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Financially solid Sweden feeling pain of heavy reliance on European trade

A worker assembles car doors at the main Volvo factory in Gothenburg. Sweden's prime minister is calling for the retirement age to be raised to 75.

Bob Strong/Reuters/Bob Strong/Reuters

Sweden wants to think "outside the European box" after its heavy reliance on trade with the region was blamed for a sharp economic slowdown in the fourth quarter.

Swedish trade minister Ewa Bjorling hopes to double exports by 2015 through measures that include pursuing export markets beyond the troubled European Union, such as Iraq, Africa and the BRIC countries (Brazil, Russia, India and China).

"We can see that during the financial crisis and immediately after, those companies that have spread their eggs in different markets outside Europe managed to handle the crisis much better," Dr. Bjorling said in an interview. "We believe we need to have other markets in combination with Europe."

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Despite solid government finances and an independent monetary policy, Sweden's dependence on trade with Europe has left it particularly vulnerable to turmoil in the euro zone. After boasting the strongest economic performance among Scandinavian countries, Sweden fell to the bottom of the pack in the fourth quarter of 2011 when its economy contracted 1.1 per cent. The decline followed several quarters of solid growth and a stellar 2010, when GDP grew at a record-breaking 7.3 per cent in the final three months of the year.

With half of Swedish GDP tied to exports, the vast majority destined for other European nations, dramatic reversals aren't unknown to the nation of 9.3 million. Sweden's economy shrank by 5.3 per cent in 2009 amid the global economic meltdown, only to rebound the following year.

"You see larger swings in the Swedish economy compared to other countries and the reason is we have a very high level of export dependence," said Robert Bergqvist, chief economist at the Swedish bank SEB. "Combine the high level of export dependence with lots of cyclical exports and the swings get bigger."

So far, solid government finances have allowed the Nordic countries to weather the euro zone's crisis relatively well. Now, with the exception of oil-rich Norway, those countries are expected to start feeling the pinch. SEB expects Denmark and Finland's economies to grow 0.5 per cent in 2012. Though the bank had called for the Swedish economy to grow 0.7 per cent in 2012, it has since revised its forecast to 0.5 per cent.

Swedish GDP will likely continue its decline in the first quarter before slowly picking up again, said Andreas Jonsson, senior economist at Nordea Markets.

"A year ago we were talking about the Swedish tiger," said Mr. Jonsson. "Now we are talking about the Swedish snail."

Dr. Bjorling's plan to boost Swedish exports calls for improving access to export markets for small and medium sized companies, pushing through a single European patent process and finalizing free trade agreements, including the one currently being negotiated between Canada and the EU.

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"We need to have more focus on specific markets and also think more outside the European box," Dr. Bjorling said.

The effort to diversify trade is wise, particularly in light of Europe's declining populations, said Mr. Jonsson. But the ambition to double exports is "beyond reach," he said.

"Trade is a very slow thing that changes over time," he said. "By 2015, my guess is our most important trading partners will still be the Nordic countries and northern Europe."

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