Nr. 12-2011 Published monthly by:
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Mart Laar and Johnny Munkhammar: Sweden and Estonia show the way out of the debt crisis - The Greek economical drama has illustrated how the financial crisis' first wave founded a basis for the second wave. Eager to avoid a deep economical recession, many governments spent huge amounts of money to stimulate the economy. But enormous budget deficits and debts have put many countries in even worse problematic situations. Sweden and Estonia are the two most clear European exceptions – for others to learn from, but also with a potential for getting even better, writes Mart Laar - Chairman of the Union of Pro Patria and Res Publica, and Johnny Munkhammar – a Swedish political writer and blogger working for the liberal free market think tank Timbro.

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Mart Laar
- The financial crisis is to a high degree created by state interferences, continues Mart Laar and Johnny Munkhammar at Newsmill, a Swedish website for debate. Laws, subsidies and state founded companies led to 1.300 billion USD in real estate loans that everybody knew the borrowers couldn't pay. Together with the central bank Federal Reserve's too low interest rate – established to avoid a deep recession in 2001 – a real estate bubble was created and the debts were resold on the world market. Now we have a debt crisis because governments have borrowed money for stimulation packages.



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Johnny Munkhammar
- Research clearly shows that publicly financed stimulation packages often functions bad. People save instead of spending, we buy imported goods instead of locally produced – and subsidized companies become less innovative. That so many countries still subsidize can be explained by populist politicians and strong special interests. But the debts have to be paid back, and the problems become real big if the credit institutions don't believe that they will get the money back.

- Greece has put itself in the worst problematic situation; deficits have been big during both good and bad times because politicians have borrowed to finance growing public expenses. But Portugal, Spain and Great Britain are other European countries with very big deficits. And, during Barack Obama's first period as President, USA will accumulate bigger debts then during the presidency of all other US Presidents before him.

- Sometimes this is called a euro crisis, and of course the problems affect the euro. But the reason behind the problems is the level of debt, not the European currency. Otherwise Great Britain and USA would hardly have any problems. Greece got big advantages by introducing the euro in 2001, but these advantages were not used as an opportunity for reforms. At this time we should welcome the stronger rules for bringing order in states' finances, which most probably will be introduced in the eurozone. One new rule could be that a country not decreasing its deficits according to agreement will be cut off from EU's structural funds.

- Growth is not created by states' stimulation packages – these deliver instead increased debts with higher interests and lower growth as a result. It is skilled innovators and entrepreneurs and their co-workers who create growth. But if creativity should lead to increased wealth it must be easy to start companies, allowed to compete and be profitable to work. Economic freedom results in growth and an increased income is the only plausible long-term way for paying back debts.

- There are too many obstacles for growth in Europe today. Public services are too often cut off from entrepreneurship. Markets are regulated like guilds, e.g. a decision on a certain number of shops per thousand inhabitants. Taxes and subsidies slow down work. This needs to be changed. Sweden and Estonia have reformed and have experienced good growth, even if more remains to be done. But of crucial importance is that France, Italy, Spain, Portugal and Greece reform.

- States must keep their public spendings under control. Sweden and Estonia have the smallest budget deficits among the 27 EU-countries. It is not impossible to have a balance in the state budget, and because of this Swedes and Estonians will not experience the extensive saving packages that the people of Greece, Spain and England will face during the coming years. It is of crucial importance that a clear framework and goals stopping deficits from occurring, and are valid independent of the government's political color, is in place. We must realize that we can't spend more than we earn, otherwise there is no way out of the current crisis.

- A basic problem is the illusion that the state has its own money, that politicians have a cashbox that can be used for different expenses. That is of course not the case. There are no free lunches. Every single public expense is paid by the individual tax payer – as are the loans that the state accumulates. The more people who realize this, the more people will decide upon the expenses. That will increase the driving forces for lower public expenses which will decrease the risk for future debt crises, conclude Mart Laar and Johnny Munkhammar at Newsmill.

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