Scandinavia is protected from Europe’s crisis

IF YOU’VE read the popular Millennium Trilogy by Swedish crime author Stieg Larsson, any clichéd idea you may have had that Sweden is some kind of socially liberal paradise will have been put to the test. If there’s any truth beneath Larsson’s fiction, it’s that, like any European country, Sweden has its fair share of problems.

Unlike the rest of Europe, though, it has managed to steer a relatively clear course through the current debt crisis rocking global markets, and the Swedish krona has been flying high, along with other peripheral European currencies including the Norwegian krone and the Swiss franc.

In fact, the Swedish krona has gained 10 per cent against the euro since the start of the year, and is now at its strongest level since September 2008. And while Sweden has some nasty internal issues to tackle – like a 10 per cent unemployment rate – its economy still looks remarkably well-managed in comparison to its European neighbours. When economists express worries about Sweden’s rising government deficit, they’re worrying about an increase from 0.5 to 3.1 per cent for this year. Compare that to the UK, whose deficit is forecast by the European Commission to hit 12 per cent of GDP.

Meanwhile, Swedish banks’ exposure to the current European debt crisis is limited to a negligible £14.3bn. And while Sweden, in common with its European neighbours, was hit hard by the downturn and had to use stimulus measures to reignite growth, the Riksbank – Sweden’s central bank – is already now thinking about fiscal tightening to keep a lid on inflation. In April it outlined plans to raise its interest rate from 0.25 to 0.5 per cent in the summer.

The Norwegian krone has put in a similarly solid performance, hitting its highest level against the euro since the start of 2008. And in many respects its Nordic neighbour is on an even more solid financial footing. Norway’s oil and gas industry has seen it overtake Sweden in terms of GDP. And unlike Britain, it hasn't frittered away the legacy of its natural resources, instead pouring the proceeds of its mineral wealth into its huge sovereign wealth fund. Norway has already raised rates twice this year, including a recent 0.25 basis point jump to 2 per cent.

But not everyone is convinced that Scandinavian currencies really represent the safe haven that many perceive them to be. Roubini Global Economics noted that the two currencies in fact weakened in the week leading up to 7 May, even though concerns about the fate of the euro were mounting and the dollar gained nearly four per cent over the same period. “If the Norwegian krone and the Swedish krona were havens they would have strengthened against the euro given the market uncertainty,” it wrote.

Its analysts point out that the two economies aren't entirely immune from potential Eurozone contagion. Sweden, in particular, is highly dependent on Europe as a destination for its exports, while slowing economic output could also take a bite out of Norway's GDP growth if oil prices come off the boil. Analysts also worry that the countries’ central banks may think twice about further rate rises if rising currencies start to hit export competitiveness. And while both currencies are performing well against the troubled euro, they, along with every other European currency, have been dragged by the bout of dollar strength in recent months.

But with both currencies expected to make further gains against the euro over the rest of the year, they’re certainly the closest thing to a safe haven you’ll get amongst the financial wreckage to be found on this side of the Atlantic.