an effort to reduce costs.

Finland is home to Europe's two largest paper mills, but the decline in print media has hurt the paper sector. Finland's paper exports are projected to decline by 3 percent in 2013 and by 4 percent in 2014. The forest industry accounts for some 15 percent of Finland's total exports, and Finnish paper mills export most of what they produce.

In June, the Finnish Finance Ministry said it expects the country's economy to contract by 0.4 percent this year instead of growing 0.4 percent as it forecast in March, and the Bank of Finland forecast a 0.8 percent contraction for the year.

Denmark's Housing Bubble

The Danish economy experienced low growth rates even before the European crisis, with average growth of 2 percent between 2003 and 2007. By comparison, Sweden's economy grew by an average of 3.5 percent and Finland's by an average of 3.8 percent during that time. This was the result of several factors, including high labor costs and relatively low productivity levels, which ensured very high standards of living for the Danes but undermined the country's competitiveness. Like most members of the European Union, Denmark was severely hit by the financial crisis in 2009, and economic growth has remained weak since then.

In addition, Denmark's housing bubble burst during the international financial crisis. Since then, housing prices have plummeted by more than 20 percent. A dozen banks were closed and another dozen were absorbed by larger competitors. As a result, Denmark currently has the highest ratio of household debt to gross disposable income in the Organization for Economic Co-operation and Development.

Danish banks remain fragile and susceptible to potential defaults related to the country's economic slowdown. Moreover, consumer spending, a key driver of economic growth, tends to be sensitive to changes in housing prices, especially in a context of high household debt. When home prices fall, highly indebted households tend to save more and spend less, thus weakening the prospects for economic growth.

Private spending, which makes up half of the Danish economy, grew 0.1 percent in the first quarter while gross domestic product contracted by 0.7 percent year-on-year in the first quarter of 2013. The Danish government and central bank expect 0.5 percent growth in 2013 and around 1.4 percent growth in 2014. In February, the Danish government announced a reduction in corporate tax rates from 25 percent to 22 percent to make the country more attractive to foreign companies.

Political Consequences

Like their southern neighbors, Nordic countries have seen their euroskeptical and nationalist political parties grow more popular since the beginning of the crisis. Finland and Denmark held general elections in 2011, and no new elections are scheduled before 2015. However, both countries have parliamentary systems, and early elections could be called in the event of a political crisis.

In Finland, the euroskeptic True Finns party fared better in the 2011 general elections than it ever has before, earning 19 percent of the vote. While the party received only 9.4 percent of the vote in the 2012 presidential election, recent polls show that it is the third-most popular party in Finland currently, at about 17 percent.

In Denmark, the anti-immigration Danish People's Party received 12.5 percent of the vote in the 2011 elections, making it the third-largest party in parliament. Unlike the True Finns, the Danish People's Party is experienced politically, having given external support to Danish governments between 2001 and 2011. Recent opinion polls show that support for the party is between 13 and 15 percent, which would increase its presence in the Danish parliament and potentially boost its influence on the next government.

The situation is particularly interesting in Sweden, where general elections are scheduled for 2014. In 2010, the anti-immigration Swedish Democrats party made it to the Swedish parliament for the first time in its history, receiving 5.7 percent of the popular vote. Recent polls show that support for the Swedish Democrats is currently between 6 and 8 percent, which would mark a record performance for the party. Moreover, Sweden was recently shocked by immigrant riots in the suburbs of Stockholm, highlighting the fragile economic situation of some immigrants in the country. As the economy slows and the fortunes of immigrants become more fragile, there could be increased friction between native and immigrant populations.

A deepening crisis could also affect the Nordics' relationship with the European Union. Sweden and Denmark have decided not to join the eurozone, while Finland has been critical of bailouts to countries in Mediterranean Europe. Though these countries support Europe's free market, they do not prioritize European integration.

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