The Accidental Keynesian: How Refugee Spending in Sweden Challenged Austerity, Put the Local Fiscal Houses In Order and Proved Beneficial to All

This is part of our special feature on The Crisis of European Integration.

 

Despite Sweden’s sizeable refugee reception, its economy is doing exceptionally well.[1] This line has been repeated on countless occasions over the past year or so. By the government, experts, and pundits — from right to left. As the president of the Swedish Trade Union Confederation put it a little while ago: “Despite an unstable world and a refugee emergency, Sweden’s economy is performing very well.”[2] Despite? As if we should just assume that refugees will be detrimental to economic growth. Such assumptions are of course unfounded. The economic impact will rather depend on the economic policy adopted to manage the admission and integration of refugees. Given that Sweden, but also Germany, let its expansive refugee intake be managed by an expansive fiscal policy, all the “despites” should have been replaced by a wave of “becauses,” as in: “Because of the large-scale refugee reception, Sweden’s economy is doing well.” That is to say, the expansive fiscal policy stimulated aggregate demand and thus helped economic growth. By mistake, then, the refugee crisis would also grant a (temporary) residence permit to John Maynard Keynes.

But before we deal more with today’s consequences of 2015, let’s return to the year itself, at the exact time of Keynes’ return from exile. “A country with a decreasing population is a stagnating country,” said Sweden’s minister of migration in August 2015 when maintaining that asylum seekers needed to be seen as “an investment for our country.”[3] Commenting on Sweden’s high number of asylum admissions, the Swedish prime minister, Stefan Löfven, put it similarly at an EU meeting in Brussels in June 2015. While the undertaking was not frictionless, refugees needed to be seen as “an asset:” “We must recognise that if we don’t do this now [i.e. admit refugees], we are going to have a gigantic problem in a few years.”[4] In Germany, politicians argued along the same lines. Said interior minister Thomas de Maizière in September 2015, when defending the admission of refugees: “We need people. We need young people. We need immigrants. All of you know that, because we have too few children.”[5]

As everyone knows, all of this was to change dramatically in the late fall of 2015. The talk of what may be termed a “refugee dividend” gave way to an alarmist rhetoric of chaos and imminent societal collapse, followed by new border enforcements and numerous other preventive measures, including high-level negotiations with Erdogan’s Turkey. This also proved to be a moment when the so-called European values could come into their own, as displayed in European Commission President Jean-Claude Juncker’s appeal to the European Parliament:

We face two possibilities and these are the options. We can say that EU and the European institutions have outstanding issues with Turkey on human rights, press freedoms and so on. We can harp on about that but where is that going to take us in our discussions with Turkey? […]. We know that there are shortcomings but we need to involve Turkey in our initiatives. We want to ensure that no more refugees come from Turkey into the European Union.[6]

Subsequently, in January 2016, Wolfgang Schäuble thought the time ripe for some measured vindication of Viktor Orban: “To be honest, we have to admit that not everything Hungary has done has been wrong.”[7]

The further we come from the fall of 2015, the more astounding and un-European Sweden and Germany’s initial approach to the refugee crisis appears. It stood in glaring contrast to the spiteful rhetoric and policies — or the plain indifference — exhibited by most other EU members. For the first time in the thirty-year history of EU asylum policy cooperation, it looked as if two members were about to break ranks, parting with the EU’s established policy of refugee prevention to instead advocate a policy of refugee admission. But the EU’s refugee austerity was not only tested by the policy of refugee expansion per se; it also seemed challenged by an economic-demographic argument that stood in sharp contrast to the established notion of refugees as a fiscal burden.

But why, then, did Sweden and Germany decide on this volte-face? Did they just give up to join Europe and the general aversion to refugees? Or did the “current” become so strong that their respective reception systems and public authorities simply could no longer carry on? There is certainly some truth to these answers. Yet, they are far from sufficient, and hence I will point to another partial explanation, one that in turn will point to perhaps the most important – yet least noticed – consequence of Sweden and Germany’s initial management of the refugee crisis. That is to say, during the last months of 2015, the reception of refugees would increasingly come to be seen as a consequential threat to nothing less than the two countries’ — as well as the entire EU’s — macroeconomic framework and doctrine of fiscal austerity. For a brief period, Germany and Sweden had given precedence to asylum over austerity, a necessary move, of course, if the former was to be at all a realistic enterprise in the first place. But since realism had paved the way for a totally unintended Keynesian experiment, it had become high time to show realism the door.

Already, in the early autumn of 2015, finance ministries were starting to grumble—a grumble that soon turned into a roar, with the ministries’ warnings going in tandem with ill-boding headlines: “Ballooning Refugee Costs Threaten Germany’s Cherished Budget Goals;”[8] “Refugee Crisis Could Cost Nearly One Trillion Euros;”[9] and “Asylum Costs: Germany’s Budgetary Burden.” Underneath the latter headline in Handelsblatt the introduction read: “A surging population of refuges in Germany could burst its balanced budget with billions of euros in added outlays.”[10] Schäuble was crystal clear: Germany’s fiscal health had come to hinge on a drastic cut in the number of asylum seekers entering the country.

In Sweden, the finance minister, Magdalena Andersson, did not mince her words either, claiming that the refugee reception was financially unsustainable. “We will both have to reduce spending and borrow,” she told Dagens industri (Sweden’s financial daily) in October 2015: “It’s about cutting migration costs as well as looking into spending cuts in other areas. But we will also have to borrow money.”[11] In December 2015, Andersson explained Sweden’s volt-face by saying that it had been financially necessary and she also confirmed that a tight fiscal policy would keep the budget ceiling intact and that the goal was to have the budget return “to balance and surplus.”[12]

And so it would continue; and with it, the refugees were swiftly re-conceptualized — until recently a demographic-economic asset, now a destructive fiscal liability. As with the Eurozone sovereign debt crisis, it was fiscal austerity that yet again had emerged victorious.

Today, Magdalena Andersson boasts of having reduced spending on migration. Yet, from the perspectives of the finance ministries in Sweden and Germany, the “damage” is to an important extent already done. By now, copious amounts of money have been spent and even today the governments have not been able to rein in spending as much as they had hoped.

But again, looking at the outcomes of this allegedly perilous flood of refugee expenditures, we see no damage done. Contrary to what Andersson, Schäuble, and scores of others tried to have us believe, refugee spending has been a smash hit for both Germany and Sweden, as well as a vindication of Keynesian policy. Thanks to the refugee intake, Germany has postponed its demographic decline in working age population, while Sweden’s surging labour market is now fuelled almost exclusively by the foreign born.

In fact, for those who cared looking, the positive impact on growth was visible early on, published in chorus with the false gloom and doom prophesies by Andersson and Schäuble. Did Sweden have to borrow? The answer is no. What about the dead cert budget deficit? Didn’t happen either. Sweden and Germany both ran surpluses in 2015 and 2016 (and are headed for surpluses in 2017 too), which only confirms that they, actually, should have gone ahead and spent much more, not the least to make up for austerity’s prolonged drag on public investment and its highly destructive impact on, for example, infrastructure, public utilities, schools, and public housing. In Sweden, moreover, government surpluses continue to add fuel to the private credit fire. In 2016, Swedish household debt rose by a terrifying seven per cent, and, all in all, Sweden’s private debt level (190 percent of GDP) is one of the worst in the EU, with mortgage debt having reached mindboggling levels (179 percent of disposable income and increasing to 343 percent when counting only those with mortgages).[13]

The European Commission’s most recent “Country Report” for Sweden provides a very neat synopsis over the Keynesian economic dynamics in Sweden during the past couple of years:

The high influx of asylum seekers in 2015 led to more spending on providing public services. This reflected spending to provide shelter, food and basic allowances for asylum seekers while increasing the responsibilities and administrative capacity of the Swedish Migration Agency. Government consumption expenditure therefore surged in 2015 and 2016. Additional public consumption and investment is expected to support economic growth in the years to come. Local authorities will play a key role in the integration of refugees. They have been granted extra funding, some of which is earmarked for accommodating refugees, but have also received a general grant from the central government. This grant is intended to be spent on staff, welfare services and infrastructure, e.g. childcare facilities and hospitals.[14]

Indeed, Keynes could not have said it better himself, and the fact that the European Commission is the author is an incredible irony — the supply-side church that shuns Keynesian policy like the plague. This just makes the Commission’s accurate description even more commendable, a truthful description that the Swedish government refuses to acknowledge, since doing so would contradict its master narrative about refugees-as-a-fiscal-burden. When presenting the fall budget in September 2017, the Swedish finance minister bragged at the press conference, saying: “We have not borrowed a single crown to finance the work during the refugee crisis.”[15] What she did not mention, though, was that it was she herself who falsely asserted, in 2015 and 2016, that Sweden would be “forced to borrow,” never missing an opportunity to sound the alarm over what she claimed to be the undeniably negative economic impact of refugee reception.

But the Swedish government is certainly not alone, this being the general view amongst much of the political establishment. Also, some on the left fell for the false analogy between a household budget and a government budget, and so began to worry that the spending tied to refugee reception by necessity would encroach on welfare, redistribution and the unemployed.

The perception here is that refugees constitute a cost, an expense, and that is the end of the story. “The costs of the refugee crisis,” read a headline in Deutsche Welle in early 2016. “The German government,” the article reported, “will have to spend 50 billion euros on refugees during this year and next, a new study estimates. In order to balance these costs, researchers urge financial restraint elsewhere.”[16] Terrible news, right? Three weeks later though, Reuters ran this headline: “Spending on refugees helps support German fourth quarter growth.”[17] A week later, coincidentally, another headline, this time in Sweden’s Dagens industri, read as follows: “Refugee wave behind Sweden’s GDP growth.”[18]

In addition to this, the simplistic “cost view” fails to take note of the fact that when the government bears the costs and spends, the money does not just disappear. Instead, as Modern Money Theory reminds us, it ends up somewhere else. [19] That is to say, it shows up as income and financial assets in other sectors and places within the economy: in the local and regional municipalities, in the private sector and with the households. Economic activity, capacity utilization, and employment increase, and so do growth and tax revenues.

As indicated above in the European Commission’s report on Sweden, the “extra funding” for refugee integration made available to local authorities, or municipalities, perfectly illustrates this spending dynamic. The funds from the state namely end up as net assets on the municipal balance sheets. As such, it also helps explain why many municipalities in Sweden have been quite positive towards receiving refugees. This year, for instance, eight municipal councils in the northern county of Jämtland banded together, urging the government that they receive more refugees, for whom both employment and housing are available.[20] They do so chiefly because refugees promise to mitigate two interrelated problems faced by scores of Swedish municipalities: that is, severe long-standing depopulation and, with it, a continuous loss of tax revenues that forces an equally continuous reduction in welfare services. With the increase in state transfers to assist municipalities’ refugee integration, many small- to medium-sized municipalities are now seeing a real chance to reverse the decades-long negative spiral, something that Stockholm is reluctant to acknowledge since it contrasts so starkly with the narrative of a budgetary burden, a “full house” and a crumbling reception system. Yet, this is how a real refugee dividend can look.

According to the Swedish Association of Local Authorities and Regions, 2016 proved to be one of the strongest years on record for the municipal economies. Out of the 290 municipalities in Sweden, 281 ran surpluses in 2016, and the 40 billion crowns (roughly €4 billion) supplied by the state to assist with refugee integration certainly helped the result.[21] The small municipality of Gnosjö in southern Sweden (with less than ten thousand inhabitants) went from a deficit of 3.5 million crowns in 2015, to a 14.7 million surplus for 2016. The economic manager for the municipality explains the dramatic improvement as mostly due to the refugee-related support received from the state.[22] In this way, not all the state funds funnelled into the municipalities were spent on refugees as such; and this of course provided additional stimulus and savings on top of the increased employment and tax revenues generated by the spending on refugee-related matters. In this sense, many municipalities in Sweden have not so much said refugees welcome as they have said: refugees, thank you! Thank you for getting our fiscal houses back in order.

So, what is the problem? Is Sweden going bankrupt? Hyperinflation? Is the state spending unsustainable? The answer to all of the above is of course no. But there are problems, one being (as mentioned above, with reference to Modern Money Theory) that the Swedish government is not spending enough; rather than identifying the financial aid to, for instance, the municipalities as a necessary good it continues to rule it a necessary evil, thinking that it threatens Sweden’s (self-constraining and unnecessary) financial framework rules of running a surplus over the business cycle. This is seen as “sound” state finances, when in fact it translates into very unsound finances at, firstly, the municipal level that over the next decade will have to make huge investments in numerous areas and facilitate employment for today’s refugees, and, secondly, within the private sector and for the households. Unassisted by government spending, the latter two risk continuing their unsustainable credit-driven investment and consumption spree.

For all the shortcomings, however, things could still have been much worse. Sweden and Germany could have decided to spend much, much less on their respective refugee admissions, integration programs, municipalities, and so on. But they didn’t; instead, and given the utterly different political situation today, they did the unthinkable and lapsed into fiscal expansion. I say unthinkable for the simple reason that Sweden and Germany are two of the countries in the EU most strongly wedded to the doctrine of fiscal austerity and the principle of budget surplus. Neither government, of course, intended such a break with doctrine. But since they aspired for a responsible refugee policy they were also compelled to be fiscally realistic and make room for necessary spending increases. In this way, a humanitarian refugee policy, as well as a real acting on the demographic “refugee dividend,” proved incompatible with fiscal austerity and so made for a rare and unintended Keynesian laboratory environment.

As I have tried to show here, mostly with reference to the Swedish case and, although to a lesser extent, the German case, this Keynesian environment was soon to demonstrate the more general social and economic benefits to be reaped from government spending and demand stimulus. This has created jobs, increased municipal tax revenues, replenished welfare budgets, and kept schools open. The northern Swedish municipality of Boden, with 28,000 inhabitants, was until recently bleeding people, like most rural municipalities in Sweden. In recent years, however, it has grown significantly thanks solely to refugee migration, adding some 1,500 people, most of whom are working age and children.[23] Says the social democratic chairman of the municipal council: “Without these 1,500 people, we would be discussing which schools to close, which housing units that stand empty or which to tear down. Now, we are instead discussing which schools to expand, the building of new schools and housing.” Indeed, in Boden it has gotten to the point where the group leader for the aggressively anti-immigration party, the Sweden Democrats, now openly supports an increase in refugees and migrants in Boden.[24] For the group leader, the reversal of the vicious depopulation circle, and hence the future sustainability of Boden, apparently trumps the party’s diehard anti-immigration ideology.

This, finally, leads us to the second problem flagged above. What I am getting at, put simply, is the fact that the EU and the Eurozone’s macroeconomic policy framework and fiscal strait-jackets effectively prevent most other member states from following the example of Sweden (and Germany). For instance, two of the most austerity-stricken countries in the EU, Greece and Italy, are also those struggling the hardest to manage refugee reception and integration. Coincidentally, they have some of the most dismal demographics in the EU, which also involve the scores of young people who have emigrated since the on-set of the crisis. Yet, the sensible solution seems utterly out of reach. Apparently, for the EU establishment, Sweden may have been more of a warning example than anything else — a potential Keynesian Trojan, if you like. Not only did it show that spending on refugees (however unintentional from the Swedish government’s perspective), proved to be an economic and fiscal success, boosting growth, employment and tax revenues. Even more offensive, probably, was that such spending on non-citizen refugees — the alleged “fiscal burden” — also imparted a glimpse of how citizens could be relieved of the burden of austerity. Instead of the misconceived trade-off between migration and welfare or the alleged choice that has to be made between welfare spending and refugee reception, the Swedish case has shown that it is exactly the other way around. Spending on the refugees, the non-citizen newcomers, has been a way of rediscovering the viability of welfare for all. It took a refugee crisis, in other words, to get a sense of how the EU’s general socio-economic crisis could be resolved.

 

Peo Hansen is Professor of Political Science at the Institute for Research on Migration, Ethnicity and Society (REMESO), Linköping University. His research focuses on European integration, migration policy, citizenship, political economy, colonialism and postwar European geopolitics. His latest book is Eurafrica: The Untold History of European Integration and Colonialism (Bloomsbury 2015, co-authored with Stefan Jonsson). He is currently writing a book on Europe’s migration crises.

Photo: Silhouette of refugees walking with Flag of Sweden as a background, vector | Shutterstock

 

References:

[1] During the three years 2013–2015, Sweden received approximately 300 000 asylum seekers in total. In 2015 alone around 165 000 asylum seekers arrived in Sweden.

[2] Svenska Dagbladet, 7 May 2017.

[3] Sveriges radio, 20 August 2015; http://sverigesradio.se/sida/artikel.aspx?programid=3993&artikel=6236652.

[4] The Guardian, “Europe needs many more babies to avert a population disaster”, 23 August 2015; http://www.theguardian.com/world/2015/aug/23/baby-crisis-europe-brink-depopulation-disaster.

[5] The Independent, “Refugee crisis: The map that shows why some European countries love asylum seekers”, 16 September 2015; http://www.independent.co.uk/news/world/europe/refugee-crisis-the-map-that-shows-why-some-european-countries-love-asylum-seekers-10492642.html.

[6] The Daily Telegraph, “EU should not ‘harp on’ at Turkey about human rights, says Jean-Claude Juncker”, 27 October 2015; http://www.telegraph.co.uk/news/worldnews/europe/turkey/11957432/EU-should-not-harp-on-at-Turkey-about-human-rights-says-Jean-Claude-Juncker.html

[7] Süddeutsche Zeitung, “’Rückkehr sollte der Normalfall sein’”, 16/17 January 2016.

[8] Reuters, 17 September 2015; https://www.reuters.com/article/us-europe-migrants-germany-budget/ballooning-refugee-costs-threaten-germanys-cherished-budget-goals-idUSKCN0RH22320150917

[9] Die Welt, “Flüchtlingskrise könnte fast eine Billion Euro kosten”, 25 November 2015; https://www.welt.de/wirtschaft/article149234485/Fluechtlingskrise-koennte-fast-eine-Billion-Euro-kosten.html

[10] Handelsblatt, “Asylum Costs: Germany’s Budgetary Burden”, 19 February 2016; https://global.handelsblatt.com/edition/372/ressort/politics/article/germanys-budgetary-burden

[11] Dagens industri, 22 October 2015.

[12] Dagens Industri, 17 December 2015.

[13] European Commission, “Country Report Sweden 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances”, Brussels, 22 February 2017, SWD(2017) 92 final.

[14] European Commission, “Country Report Sweden 2017 Including an In-Depth Review on the prevention and correction of macroeconomic imbalances”, Brussels, 22 February 2017, SWD(2017) 92 final.

[15] Dagens ETC, 20 September 2017; https://www.etc.se/inrikes/magdalena-andersson-presenterar-hostbudgeten

[16] Deutsche Welle, “The costs of the refugee crisis”, 1 February 2016; http://www.dw.com/en/the-costs-of-the-refugee-crisis/a-19016394

[17] Reuters, 23 February 2016; http://www.reuters.com/article/us-germany-economy-gdp/spending-on-refugees-helps-support-german-fourth-quarter-growth-idUSKCN0VW0TP

[18] Dagens industri, 29 February 2016; https://www.di.se/artiklar/2016/2/29/flyktingvagen-ligger-bakom-sveriges-bnp-tillvaxt/

[19] See L. Randall Wray, Modern Money Theory: A Primer on Macroeconomics for Sovereign Monetary Systems, 2nd ed. (New York: Palgrave Macmillan, 2015).

[20] Svenska Dagbladet, 23 February 2017; https://www.svd.se/sa-forsoker-jamtland-runda-lagen–for-att-fa-fler-flyktingar

[21] Sveriges kommuner och landsting, “Ekonomirapporten, maj 2017”, Stockholm, 2017.

[22] Värnamo Nyheter, 28 april 2017; https://www.vn.se/article/statsbidrag-raddar-gnosjos-ekonomi/

[23] Bodens kommun, Beskrivning av befolkningen och befolkningsutvecklingen i Bodens kommun, 22 March 2017; http://www.boden.se/DB/web/filelib.nsf/0/DEEFD84A822ED502C1257FA3004800B1/$FILE/Beskrivning%20Bodens%20Befolkning%20och%20Befolkningsutveckling%202016.pdf

[24] Sveriges Television, ”Resten av Sverige”, Part 3 (Documentary by Po Tidholm), 2016.

 

 

 

Published on November 2, 2017.

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