Krugman Jibes Linger as Biggest Party Seeks Riksbank Review

Two months after Nobel laureate Paul Krugman criticized Sweden’s central bank for exposing the largest Nordic economy to a deflationary spiral, the country’s biggest party is seeking a monetary policy review.

The Social Democrats, who polls show will head the government after elections in September, are open to letting an independent body review monetary policy after five consecutive months of declining consumer prices and as unemployment exceeds rates elsewhere in Scandinavia.

“The Riksbank has not fulfilled the inflation target,” Stefan Loefven, head of the party and the front-runner to become Sweden’s next prime minister, said yesterday in an interview in Stockholm. “If you give someone a task, we must be able to discuss whether they have managed that task or not, or the target to be more precise, I absolutely think we should be allowed to do that.”

The world’s oldest central bank has shown reluctance to cut interest rates in part to avoid a build-up in mortgage debt, now at a record 370 percent of disposable incomes. That’s drawn criticism from trade unions and even members of the Riksbank’s own board, who argue the policy has contributed to unemployment. Krugman in April entered the debate, describing the Riksbank’s policy as “sadomonetarism.”

Democratic Obligation

“It’s good that we’re having a discussion about these things and we can very well have a discussion about its targets,” Loefven said. “It’s a democracy that we’re living in and we have not just a right but an obligation to voice our views, but not to intervene.”

The krona weakened as much as 0.3 percent against the dollar and was 0.2 percent lower at 6.6375 as of 9:52 a.m. in Stockholm. It lost as much as 0.2 percent against the euro.

The 56-year-old last month called on parliament to consider adding a labor market target to the central bank’s mandate.

Adjusting for seasonal swings, Sweden’s jobless rate was 7.8 percent in May, compared with 6.7 percent when the tax-cutting government of Prime Minister Fredrik Reinfeldt came to power in 2006. Some of Sweden’s biggest companies, including Volvo AB and Electrolux AB, have cut thousands of jobs to stay competitive. The nation relies on exports to generate about half its total output.

Creating Jobs

“If we can’t manage to create jobs, the country won’t do well,” Loefven said, adding that any changes need to be made “in a calm manner. It’s important with stability.” “Regardless of the discussion of indebtedness and so on, I want under all circumstances to discuss the possibility to move up employment on the agenda. It’s important that our fiscal policy, but also monetary policy, look at what more we can do” to increase employment, he said.

At the same time, consumer prices dropped for a fifth month in May and Sweden’s four biggest banks now predict the Riksbank will have to cut its repo rate to 0.5 percent next month from 0.75 percent.

Dagens Nyheter, Sweden’s biggest newspaper, in an opinion piece published on June 15 called for politicians to boost control over the Riksbank, calling its independence “a growing democratic problem.”

Union Days

Loefven, a former union boss, who became the Social Democrats’ leader in 2012, said the case for tighter oversight of the bank needs to be weighed against the need to safeguard its independence.

The comments support a recommendation by Finance Minister Anders Borg to explore the option of having a non-government agency such as the Fiscal Policy Council monitoring the bank’s performance. Borg said such a move would require that the council operates under parliament.

The opposition Left Party, which is poised to form a coalition with the Social Democrats that would end the party’s eight-year hiatus from government, said last week it was also open to discussing the proposal.

“Whether it should be the Swedish Fiscal Policy Council or not can be an open question but I absolutely think that we can find someone else who can also have that role,” Loefven said. Any move needs “broad participation” in parliament, he said.

Mervyn King

Parliament said today it has appointed former Bank of England Governor Mervyn King and Professor Marvin Goodfriend, a former U.S. Federal Reserve official, to conduct a review of the Riksbank’s policy for 2010 to 2014. It will be the third external evaluation of the bank and will be finished by the end of next year, according to the parliament.

Borg today called for “a broad discussion” on how monetary policy has worked. Hans Lindblad, head of the Swedish National Debt Office, said it’s “reasonable” that the Riksbank’s mandate is up for discussion.

“It can be appropriate to ponder especially since there is a pretty intense discussion in society about whether the Riksbank has fulfilled its mandate,” Lindblad told reporters. “Its completely natural that we’re discussing an examination.”

The central bank, led by Governor Stefan Ingves, has hesitated to ease policy in part to avoid fueling a housing bubble and record consumer borrowing. Property prices have almost tripled since 1995 while consumer debt has almost doubled to 174 percent of disposable incomes.

The bank’s stance was backed by the International Monetary Fund last week, which said high and increasing household debt burden means monetary policy may have to “lean against the wind and follow a less supportive policy course than warranted by short-term macroeconomic conditions alone.”

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