EUROPEAN COMMISSION Brussels, 26.2.2020 SWD(2020) 526 final COMMISSION STAFF WORKING DOCUMENT Country Report Sweden 2020 Accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT, THE EUROPEAN COUNCIL, THE COUNCIL, THE EUROPEAN CENTRAL BANK AND THE EUROGROUP 2020 European Semester: Assessment of progress on structural reforms, prevention and correction of macroeconomic imbalances, and results of in-depth reviews under Regulation (EU) No 1176/2011 {COM(2020) 150}



Contents Executive summary 1.Economic situation and outlook 2.Progress with country-specific recommendations 3.Summary of the main findings from the MIP in-depth review 4.Reform priorities 4.1.Public finances and taxation 4.2.Financial sector 4.3.Labour market, education and social policies 4.4. Competitiveness, reforms and investment 4.5.Environmental sustainability Annex A: Overview table Annex B: Commission debt sustainability analysis and fiscal risks Annex C: Standard tables Annex D: Investment guidance on Just Transition Fund 2021-2027 for Sweden Annex E: Progress towards the Sustainable Development Goals (SDGs) References LIST OF Tables

Table 1.1:Key economic and financial indicators - Sweden Table 2.1:Summary table on CSR assessments (*) Table 3.1:MIP assessment matrix (*) - Sweden 2019 Table 4.2.1:Financial soundness indicators (1) Table 4.4.1:Contributions to productivity growth in the business sector Table C.1:Financial market indicators Table C.2:Headline Social Scoreboard indicators Table C.3:Labour market and education indicators Table C.4:Social inclusion and health indicators Table C.5:Product market performance and policy indicators Table C.6:Green growth LIST OF Graphs Graph 1.1: Output gap, real GDP growth and its components (1) (2) Graph 1.2: Contributions to potential growth (1) Graph 1.3: Share of employees working in elementary occupation, 2nd quarter of 2019 Graph 1.4: Breakdown of rate of change of unit labour costs (ULC) Graph 1.5: Labour productivity and wage growth, 2011-2017 Graph 1.6: Breakdown of Net International Investment Position by sectors Graph 2.1: Overall multiannual implementation of 2011 - 2019 country-specific recommendations to date (1) (2) (3)

Graph 4.1.1: Swedish fiscal rules index and government gross debt Graph 4.2.1: Common Equity Tier 1 capital ratios (%) Graph 4.2.2: House prices by market segment (nominal) Graph 4.2.3: Estimated house price valuation gaps based on different indicators (1) (2) (3) Graph 4.2.4: New housing construction and estimated need Graph 4.2.5: Household dwellings by type Graph 4.2.6: Types of tenure and vacancy rates Graph 4.2.7: Household debt evolution (indexed, 2005 = 100) Graph 4.2.8: Maturity of mortgages and interest rates Graph 4.2.9: Household saving ratio, adjusted for net pension contributions and capital formation Graph 4.2.10: Leverage, Non-Financial Corporations Graph 4.3.1: Employment rate by educational attainment Graph 4.3.2: Employment rate by citizenship Graph 4.3.3: At-risk-of-poverty or social exclusion rate and its components (AROP, SMD, LWI) Graph 4.4.1: Labour productivity in the business sector in SEK per hour worked Graph 4.4.2: Labour productivity and hours worked by sector 2001-2018 - changes between 2001 and 2018 (1) Graph 4.4.3: Investment as share of GDP by institutional sector - EU 28 and Sweden Graph 4.4.4: Investment in intangible capital assets Graph 4.4.5: Business birth rates Graph 4.5.1: The ten EU countries with the lowest greenhouse gas emissions in 2017

Graph 4.5.2: Greenhouse gas emissions, carbon taxes and economic growth Graph 4.5.3: Share of renewable sources in final energy consumption, 2017 Graph 4.5.4: Final energy consumption (Mtoe(1)) Graph 4.5.5: Carbon dioxide emissions/gross value added (g/SEK) LIST OF Boxes Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Sweden Box 4.3.2: Monitoring performance in light of the European Pillar of Social Rights Box 4.4.3: The dynamics of labour productivity Box 4.4.4: Investment challenges and reforms in Sweden Box 4.5.5: Fossil free Sweden initiative Executive summary Sweden’s economy has performed well in recent years, but its subdued medium-term growth prospects call for further structural reforms. A persistent housing shortage is the result of demographic developments, insufficient new housing construction and inefficient use of the existing housing stock. Reforming the rental market and supporting construction, in particular in urban areas, could help address this shortage and support mobility and flexibility in the labour market. Tax incentives favouring property ownership and mortgage debt are contributing to high household debt and elevated house prices. In the labour market, the integration of non-EU migrants remains a major challenge, while shortages have emerged for high-skilled workers and productivity growth has recently stalled. Reviving reform momentum, e.g. by advancing the announced comprehensive tax reform, would address these issues and make the Swedish economy more resilient, while reducing risks from imbalances (). Economic growth remains positive, but is expected to slow. According to the Commission’s autumn 2019 forecast, real GDP grew by 2.2% in 2018 and is set to have slowed to 1.2% in 2019. With domestic demand and investment in particular weakening and a slowing global economy, economic activity is forecast to remain subdued. Real GDP growth is expected to stay just above 1% over the forecast period. In the long run, potential growth should remain below pre-crisis levels as productivity growth is set to be low. Sweden has had high growth, while lowering greenhouse gas emissions. In 1990-2017, Sweden’s greenhouse gas emissions fell by 26%, while it’s GDP per capita increased by 54%. This is partially due to a significant price on carbon dioxide emissions introduced in the early 1990s. Exports are still holding up well, but are expected to lose momentum. Growth in exports, particularly of services, was strong in 2019. A slowing in import growth due to weak domestic demand pushed up the current account surplus. Exports of goods and services are likely to expand more modestly by around 2% in 2020-2021, against the backdrop of trade tensions and as growth in Sweden’s main trading partners eases. The current account surplus is forecast to increase to above 4% of GDP. The labour market has started to weaken, albeit from high employment levels. Sweden has one of the highest employment rates in the EU (82.4% in 2018), but the Commission’s autumn 2019 forecast expects unemployment to increase from 6.3% in 2018 to 7.2% in 2021. However, labour shortages and skills mismatches, where the jobs available do not match the skills of the jobless, will remain, in particular for high-skilled jobs. Low-skilled people, especially non-EU migrants, face particular difficulties finding a job given the current economic headwinds. Long-term unemployment is set to rise, therefore, albeit from low levels. Monetary policy is normalising, despite limited inflationary pressures, and the fiscal position is strong. Monetary policy has remained accommodative for years due to low inflation. Despite inflation remaining below the Riksbank target of 2%, the central bank further lifted the policy rate at the end of December 2019 to 0%. The general government balance, while remaining in surplus, is expected to decline from 0.8% of GDP in 2018 to 0.1% of GDP in 2021. Public debt is expected to continue falling to 32% of GDP by 2021 due to prudent fiscal management.

Overall investment levels are high. Residential and equipment investment are declining due to the slowing economy. Investments in R&D, sustainable transportation and education and skills have been maintained tackling the continued investment needs in these areas. Sweden has made some () progress in addressing the 2019 country-specific recommendations. There has been substantial progress in the following area: ·Sweden maintained investment in sustainable transport (see Section 4.4). There has been some progress in the following areas: ·With its 2020 budget, Sweden focused investment-related economic policy on education and skills, and research and innovation (see Sections 4.1 and 4.4). ·Sweden adopted new legislative measures to strengthen the anti-money laundering framework. In addition, the country has started to address shortcoming in effective enforcement (see Section 4.2). There has been limited progress in the following area: Stimulating housing construction, most notably through an investment subsidy for construction (see Section 4.2). There has been no progress in the following areas: ·No progress has been made on reforming the favourable tax treatment of mortgage debt and home ownership, flexibility in the rental market and revising the design of the capital gains tax (see Section 4.2). Sweden performs very well on the Social Scoreboard supporting the European Pillar of Social Rights. The employment rate is among the highest and the gender employment gap is among the lowest in the EU. The level of digital skills among the population is very high. The good overall results reflect Sweden's advanced welfare model with a strong dialogue between unions and employers. However, the increasing share of early leavers from education and training is a source of concern and income inequality is rising, albeit from a relatively low level. On progress towards its national targets under the Europe 2020 strategy, Sweden has reached its targets for the employment rate, greenhouse gas emissions, share of renewable energy, post-secondary education attainment and poverty risks. Areas where the targets have not yet been achieved are early school leaving, energy efficiency and R&D. Sweden is among the best performing Member States on ‘Good health and well-being’ (SDG3), while its performance has deteriorated recently on ‘Reduced inequalities’ (SDG10), albeit from high levels (). The main findings of the in-depth review contained in this report and the related policy challenges are as follows: ·The banking sector is resilient but could be vulnerable to sudden changes in economic and financing conditions. The profitability of banks has been among the highest in the EU due to low non-performing loan ratios, high cost efficiency and low funding costs. However, banks rely on wholesale funding, exposing them to risks of liquidity shortages and changes in interest rate conditions. In addition, they have a large exposure to mortgages and commercial real estate. In the event of an abrupt reversal of the high valuation of house prices, in combination with a general worsening of economic and financing conditions, these structural features could have negative consequences for the Swedish economy and the Nordic region, where Swedish banks are active. ·Household debt as a share of GDP has stabilised at high levels. Household debt grew by 6.1 % in 2018, reaching about 88% of GDP and 176% of disposable income, which is among the highest in the EU. This was driven mainly by higher mortgage borrowing linked to high house prices, coupled with structural distortions favouring mortgage-financed property purchases. Sweden has implemented several macro-prudential measures in recent years, including a strengthened repayment rule for high debt-to-income mortgages in force since March 2018 and increased the countercyclical capital buffer for banks from September 2019. However, the policy steps taken so far appear to have had a limited overall impact on the growth of mortgage lending. ·While house prices declined in late 2017, they have started to rise again and valuations remain stretched. Key issues include tax incentives favouring home ownership and mortgage debt, and accommodative credit conditions coupled with still relatively low mortgage repayment rates. New construction does not meet housing needs, particularly of affordable homes around major cities, where demand is growing. This shortage is linked to structural inefficiencies, such as a limited level of competition in the construction sector. The housing stock is not being used efficiently. In the rental market, below-market rents create lock-in and ‘insider/outsider’ effects while the vacancy rate has fallen to virtually zero. In the owner-occupancy market, capital gains taxes reduce homeowner mobility. The housing shortage makes it harder for people to move location for a new job, thus contributing to labour shortages, and can add to intergenerational inequality. ·The high level of household debt and banks’ exposure to real estate are a risk to macroeconomic stability. Despite gradual policy action, mortgage debt continues to grow. With the housing market still appearing somewhat overvalued, high levels of indebtedness create a risk of a disorderly correction. This could have an adverse impact on the economy and potentially also for the banking sector. Other key structural issues analysed in this country report, which point to particular challenges facing the Swedish economy, are the following:

·Allegations of suspected money laundering remain a source of concern and have affected the reputation of Swedish banks. However, new legislation is in force and measures have been taken to improve coordination of the enforcement measures of the anti-money laundering regime and increased resources have been allocated to authorities to strengthen anti-money laundering work. These measures have yet to be assessed and yield results. ·Despite years of economic growth, some population groups have difficulties finding a job. Sweden is a top performer in the EU for high employment and low long-term unemployment rates. Challenges remain, however, for the integration of low-skilled people and non-EU migrants, especially women, into the labour market. This challenge is likely to remain in the coming years aggravated by the number and composition of asylum seekers who arrived in late 2015. Efforts have been made to improve their employability, but the slowing economy might further add to this challenge. ·While educational performance has improved overall, the educational attainment gap between different social groups is large and widening. Despite positive results in the OECD’s Programme for International Skills Assessment (PISA), the performance gap between pupils born in Sweden and those with a migrant background has markedly increased, especially challenging as the number of pupils with a migrant background nearly doubled between 2009 and 2018. Another challenge is the growing shortage of teachers. ·Despite the favourable business environment, productivity growth has stalled recently and is expected to remain low in the short term. Productivity growth in the longer term will depend on the successful transformation of the production base and the introduction of further innovations in information and communication services and strategic value chains. The country performs well in terms of efficient public administration, access to finance for small and medium-sized enterprises, and innovation and internationalisation by businesses. However, investment and innovation could benefit from a closer cooperation between academia and business, supporting productivity growth. ·To achieve Sweden’s ambitious climate objectives, sizeable investments and adequate funding will be key. The country intends to be carbon-neutral by 2045. This will require investments in infrastructure, such as the electrification of transportation and industry, and close cooperation across society to support innovation, while maintaining competitiveness. On the government’s initiative, several energy-intensive sectors including steel, cement and mining have presented roadmaps for becoming climate neutral by 2045, while discussions are ongoing on a comprehensive tax reform for increasing environmental taxes while reducing those on labour and business. The Commission’s proposal for a Just Transition Mechanism under the next multi-annual financial framework for the period 2021-2027, includes a Just Transition Fund, a dedicated just transition scheme under InvestEU, and a new public sector loan facility with the EIB. It is designed to ensure that the transition towards EU climate neutrality is fair by helping the most affected regions in Sweden address the social and economic consequences. Key priorities for support by the Just Transition Fund, set up as part of the Just Transition Mechanism, are identified in Annex D, building on the analysis of the transition challenges outlined in this report. 1. Economic situation and outlook GDP growth After years of solid growth, the Swedish economy is losing momentum. Real GDP increased by 2.2% in 2018, but grew very little in the first three quarters of 2019 as domestic demand decelerated. Gross fixed capital formation even turned negative in the first half of 2019. The unemployment rate, which normally lags economic growth, has increased since mid-2018 with the cooling of the economy. Waning domestic demand and heightened external risks cloud the outlook. Investment, a main growth driver in recent years, has become a drag on economic growth and private consumption has slowed. Although the fall in investment was led by a drop in housing construction, investment in machinery and equipment is cooling as well. Gross fixed capital formation is not expected to turn positive until 2021 (Graph 1.1). By contrast, net trade was buoyed by strong services exports and is forecast to support growth, in particular in 2019 and 2020 and private consumption will pick up from 2020. Overall, real GDP growth is projected to average 1.3% in 2019-2021. Graph 1.1:Output gap, real GDP growth and its components (1) (2) Source: European Commission Potential growth The slowing economy is negatively affecting estimated potential output growth. As labour demand weakens due to waning domestic demand, the contribution of labour to potential growth is set to halve (Graph 1.2). In addition, the fall in gross fixed capital formation reduces the capital contribution to potential growth. The fact that the labour market is decelerating faster than investment, together with high growth in the capital stock in recent years, supports total factor productivity growth ( ) (see Box 4.4.1). Graph 1.2:Contributions to potential growth (1) Source: European Commission Inflation and monetary policy Inflation remains low at below 2%. Following an increase in 2018 due to temporary factors (in particular a sharp rise in energy prices) the inflation rate is set to fall to 1.6% in 2021. Weak economic activity and expected moderate wage increases limit inflationary pressures. Despite a slowing economy and low inflation, the Riksbank increased its central policy rate from negative territory to zero. The Riksbank increased the repo rate on 20 December 2018 from ‑0.5% to ‑0.25% and again to 0% on 19 December 2019 and indicated that no more rises are planned in the immediate future. The Riksbank will continue to purchase government bonds until the end of December 2020, maintaining its holdings close to the average since the beginning of 2018. Long-term interest rates in Sweden have been determined by government bond purchases in combination with the international low-interest rate environment. The 10-year government bond benchmark rate turned negative around mid‑2019, associated with an even more negative term premium in mortgage rates with a likely supportive effect on credit growth. Private debt Household debt remains at historically high levels posing a risk to the economic outlook. Household debt reached 176% of disposable income in 2018, with the ratio levelling off. In nominal terms, household debt increased by 4.8% year-on-year in the first three quarters of 2019, following a rise of 5.8% in 2018. Following macro-prudential tightening, the distribution of debt has become more concentrated. The share of new loans with debt-to-income ratios above 450% fell from 15.0% in 2017 to 8.4% in 2018. At the same time, the share of new loans with debt-to-income ratios between 300% and 450% jumped from 32.1% in 2017 to 37.8% in 2018. High indebtedness, linked to high house prices, implies a risk of a need for deleveraging with possibly severe implications for domestic demand (see Section 4.2.3). Labour market The labour market, which has had a high employment level, has started to weaken. The unemployment rate has increased markedly from an average of 6.3% in 2018 and is set to stabilise just above 7% in 2020 and 2021 ( ). At the same time, Sweden continues to have one of the highest employment rates in the EU. However, the disparity between the employment rates of low-, medium-, and high-skilled workers remains high. In 2018 the employment rate for low-skilled employees stood at 62%, compared to 89% for those with tertiary education.

Labour shortages and skills mismatch persist. The Public Employment Service (PES) (Arbetsförmedlingen) expects continued labour shortages in the coming years. While the cyclical economic slowdown should ease the pressure, skills shortages of a more structural nature are expected prevent the gap from narrowing. This applies in particular to education, health care, social work, ICT, industry and construction. Thus, securing sufficient skills is a key challenge if sustained economic growth is to be ensured (see Section 4.3). Growth of the Swedish labour force is increasingly due to immigration. In 2018, the foreign-born represented half of total growth in employment, and in education and health care the foreign-born actually accounted for all growth (Arbetsförmedlingen, 2019a). The PES expects the foreign-born to account for 90% of employment growth over the medium to long term. Finding employment without adequate education is a challenge, in particular for the non-EU-born. Sweden is among the countries with the lowest share of employees in occupations for which only primary education is required with a figure standing at around 5% (Graph 1.3). Non-EU migrants who have only primary education often find it hard to find work. As structural labour shortages are most pronounced for high skilled jobs, weaker employment growth in the expected cyclical economic downswing risks having the most impact on the employment prospects of the lower educated, including immigrants. Graph 1.3:Share of employees working in elementary occupation, 2nd quarter of 2019 Source: European Commission Competitiveness Despite weak productivity growth, the Swedish economy remains competitive. Strong competitiveness is shown by indicators on effective exchange rates and wage and cost developments (Graph 1.4) and is consistent with a relatively strong export performance. On average, real hourly wage growth has outpaced lacklustre productivity growth since 2011. In the most recent expansionary phase of the business cycle average wage growth remained modest, while wage dispersion across industries remained limited ( ). The ensuing moderate gains in unit labour costs, together with the depreciating krona, have supported overall competitiveness and have been an important determinant of subdued inflation. Graph 1.4:Breakdown of rate of change of unit labour

costs (ULC) Source: European Commission Inequality The increasing return on human capital benefits the lower paid but not the lowest paid. In 2015, the Organisation for Economic Cooperation and Development (OECD) noted that in Sweden employment opportunities, including wages, are strongly linked to educational attainment (OECD, 2015). Those on the highest incomes, in sectors where skills shortages are most pressing, have experienced significantly higher wage growth than those on the lowest incomes (Graph 1.5). With a large part of the labour force being relatively well-educated, however, increases have not been proportional across income groups. Wage growth has been particularly strong for those in lower paid jobs, although not for the 20% of the workforce earning the lowest wages. While Sweden remains among the more equal societies in the EU, it is no longer among the top performers. Social transfers are the main means of counterbalancing the increased disparity between low and higher-wage earners. While wages have increased for the lower paid jobs but not for the lowest paid, the disposable income of the lowest paid has actually increased more than that of any other income group due to redistribution, except the top decile for which business income is an important determinant of disposable income. Income inequality, measured by the income share of the richest 20% compared with that of of the poorest 20%, remains stable at just above a ratio of 4. However, when measured using the Gini-coefficient, income inequality has increased because of changes in relative incomes other than the lowest due to changes along the full range of incomes. In addition, Sweden has experienced increased wealth inequality and, in particular, housing wealth inequality (see Section 4.2.2). It is difficult for young people, low-income groups, and newly arrived migrants to find affordable housing, particularly in the big cities. More broadly, housing, other non-financial and financial wealth dynamics have been an important driver of income inequalities (Andersen, 2019). Graph 1.5:Labour productivity and wage growth, 2011-2017 Source: Statistics Sweden (income) and European Commission (productivity, wages), European Commission calculations Note: Ninth decile given for its high wage income share in disposable income; tenth decile has large share of business income External position The fall in the current account surplus reversed in 2019. While the goods balance fell from a surplus of 6.9% of GDP in 2006 to 1.5% of GDP in 2018, an increasing services surplus compensated for this until 2016. From then onwards, however, the services balance deteriorated too and the total trade surplus fell from 4.4% of GDP in 2016 to 1.9% of GDP in 2018, despite the fact that the Swedish krona depreciated by 4.7% in real effective terms over the same period. In 2019, however, the current account surplus widened, as exports held up (supported by strong competiveness) while imports slumped in line with the deceleration in domestic demand. Corporates reducing their borrowing, and further increases in household savings, will support the current account. Since 2004, a rising household savings surplus was partly offset by a reduction in borrowing by corporations. As the economy enters a phase of muted growth, weak domestic demand is lowering imports, and reduced corporate investments are expected to improve the savings ratio. Looking at the sectoral breakdown of the international investment position, only the monetary financial institutions have a substantial negative net international investment position (NIIP). This to a large extent mirrors the funding of banks through securities issuance, mostly in international capital markets, amounting to around 40 to 50% of GDP and around 25% of total funding. This source of financing has remained stable, also in the wake of recent money laundering allegations (see also Section 4.2). Graph 1.6:Breakdown of Net International Investment Position by sectors Source: European Commission Public finances While some pressure is building, budgetary developments remain solid. The cooling of the economy, in combination with tax cuts, has slowed revenue growth in 2019 and beyond. At the same time, demographic developments and the integration of recently arrived immigrants are putting upward pressure on expenditure. Consequently, medium-term budget projections point to decreasing surpluses of 0.3% of GDP in 2019 and 0.1% in 2020-2021. Sweden’s debt-to-GDP ratio is expected to continue to fall. Strong economic growth, primary budget surpluses and prudent fiscal management brought the debt-to-GDP ratio to 38.8% in 2018. The decline is set to continue with the debt-to-GDP ratio at 32.0% in 2021, significantly below the reference value of 60 % of GDP agreed in the Treaty (see also Section 4.1). Moreover, while the overall debt is set to decrease, its composition is changing: local governments and regions are taking on more debt to finance investments welfare provision facilities such as schools, preschools and homes for the elderly. Progress towards the Sustainable Development Goals Sweden generally performs very well towards achieving the Sustainable Development Goals (SDGs) ( ). It is among the EU Member States performing best on “zero hunger” (SDG 2), “Good health and well-being” (SDG 3), “Gender equality” (SDG 5), “Clean water and sanitation” (SDG 6), and “Sustainable cities and communities” (SDG 11). Sweden has seen a deterioration in its performance in recent years on “Reduced inequalities” (SDG 10) and “Responsible consumption and production” (SDG 12) albeit from high levels. In several sub-indices Sweden is among the top performers, e.g. in adult participation in learning", "death rate for chronic diseases”, “investment as a share of GDP”, and “seats held by women in parliament”. Swedes continue to have a high confidence in institutions. The crime rate, however, has been rising and is now above the EU average.

Table 1.1:Key economic and financial indicators - Sweden Source: Eurostat and ECB as of 4-2-2020, where available; European Commission for forecast figures (Winter forecast 2020 for real GDP and HICP, Autumn forecast 2019 otherwise) 2. Progress with country-specific recommendations Since the launch of the European Semester in 2011, 88% of all country-specific recommendations (CSRs) addressed to Sweden have recorded at least ‘some progress’ ( ). 12% have recorded ‘limited’ or ‘no progress’ (Graph 2.1). Substantial progress and full implementation have been achieved in several policy areas, in particular fiscal governance and research and innovation. Limited progress has been achieved in implementing CSRs related to the housing market and household debt. Graph 2.1:Overall multiannual implementation of 2011 - 2019 country-specific recommendations to date (1) (2) (3) Source: European Commission Sweden’s fiscal policy continues to be in a healthy state. Continued budgetary surpluses, a declining debt-to-GDP ratio well below the Treaty threshold and a sound fiscal framework have ensured Sweden’s compliance with the medium-term budgetary objective. For the labour market, the government achieved some progress in improving the employment situation of young people. Measures to support apprenticeships and other types of work-based vocational education were adopted, but the low-skilled and the non-EU born citizens in particular face high unemployment levels. Every year since 2011, it has been recommended that Sweden address its high and rising household debt and high house prices. The authorities have implemented and adopted policy measures to address the issue, but these have been of a rather incremental nature. In addition to macro-prudential steps, the government has aimed to increase housing supply. Macro-prudential measures include a loan-to-value ceiling of 85% in 2010, raising banks risk weight floors for mortgages in 2013 and 2014, a formal amortisation requirement in 2016, further strengthened in 2018 and an enhanced legal mandate for the financial supervisor in 2018. While this has improved banking sector resilience, it has not stopped household debt growth. The authorities also revised the building and planning regulations and provided budgetary support for more construction. This has increased building supply, but not enough to cover expected needs, in particular in major cities. Sweden has made some progress ( ) in addressing its 2019 country-specific recommendations. Sweden received three CSRs. The first one relates to the high level of household debt and high house prices. This is relevant for the macroeconomic imbalance procedure (see Section 3). Limited progress has been made in addressing these imbalances. The unlawful sale of rental contracts has been criminalized and fines are now higher. The government marginally changed the capital gains tax to improve mobility and achieve a better use of the existing housing stock. To support housing supply, the government has reinstated investment support for building rental apartments (see Section 4.2.2). In addition, the countercyclical capital buffer requirement for systemic banks has been raised from 2.0% to 2.5% effective from 19 September 2019. Sweden has made some progress on the second CSR related to investment and on the third CSR related to anti-money laundering. The country is increasing its investment in education and in infrastructure. Investment in research and innovation and transport has been maintained. The third recommendation covers anti-money laundering, where Sweden has made some progress. It strengthened the legal anti-money laundering framework and somewhat increased staffing, although a further strengthening is needed. The country has started reviews of the governance of major Swedish banks and their control of anti-money laundering measures in Baltic subsidiaries and launched two investigations at the end of 2019. Upon request from a Member State, the Commission can provide tailor-made expertise via the Structural Reform Support Programme to help design and implement growth-enhancing reforms. Since 2018, such support has been provided to Sweden for three projects. In 2018, the Commission provided the authorities with support for the implementation of the corporate-income-tax gap assessment methodology. In 2019, work started to improve the capacity of municipalities to assess the quality of healthcare at home and in nursing homes. The Commission is also assisting the authorities in preparing a study to digitalise the issuance of import permits, export permits and re-export certificates in order to comply with the Convention on International Trade in Endangered Species of Wild Fauna and Flora ( CITES ). Table 2.1:Summary table on CSR assessments (*) Source: European Commission (*) The assessment of CSR 2 does not take into account the contribution of the EU 2021-2027 cohesion policy funds. The regulatory framework underpinning the programming of the 2021-2027 EU cohesion policy funds has not yet been adopted by the co-legislators, pending inter alia an agreement on the multiannual financial framework (MFF). Box 2.1: EU funds and programmes to address structural challenges and to foster growth and competitiveness in Sweden Sweden benefits from EU support. The financial allocation from the EU Cohesion policy funds I for Sweden amounts to € 3.47 billion in the current Multiannual Financial Framework, equivalent to around 0.1% of GDP annually. By the end of 2019, some € 2.98 billion (around 86 % of the total amount planned) was allocated to specific projects, while € 1.57 billion was reported as spent by the selected projects II showing a level of implementation above the EU average. EU Cohesion policy funding also contributes to addressing structural challenges in Sweden. The Cohesion Policy programmes for Sweden have allocated € 644.25 million for smart growth, € 244.54 million for sustainable growth and sustainable transport and € 783.80 million for inclusive growth. In 2019, following a performance review III , € 139.54 million was made available within performing priorities. EU Cohesion policy funding is contributing to transformations of the Swedish economy by promoting growth and employment via investments, mainly in research, technological development and innovation, competitiveness of enterprises, sustainable transport, employment and labour mobility. By 2019, investments driven by the European Regional Development Fund (ERDF) had approved 800 projects, 1,800 organisations are co-financing the projects, 20,000 SMEs are supported. European Social Fund (ESF) funding contributes to employment growth and a sustainable working life through measures aimed at skills development and support for vulnerable groups. In total, more than 160,000 people have benefited from the support. The Fund has helped the process of integration of the foreign-born into the labour market, especially women. The ESF and the Youth Employment Initiative supported over 25,000 participants with a foreign background or minorities. Over 10% of the ESF projects focus on the newly arrived in Sweden. Agricultural and fisheries funds and other EU programmes also help address investment needs. The European Agricultural Fund for Rural Development (EARDF) provides supports of € 3.46 billion and the European Maritime and Fisheries Fund (EMFF) has € 173.18 million (including the national co-financing for both) available. Sweden benefits also from other EU programmes, such as the Connecting Europe Facility, which allocated € 347.11 million to specific projects on strategic transport networks. Horizon 2020 allocated € 1.6 billion (including to 485 SMEs of about € 248.11 million). EU funding contributes to mobilisation of private investment. By the end of 2018, European Structural and Investment funds IV helped programmes mobilise additional capital by committing about € 275.3 million in the form of loans, guarantees and equity, which is 4.6% of all decided allocations of the European Structural and Investment funds (ESIF). EU funds already invest amounts on actions in line with the Sustainable Development Goals (SDGs). In Sweden, European Structural and Investment Funds support 10 of the 17 SDGs with up to 95% of the respective expenditure. 3. Summary of the main findings from the MIP in-depth review The 2020 Alert Mechanism Report concluded that another in-depth review should be undertaken for Sweden to assess the persistence or unwinding of imbalances (European Commission, 2019a). In February 2019, Sweden was again identified as having macroeconomic imbalances (European Commission, 2019a). The identified imbalances related in particular to elevated house prices coupled with high and increasing household debt. This chapter summarises the findings of the analyses in the context of the MIP in-depth review that is contained in various sections in this report ( ).

3.1.Imbalances and their gravity Consolidated private sector debt stood at 200% of GDP in 2018, among the highest in Europe. It grew by two percentage points in 2017-2018. Consolidated debt of both households (88% of GDP in 2018) and non-financial corporations (112% of GDP in 2018) both grew. Current debt levels are high compared to other EU countries and above debt benchmarks developed by the European Commission. Household debt remains the main concern. Not only has household debt risen faster than GDP and disposable income for an extended period of time, but the expansion of household debt is also strongly tied to high house prices and very low interest rates. While households possess significant assets, these are usually illiquid and their value is exposed to market risk. Moreover, high household debt is a particular concern for certain groups that entered the housing market in recent years and took on above average levels of debt relative to income (see ‘Household debt developments’ in Section 4.2.3). The debt level of non-financial corporations, while high, appears manageable. Swedish non-financial corporations deleveraged following the financial crisis as nominal GDP growth outstripped credit growth. Deleveraging in Sweden has been orderly, i.e. the non-performing (NPL) ratio and the number of bankruptcies have been low and stable. Leverage continues to be high in comparison with most Member States, however, but equity cushions and corporate savings provide for a substantial buffer. Thus, overall, the corporate sector is in a position to further reduce leverage if needed. Some segments, like commercial real estate, appear more vulnerable. In the commercial real estate sector, asset prices have risen fast, yields have fallen and banks’ exposure to lending for the sector has increased. (see ‘Corporate debt developments’ in Section 4.2.3). High house prices in combination with high household debt expose the Swedish economy to shocks. House prices have risen significantly over the past two decades and remain high, despite a correction in 2017. The overall estimate of the overvaluation gap is at around 30%. Strong fundamentals, low interest rates, distortive taxation and supply side inefficiencies all contribute to the overvaluation (see Section 4.2.2). Because of the combination of high house prices and high private debt, the European Systemic Risk Board (ESRB) stepped up its warning and issued in 2019 a recommendation to Sweden to address these structural factors (ESRB, 2019a). The banking sector is relatively resilient, but could be vulnerable to sudden changes in economic and financing conditions. Bank profitability has been among the highest in the EU due to low NPL ratios, high cost efficiency and low funding costs. However, banks rely on wholesale funding, exposing them to risks of liquidity shortages and changes in interest rate conditions. In addition, they have a large exposure to mortgages and commercial real estate. If there is an abrupt reversal of the high house prices, in combination with a general worsening of economic and financing conditions, these structural features could have negative consequences for the Swedish economy and for the Nordic region, where Swedish banks are active. 3.2.evolution, prospects and policy responses Household debt continues to rise. The stricter amortisation rules for new residential mortgages resulted in a somewhat slower credit growth. In nominal terms, it grew 4.8% year-on-year in the first three quarters of 2019 (5.8% in 2018). In the third quarter of 2019, household debt stood at 177% of disposable income. The combination of favourable financing conditions due to low interest rates, a uptick in house prices and still growing disposable income will highly likely result in continued uptake of debt in particular by first-time buyers (Emanuelsson et al., 2018). House prices are likely to increase further. House prices started to grow again in 2019 as the supply of new homes is lagging and the rental market does not offer many alternatives. Moreover, the low interest rates and negative term premium can suppress user housing costs even if debt increases. In December 2019 the year-on-year increase in house prices was 4.2%, leaving them 3.2% below their August 2017 peak ( ). Real house prices were 2.3% year-on-year higher in December 2019 and 7.8% below their 2017 peak. Indicators still point to an overvaluation of house prices, with the gap between prices and fundamentally justified values among the highest in the EU. Continued distortions in supply and demand together with growth of nominal disposable income and some financial space (lower interest rates at the longer end of the yield curve plus uptake of consumer loans) suggest that prices are likely to rise moderately in the future. Corporate debt is on the rise, again. After reaching a post-crisis low of 106% of GDP, consolidated corporate debt has started to rise again. Quarterly indicators for non-consolidated debt point to a further, albeit moderate, rise in the first half of 2019. Corporates have somewhat started to lengthen the duration of loans following the strong decline in longer maturities. Still, 70% of the remaining maturity is below 3 months and 90% below one year. Limited policy steps have been taken to address the imbalances associated with household debt and the housing market. For the rental market, the unlawful sale of rental contracts has been criminalised and fines have been increased. The government marginally changed the capital gains tax to improve mobility and achieve better use of the existing housing stock. Deferral of the capital gains tax liability on housing transactions remains possible when moving house, with the maximum deferrable amount increased to SEK 3 million. To partially address the continued shortage of housing supply, the government has reinstated investment support for building rental apartments (including for students) as part of the 2020 budget bill. This entered into force on 1 January 2020 with a budget allocation of SEK 2.1 billion, which should gradually increase to SEK 3 billion. Concerning macroprudential policy, the countercyclical capital buffer for systemic banks has been raised from 2.0 to 2.5%, effective from 19 September 2019 and the FSA proposed tighter capital requirements on banks for their exposures to commercial real estate. Important policy gaps remain, particularly in relation to tax incentives for (debt-financed) home ownership and the rental market. Sweden is one of the very few EU countries with tax relief on the full amount of mortgage interest paid and there has been no progress towards reducing this tax deductibility. Nor has any action been taken to reform the system of recurrent property taxation, which currently has a relatively low ceiling so that the tax in practice tends to be a rather modest fixed fee that does not increase apace with property values. At the same time, the capital gains tax, which negatively affects housing mobility in the owner-occupied housing market segment, has been broadly left untouched. Sweden’s rental market remains tightly regulated and discourages increased supply of rental housing and more efficient usage of the existing stock. 3.3.Overall assessment The Swedish economy still faces macro-economic imbalances related to high private debt and overvalued house prices. Macroeconomic shocks could still destabilise the Swedish economy as household debt related to overvalued house prices could trigger a harmful adjustment. In such an adverse scenario, a large and disorderly correction of house prices would lead to a negative interaction between credit and economic growth. This could spill over to other countries in the region through the financial system. Policy measures have not sufficiently addressed housing debt and house price imbalances. The authorities have resorted mostly to macro-prudential measures to address demand pressures while supply measures have been restricted to subsidising construction in the rental market. The 2016 ‘22-point plan’ to improve the working of the housing market, which was implemented gradually, has been superseded by the broader reform agenda contained in the government programme of January 2019 (‘the January Agreement’). Still policy gaps remain for housing-related taxation and for the functioning of housing supply and the rental market. Table 3.1:MIP assessment matrix (*) - Sweden 2019 (Continued on the next page) Table (continued) Source: European Commission 4. Reform priorities 4.1.Public finances and taxation

Public finances remain resilient. The general government balance had a surplus of 0.8% of GDP in 2018, with the general government gross debt at 38.8% of GDP and the debt-to-GDP ratio expected to have declined below the new 35% debt anchor in 2019. A slightly expansionary 2020 budget bill and slower growth are expected to lead to a decline in the general government surplus, but Sweden still faces low fiscal sustainability risks in the medium to long term. 4.1.1.Fiscal framework A revised fiscal framework came into force in Sweden in 2019. The main changes are the introduction of a debt anchor set at 35% of GDP with a 5 percentage point tolerance margin and a lower net lending surplus target over the cycle to 0.33% of GDP, from the previous 1% of GDP. In addition, it entails a strengthened mandate for the Fiscal Policy Council (Finanspolitiska rådet), which has worked since 2007 to monitor fiscal rules and evaluate the official macro-forecasts. The fiscal framework kept the expenditure ceiling and a balanced budget requirement for local authorities. The framework has strong credibility based on its institutional set-up and Sweden’s track record. The framework has contributed to long-term fiscal sustainability in Sweden (Graph 4.1.1), combining stability and sound implementation over time with the possibility of amending when necessary, for example in response to demographic changes or debt development assessments. Since 2017, ties between the budget and climate policies have been strengthened through the climate policy framework, and the budget includes an annual climate report. Graph 4.1.1:Swedish fiscal rules index and government gross debt Source: European Commission Broad political support was and remains crucial for the success of the framework. The institutional set-up of Sweden’s public finances is based on consensus across party lines, which has been a factor for its soundness (see European Commission, 2019b). The predictability of the fiscal framework has contributed to its success. According to the framework, statutory revisions should be made every 8 years. The current policy agreement between the government and two centre-right parties (the Liberals and the Centre Party) explicitly states that the framework is to be complied with over the election period, also to be prepared for a downturn. It is too early to evaluate the results of the new fiscal framework. While the debt level is in line with the benchmark rule and is projected to have fallen to 34.6% of GDP in 2019, an assessment of the surplus target requires more data points under the new rule. It appears that the current expenditure ceiling will help achieve the surplus target. In a retroactive perspective, the new target would not have been reached (Finanspolitiska rådet, 2019). Looking ahead, local governments and regions face a rising demand for welfare services. The long-term ability of the pension system to guarantee adequate pensions is also uncertain. In the event of substandard pensions, ad hoc interventions could put additional pressure on public finances (Aspegren et al., 2019). 4.1.2.Taxation and budgetary developments The general level of taxation remains above the EU average, but varies across specific taxes. The total tax burden was 43.8% of GDP in 2018 (EU average 39.2% of GDP). The overall labour tax burden is also high with an implicit tax rate of 39.6% in 2018, above the EU average of 36.2%. At the same time, the relatively low recurrent property tax on homes ( ), and mortgage interest deductibility, result in a regressive tax bias in favour of house ownership. However, capital taxes are also below the EU average (6.1% of GDP; EU average of 8.5%, and 13.8% of total taxation; EU average of 21.6%). The high tax burden on labour might affect work incentives. Low-income earners at 50% of the average wage face a particularly high tax wedge, i.e. the gap between labour costs and take-home pay, at 39.5%. Furthermore, incentives to move from inactivity to employment as measured by the inactivity trap indicator, are low at 50% and 67% of average wage, due to a high tax burden. A broader tax reform could support employment and help mitigate the build-up of household debt. The government’s 2019 policy statement included an objective to carry out a major tax reform. No concrete plans have yet been announced, however. Therefore, it is not certain whether the forthcoming reform would include e.g. a tax shift from labour to property by revising the rules on mortgage interest deductibility or the recurrent property tax. Reforms in this area could contribute to more favourable development of household debt (see Section 4.2), foster employment and possibly also have a favourable impact on income equality (Justo et al., 2019). The 2020 budget bill is slightly expansionary. It reflects rising demand for welfare services and the financial constraints of local governments and regions, which will receive higher grants (an increase of SEK 5 billion). Moreover, it includes new spending on law and order and a commitment to support a green transition using SEK 3.2 billion to promote the transition to a fossil-free economy. On the revenue side, sizeable tax cuts translate into slower revenue growth. This includes the abolition of the 5% ‘austerity tax’ levied on the portion of individual incomes exceeding SEK 689,300 per year (removing the top layer of progressivity), and a reduction in income tax rates for income above SEK 17,000 /month for the over-65s. The aim of the measure is to remove the gap between taxation of employment income and pension income. Revenue from environmental taxes is below the EU average. Environmental taxes accounted for 2.1% of GDP in 2018 (EU average 2.4%) and energy taxes for 1.6% of GDP (EU average 1.8%). In the same year, environmental tax revenue accounted for 4.8% of total revenue from taxes and social security contributions (EU average 6.2%). This situation is partially due to the intended behavioural impact of taxes, and an increased substitution to biofuels in the transport sector. Some exemptions and reductions in tax rates for carbon and energy are being phased out. Discounts in the carbon tax on heating fuels in the non-ETS (emissions trading system) sectors have been reduced, and ultimately abolished in 2018. Tax reductions or exceptions remain only for fuels in certain areas, such as agriculture and inland sea transport. Since 2017, taxes on petrol and diesel are subject to an annual increase of two percentage points on top of consumer price inflation. The ‘diesel differential’ (difference in price of diesel versus petrol) has been reduced by gradually adjusting the respective excise tax rates. 4.1.3.sustainability of public finances Sweden’s government debt is expected to continue declining over the medium term. Sound fiscal management and sustainable economic development under the Commission’s baseline no-policy change scenario is projected to bring government debt to 15.4% of GDP in 2030 from 34.6% of GDP in 2019. The pension system is being reformed, with the aim of tying the minimum pensionable age to a ‘reference age’ that will increase with life expectancy. As a first step, the minimum age for the regular old age pension (income-based pension) has been raised from 61 to 62 in January 2020, and further steps to raise the reference age for the old age (income-based) pension and minimum (guaranteed sum) pensions are expected in the coming years (Aspegren et al., 2019). Overall, the outlook for fiscal sustainability appears sound in the short, medium and long term (European Commission, 2020a) ( ). Debt appears to be resilient to shocks. Given the low stock of initial debt, adverse shocks to growth, interest rates or the primary balance would not have a sizeable impact on the debt ratio. In all sensitivity test scenarios government debt remains on a downward trend. Debt-to-GDP at the end of the projection period (2030) in these scenarios is moderately higher than the baseline. In the worst case scenario, based on a shock to the exchange rate, gross public debt would reach 18.0% of GDP in 2030. Public expenditure on long-term care is projected to increase. Demographic changes imply that under current policies, spending on long-term care can be expected to increase significantly, from 3.2% of GDP in 2016 (the second highest in the EU) to 4.9% of GDP in 2070 (European Commission and Ageing Working Group of the EPC, 2018). This corresponds to a 53% increase, slightly below the EU average. The share of the population receiving long-term care is relatively high by EU standards, whereas the underlying level of need ( ) is among the lowest in the EU. 4.2. Financial sector 4.2.1.Banking sector (*) ( )

Overview The banking sector is resilient thanks to high profitability and low credit losses. Despite negative interest rates in recent years, bank profitability still ranks among the highest in Europe. Moreover, in 2019, the Swedish banking sector continued to exhibit one of the lowest average NPL ratios for both households and non-financial corporations (see Table 4.2.1). This low incidence provides resilience in the event of adverse shocks and has led to low funding costs. These developments and high cost efficiency resulted in return on equity and return on assets averaging 12 and 0.7% respectively in 2019. Share prices fell, however, as several Swedish banks are being investigated for failures to properly prevent money laundering, particularly in their Baltic branches and subsidiaries. Vulnerabilities and risks remain due to the size, concentration and interconnectedness of the Swedish banking system. The size of the banking system, measured by its total assets, is almost 300% of GDP ( ). The sector is concentrated around three major (pan-Nordic) banks covering over 60% of the market across all main segments. In addition, these banks are closely interlinked through their trading operations and their bilateral non-secured loans. There are also sizeable cross-holdings of covered bonds ( ), which entails significant risks of contagion in the event of disruptions. Regulatory changes in the calculation of banks' risk-weighted assets led to a significant decline in reported capital ratios. At the end of 2018, the Financial Supervisory Authority (Finansinspektionen, FSA) revised the modalities for the risk-weight-floor imposed on residential mortgages for banks using internal risk models, enhancing the international comparability of reported capital ratios. The ensuing drop in reported bank capitalisation as a ratio of risk-weighted assets moved it closer to the EU average (see Graph 4.2.1). However, the leverage ratio remains between 4% and 5% for most banks and is among the lowest in the EU. The comparatively low level of own funds illustrates the existing structural vulnerabilities, consistent with the finding of Betz et al. (2014) that the leverage ratio is the simple best indicator predicting failure for European banks. Capital requirements related to the output floor ( ), as agreed by the Basel Committee on Banking Supervision, may lead to higher capital buffers for Swedish banks going towards full implementation on 1 January 2027 (Finansinspektionen, 2019a). Graph 4.2.1:Common Equity Tier 1 capital ratios (%) Source: European Commission Table 4.2.1:Financial soundness indicators (1) Source: European Central Bank; European Commission calculations Swedish banks have maturity mismatches between assets and liabilities and rely on wholesale funding. The loan-to-deposit ratio is high in Sweden (182.2 as of Q2-2019, twice the EU average). Compared to European peers, the major banks in Sweden have a large share of loans on the asset side, mainly mortgages with usually a very long maturity of 30–50 years. On the liability side, bank deposits, commonly perceived as a stable funding source, are a comparatively small share. Swedish banks rely on the international capital markets to cover the resulting funding gap of around 50% of their loan books, mostly with short-term debt in foreign currency and covered bond issuances backed by residential mortgages. The liability structure exposes credit institutions to the risks of liquidity shortage and higher funding costs. Because international wholesale funding is much more sensitive to changes in interest rates or conditions of financial stress, Swedish banks could find it difficult to get sufficient liquidity in an adverse situation e.g. disruption on the housing market or confidence effects stemming from the ongoing money laundering investigations. Against this background, Swedish supervisors have stressed the importance of adequate liquidity coverage ratios and the need to diversify liquidity buffers (Finansinspektionen, 2019b; Riksbank 2019a). On the other hand, all systemically important institutions already meet the current minimum requirements for own funds and eligible liabilities (MREL). This is the amount of own funds and liabilities that can be written down or converted into new equity to absorb losses and restore capital in a crisis. Stress tests show mixed results for Swedish banks. According to the 2018 stress test conducted by the European Banking Authority (European Banking Authority, 2019), the major Swedish banks would have the ability to withstand a severe recession combined with falling real estate prices (illustrated, among other things, by a reduction in the Common Equity Tier 1 (CET1) ratio of at the most between 2.7 and 3.3 percentage points). By contrast, the results of the Riksbank’s stress tests show that in the event of a deep recession the major banks’ credit losses could be higher. They would incur substantial operating losses, lowering their CET1 ratio by almost 14 percentage points and the leverage ratio by over 4 percentage points ( ). The exposure of banks to the housing market poses risks. Households remain vulnerable to an adjustment in the housing market and an increase in debt service costs (see Section 4.2.3). An indicator developed by the Riksbank (Giordani et al, 2017) to measure vulnerability in the financial system is currently at historically high levels, partly due to high indebtedness and rising real housing prices. This is despite the macro-prudential policy measures adopted to cover the associated risks. Risks related to the commercial real estate market triggered an in-depth analysis by the Financial Supervisory Authority. Commercial real estate prices have increased sharply since 2013, in particular for offices in the centres of Stockholm and Gothenburg (Finansinspektionen, 2019c). Banks' commercial real estate lending has grown in parallel, possibly indicating a search for yield. However, given the size of the commercial property market in Sweden (around 36% of GDP)( ) and its sensitivity to macro-financial shocks, a sharp market correction could have ramifications for financial stability, via the exposure of construction firms to interest rate and refinancing risk. Thus, the FSA conducted an in-depth analysis of the appropriate capital requirement for banks to cover losses from commercial real estate lending. In January 2020, the supervisor raised Pillar 2 capital requirements to ensure sufficient capital coverage (Finansinspektionen, 2020). The adjusted risk weight is 35% (with a lower 25% requirement for commercial exposures secured by residential property) against the current level of around 23%. Work on a revised Riksbank act is progressing, while the Banking Union inquiry was completed. On 29 November 2019 a dedicated parliamentary committee presented a report to the government with a proposal for a new Riksbank Act with some changes to the mandate of the central bank, which is due for subsequent public consultation (SOU, 2019a). On 10 December 2019, the government released the results of an inquiry into a possible Swedish membership of the Banking Union (SOU, 2019b). The report lists advantages and disadvantages of membership, but does not contain explicit policy proposals. Anti-money laundering Cases of alleged money laundering have put the spotlight on Swedish banks. Recent large-scale alleged money laundering cases involving activities of Swedish banks through their branches and subsidiaries in the Baltics, resulted in a CSR for Sweden to address shortcomings in its anti-money laundering framework (see Section 2). The European Commission looked at the case of Nordea and the role of the Swedish authorities (European Commission, 2019c) and asked the European Banking Authority to investigate whether financial supervision in the Swedbank case was in line with EU law. This investigation has not yet been completed. Allegations of suspected money laundering have affected the reputation of Swedish banks, resulting in a sharp fall in share prices in 2018-2019. Enforcement of the anti-money laundering legal framework will be better coordinated. Sweden has created a special body to promote efficient collaboration between the supervisory authorities and the Police Authority, consisting of representatives from 17 organizations. It aims at bring together different types of knowledge and skills to ensure that they are of use to the entire system, and to foster collaboration, dialogue and effective exchange between the authorities, and between the authorities and operators. The Financial Supervisory Authority recruited additional staff to ensure a more transparent, risk-based and efficient supervision. It increased its staff by four new posts in 2018 to a total of 13, still low for the size of the Swedish financial sector. The 2020 budget allocates an additional amount of SEK 10 million to the FSA to strengthen its anti-money laundering work (Finansinspektionen, 2019d).The FSA is currently working at domestic level to apply the risk-based supervision approach through a risk classification tool, which will need to be updated in 2020. More work is needed, however, to understand and correctly apply the risk-based approach, revising its inspection procedures and applying a more dissuasive sanctioning policy. In parallel, permanent structures have been set up to integrate anti-money laundering and counter terrorism financing supervision at the Nordic or Nordic-Baltic levels. Sweden’s Financial Intelligence Unit (Finanspolisen, FIU) started to upgrade its national reporting system for suspicious transactions. Also to be able to handle an increased number of notices, the FIU plans to replace its existing reporting system with an integrated one by March 2020. The new system should not only improve the quality of reporting but also enhance the FIU’s capacity to identify, map and analyse risks and methods for money laundering and terrorist financing. Sweden only makes limited use of the FIU.net for requests and exchange of information with other EU Financial Intelligence Units. At present, it still suffers from outdated internal databases and a lack of clear procedures to prioritise and analyse incoming suspicious transaction reports. The FIU has currently around 35 staff, and is in the process of recruiting more staff to strengthen its analytical capacity. 4.2.2.housing market (*) Housing market developments

Residential real estate prices have started to grow again in 2019, while housing construction is shrinking. House prices increased by 2.7% in September 2019 year-on-year, leaving them 2.5% below their peak of August 2017. In real terms, the increase was 1.4%. House prices are estimated to have been overvalued by 7% in 2018 according to the European Commission’s model. When compared to income only, the overvaluation amounted to 36% in 2018. After the cooling of the housing market for tenant-owned apartments in 2018, the transaction volume returned to its 2017 high in early 2019. Supply constraints and demand developments are expected to support house prices in the near term while market distortions remain in place. Single-family houses and apartments showed different price trends. Apartments have been more affected by the 2017 price decline than single-family houses, possibly due to a combination of high construction volumes for apartments coupled with macroprudential tightening. Apartment prices declined more (10.4%) than those for single-family houses (8.3%) from peak (August 2017) to trough (December 2017) and have recovered less with prices in September 2019 standing 5.1% below their peak (single-family houses: -0.8%) (see Graph 4.2.2). Graph 4.2.2:House prices by market segment (nominal) Source: Valueguard HOX house price index Real house prices have grown faster than disposable income over the past 25 years. The increase of about 200% outpaced house price rises in most other EU countries. House prices are most overvalued when compared with rents. Since the Swedish rental market is highly regulated, rents are on average below market rents and waiting lists are long (see European Commission, 2019b, p.30). The development of price-to-income and the Commission’s in-house model also suggest some overvaluation (see Graph 4.2.3). The European Systemic Risk Board came to a similar conclusion in its assessment and recommendation to Sweden (ESRB, 2019a; ESRB, 2019c). ( ) Low interest rates have supported high house prices, but valuations seem stretched. Historically low interest rates have reduced the user cost of home ownership, pushing house prices up. Interest expenses of households have declined to the lowest level in three decades. Debt service of households, however, has stayed close to its pre-crisis high since 2011. The Swedish Debt Office (Riksgälden) (Bjellerup and Majtorp, 2019) examined the valuation of the housing market and concluded that price developments up to 2017 can be explained by changes in disposable income and after-tax interest payments, with also a significant effect from the imposition of loan-to-value limits. Recent developments are more difficult to explain using this model. In recent years, there have been changes in the structure of the mortgage market. Engström (2020) examines the role of new credit intermediaries and the possible impact they have on competitive conditions and interest rates in the mortgage market. To conclude, valuations continue to appear stretched for the entire market, but less markedly so than in 2016 and 2017. Graph 4.2.3:Estimated house price valuation gaps based on different indicators (1) (2) (3) Source: European Commission calculations Demand drivers Interest rates at historical lows and structural features propel housing demand. Monetary policy has been expansionary due to low interest rates and quantitative easing (see Section 1). Therefore, three-month interest rates have been negative since the second quarter of 2015. Interest rates for longer maturities have declined even more. This has translated into households increasing the duration of their mortgages (see Section 4.2.3). However, it seems difficult to secure current low mortgage rates beyond five years, regardless of the lower long-term rates and the predictability this could offer for monthly housing costs. The tax system still favours debt used for investment in housing, and amplifies regional divergences in house prices. The interest that households pay on their debt is deductible at 30%, first against capital income and then against labour income tax if capital income is smaller than labour income. For annual interest payments above the threshold of SEK 100,000, 21% can be deducted ( ). At the same time, local property taxes continue to be low compared with other countries and are capped nationally. The national cap implies that accumulated housing wealth is taxed relatively more in poorer regions than in richer regions. Combined with regional disparities in the income tax, this may reinforce differences in house prices between regions. The opening gap between growth in house prices and income has increased the vulnerabilities of specific groups. While house prices have increased across the entire spectrum, it seems that the rise has been stronger in lower housing market segments than for other parts of the market. At the same time, there has been less growth of income in households focusing on these segments. Using the difference between mean and median as a rough indicator for this development shows that for tenant-owned apartments, the median price increased 36 percentage points more than the mean between 2005 and 2017 ( ). Three factors possibly explain the relatively higher prices in the lower segment. These are: (1) building activity favouring more expensive houses, (2) increased income inequality, and (3) housing wealth accumulation. The annual additions to the housing stock has on average been below 1% (see “Supply drivers”) in the past 10 years and income inequality (see Section 4.3) has increased only to a limited extent. Housing wealth accumulation takes place when new entrants pay a higher price than earlier entrants did. This wealth accumulation can be passed on along the housing ladder, i.e. those selling a house to a new entrant will use the proceeds to acquire a new, likely more expensive house. The growing wealth accumulation on the asset side is partially offset by the increase in household debt. At the current very low interest rates, this does not translate into higher housing costs for new homeowners but new entrants in the housing market tend to have (much) higher debt relative to their income than households that had entered earlier (see subsection 4.2.3). Supply drivers Building activity has fallen short of estimated needs for several years. The National Board of Housing, Building and Planning (Boverket )(2019) projects an annual need of some 93,000 new home constructions for 2018- 2020 and a need of 51,000 for the subsequent period to 2025. The effective housing supply, even at the peak in 2017, has fallen well short of the estimated short-term need and has only rarely met the structural, longer-term need. Residential real estate construction is forecast to shrink at a high rate in 2019 (-9.0% year-on-year) with a further decline in 2020 (-2.0% year-on-year). Confidence surveys record falling orders and expectations are at the lowest level since the 2012 recession. New building permits and housing starts show a decline too. Structural hurdles tend to constrain housing supply and raise construction costs. Developable land is not coming fast to the market and despite some reforms, zoning and building regulations, such as the varying interpretation of building rules by municipalities seems to fragment the market. This could particularly prevent foreign construction companies from entering the market, preventing competition to induce lower prices and higher productivity (European Commission, 2019b, p.29). In addition, lack of competition in a number of building materials markets contribute to increased construction costs (Swedish Competition Authority (Konkurrensverket), 2018). Graph 4.2.4:New housing construction and estimated need Source: Boverket, Statistics Sweden In addition to shortage of supply, available housing does not fit households’ needs. The ratio of existing housing stock to number of households has been relatively stable recently at between 105% and 106% because the number of households has increased since 2013 at the same annual rate of 1.0% as the housing stock. Beyond the shortage of building supply, the most pressing mismatch appears to be the size of households and the characteristics of the housing stock. Around 70% of Swedish households consist of no more than two people, but only 51% of the housing stock is non-rental multi-dwelling houses, broadly unchanged since the start of records in 2013 (first available year, see Graph 4.2.5). The number of one person households, already 40% of all households, has grown faster than average (1.2%) as has the number of households with more than five people. This last category represents only 6% of all households. Graph 4.2.5:Household dwellings by type Source: Statistics Sweden The housing stock and rental market fail to adjust to changing needs due to inertia. Conversion and destruction are even more limited than new additions to the housing stock, rendering changes in the existing stock slow. Building constraints are particularly binding in the metropolitan areas ( ). Those depending more on public housing, i.e. those with lower incomes, face an-ever-tighter gridlock in the rental market. The share of public housing for rent out of the total housing stock has declined from 23% in 2001 to 18% in 2018 while the vacancy rate for rental accommodation has dropped to a historic low of 0.5% and continues to be much lower than the EU average (see Graph 4.2.6). The housing stock is not used efficiently. In the rental market, below-market rents create lock-in and ‘insider/outsider’ effects. In the owner-occupancy market, capital gains taxes reduce homeowner mobility. The housing shortage makes it harder for people to change jobs (European Commission, 2019b, p.30). Graph 4.2.6:Types of tenure and vacancy rates Source: European Central Bank

Policy developments Policy steps to address imbalances in the housing market have been limited. Whereas policy measures in 2018 mostly focused on the demand side, the supply side featured more prominently in 2019. These steps have been of a rather incremental nature and are unlikely to fundamentally change housing market distortions. To bring this about, determined policy action is needed in the rental market and in tax policy. Sweden has raised the ceiling for deferred capital gains taxes from SEK 1.45 million to SEK 3 million. The increase in the ceiling can promote housing market mobility. However, the deferred capital gain is subject to an annual tax of roughly 0.5%, which in the current low-interest-rate environment makes deferral less interesting. Moreover, during the period 21 June 2016 - 20 June 2020, there is a temporary exemption from the previous maximum deferrable amount of SEK 1.45 million, so in practice the new rules represent a tightening of the deferral conditions. More generally, deferral only reduces the immediate cash flow impact and not the effective wealth reduction, and so there is still room for a substantial capital gains tax reform. The FSA has tightened macro-prudential policy somewhat further. The supervisor increased the countercyclical capital buffer (CCyB) to 2.5% from 19 September 2019. Previously, the FSA had gradually raised the CCyB since its introduction in 2014. The previous level of 2% had been applicable from 14 March 2017. This increase in the countercyclical buffer aims to support overall financial sector resilience even if was not specifically targeted at imbalances related to household debt and the housing market. In addition, the FSA adapted the requirements for macro-prudential risk weights for residential real estate. This measure entered into force on 31 December 2018 for a period of 2 years. While unlikely to have a marked impact on lending, it increased the comparability of reported risk-weighted capital ratios for Swedish banks with those of their EU peers. Investment support for building rental apartments has been reinstated. To reduce the continued shortage of housing supply, the government has earmarked SEK 2.1 billion to encourage the building of rental apartments (including for students) in its 2020 budget bill. The support should enter into force on 1 January 2020. Together with an easing of building regulations this may attenuate supply side issues somewhat. The announced comprehensive tax reform could be an opportunity to address several shortcomings in one go. In its political agreement, the government indicated the intention to overhaul the tax system. So far, no timeline or details have been communicated. Such a tax reform could address not only the incentives for debt accumulation but could also lower the barrier to the housing market for people with lower incomes, promoting housing mobility and reducing wealth inequality. 4.2.3.Private indebtedness (*) Household debt developments Household debt remains high, although its rate of increase is slowing. Swedish household debt has been on a persistent upward trajectory since the early 2000s, significantly outpacing debt growth in peer countries (see Graph 4.2.7). However, on the back of less buoyant credit flows, the rate of growth of nominal household debt slowed to 5.8% in 2018, well below the peak increase of 8.0% in 2016 and declined further to 4.8% by the third quarter of 2019, bringing it broadly on a par with nominal household disposable income growth. Graph 4.2.7:Household debt evolution (indexed, 2005 = 100) Source: European Commission The recent more moderate increase in household debt helped stabilise household debt ratios. The average debt-to-disposable income (DTI) and debt-to GDP ratios both broadly levelled off in 2018 and even fell back somewhat in the first half of 2019. Despite the broad stabilisation in aggregate debt ratios, they remain well above the fundamentals-based and prudential benchmarks for Sweden and are still among the highest in the EU. There is also significant dispersion in debt levels across households. The average DTI ratio for new borrowers in 2018 was 289% down from 300% the previous year. Households with a mortgage living in large metropolitan areas, as well as younger and lower-income households tend to face particularly high debt service costs relative to their incomes( ).That said, persistently low interest rates helped check the rise in mortgage interest payments and thus debt service as a share of disposable income (Finansinspektionen 2019e). Drivers of household debt dynamics Household debt growth mostly reflects mortgage lending. Mortgage debt amounts to over 80% of total household borrowing, and has been the key driver of the persistent rise in overall household indebtedness. Sweden experienced an extended period in which house price rises (see Section 4.2.1) and mortgage debt growth were mutually reinforcing. Increases in the underlying value of collateral enabled higher housing loans, in turn putting upward pressure on prices and thus keeping increases in the loan-to-value ratio in check. The growth in household mortgage loans contracted slightly for most of 2018 in the wake of the correction in house prices in late 2017. However, as house price growth has resumed, albeit at modest rates, and mortgage interest rates have remained low, overall mortgage lending has picked up again. Unsecured borrowing has not been a major substitute for mortgages. Unsecured borrowing and household loans with other collateral (e.g. cars) have historically grown comparatively slowly. As mortgage credit growth slowed, unsecured borrowing kept increasing at a brisk pace, in part due to rapid changes in the technological, institutional and market conditions under which providers of consumer credit operate. However, Van Santen (2017) finds no evidence of a significant shift in borrowing for housing purposes towards unsecured loans. Overall, unsecured borrowing by households remains under 5% of GDP, a level broadly in line with the EU average, with currently limited implications for financial stability. Structural factors account for relatively low debt service costs. There are strong tax incentives for purchasing owner-occupied housing, especially when financed with tax-deductible debt (see Section 4.2.2). Swedish mortgage contracts have long maturities compared to other EU countries, and overall amortisation rates are still low in comparative perspective. For historical and institutional reasons, mortgages mostly have had variable rates heavily skewed towards the short end of the yield curve( ), which between 2011 and 2016 allowed lower interest rates to translate relatively quickly into reduced interest payments as a share of household income, despite ongoing increases in house prices. The combination of these factors has limited current debt service costs, but also implies risks related to future interest rate rises. Graph 4.2.8:Maturity of mortgages and interest rates Source: Macrobond A move towards longer maturities helps reduce the interest sensitivity of mortgage service. The long-term increase in the ratio of household mortgage debt to income implied higher interest sensitivity, given the predominance of housing loans linked to very short-term interest rates. Since late 2017, however, the share of mortgages with a maturity of 3‑5 years has increased markedly, implying a lower speed at which interest rates changes would be passed on to households (Graph 4.2.7). This broadly coincided with the adjustment in the housing market in the autumn of 2017 and thus possibly partly reflects a shift in risk appreciation on the part of households. However, it also went hand in hand with a change in the term structure of mortgage interest rates offered by banks, as the yield premium for longer maturities increased. On balance this recent shift implies that the immediate effects of an interest rate increase on the capacity of households to service their debt would be cushioned, thus heightening resilience. Policy developments High household debt coupled with high house prices are a risk for the Swedish economy. While the recent stabilisation in household debt implies that debt dynamics do not further aggravate existing vulnerabilities, the already high debt level keeps the Swedish economy vulnerable to a rapid deterioration in market conditions. Hence, risks may come into play should the projected economic slowdown be more severe than expected. If incomes were to fall due to an external shock to the economy, or if there was a sharp rise in mortgage risk premiums triggered, for instance, by higher bank funding costs that might originate in the global economy, highly-leveraged households may need to reduce consumption to service their debts. This would reduce demand and increase uncertainty, potentially weighing on investment, employment and economic growth thus further impairing households' debt service ability. At the same time, falling collateral values make banks more cautious about new lending. Ultimately, this could lead to a self-reinforcing deleveraging process with a broader macroeconomic impact. Risks are partly mitigated by households’ robust payment ability and financial wealth. Households have relatively high income surpluses after mortgage service costs and day-to-day expenses, of roughly 40% of disposable income on average (Finansinspektionen, 2019f). The fact that these estimated buffers have stabilised or even slightly improved in recent years lends some comfort. The strong ability of households to pay back their loans is also reflected in a very low share of non-performing household loans (see Section 4.2.1). Additionally, households have significant financial wealth, estimated at roughly three times their liabilities.

Amortisation requirements for mortgages helped dampen household debt dynamics. In 2016 and 2018 the Financial Supervisory Authority (FSA) imposed amortisation requirements on mortgage loans for households with loan-to-value and/or loan-to-income ratios above certain thresholds (European Commission, 2019b, p. 35), with a view to curbing the growth in housing loans and indebtedness. According to preliminary assessments from the FSA (Finansinspektionen, 2019d), the stricter amortisation requirements helped limit the build-up in household debt. New mortgagors who were subject to the stricter amortisation requirement borrowed less and purchased less expensive homes than they would have done without the requirement. The FSA further found that the sharpened amortisation requirement did not significantly limit young households’ access to the housing market compared to other groups. Their access was affected, however, by the general increase in house prices (Finansinspektionen, 2019b). However, the strong overall financial position would likely provide only limited cushioning in a disorderly deleveraging scenario. Income surpluses are high on average, but they are heavily skewed towards higher-income households (European Commission, 2018). Moreover, stressed scenarios assume that households are able to reduce their spending to near-subsistence levels. Thus, although most households may be able to continue servicing their debt even in a downturn, this would likely require a considerable fall in consumption with substantial knock-on effects on the rest of the economy. A significant part of household financial wealth is illiquid, tied up in pension funds or life insurances. The Swedish gross household savings ratio is among the highest in the EU, partly due to considerable pension savings which outstripped the rise in household income in the last decade. The build-up in pension buffers reflects ageing but also the shift towards a pension system based on defined contributions in both the first and second pension pillars (Aspregren et al., 2019). However, correcting for pension contributions and capital formation the freely available savings that Swedish households have available to counter financial shocks do not appear to be particularly high in comparison to other EU countries with high gross household saving ratios (Graph 4.2.9). In addition, most non-housing financial assets are exposed to market risks and would likely fall in value in an economic downturn, weighing on consumption via wealth effects. Graph 4.2.9:Household saving ratio, adjusted for net pension contributions and capital formation Source: European Commission Corporate debt developments Following a period of post-crisis deleveraging, corporate debt growth has again picked up in recent years. Swedish non-financial corporations deleveraged significantly in the wake of the global financial crisis, as still positive net credit flows to the sector grew less than nominal GDP. The ratio of consolidated corporate debt bottomed out at around 106% of GDP in 2016, still well above the fundamentals based and prudential benchmarks and also well above the EU average. The increase in the debt ratio in 2017 reflected buoyant credit growth spurred by low interest rates in an environment of strong economic activity, supporting corporate investment. Thus, in 2017 the absolute size of credit flows to the nonfinancial corporate sector outpaced those to households for the first time since 2008. The recent cyclical weakening in economic activity led to a moderation in credit growth to nonfinancial corporations, which, however, kept outpacing nominal GDP growth. In recent years, commercial real estate has become an important driver of growth in credit to non-financial corporations. The debt-to-GDP ratio reached 113.9% at the end of the second quarter of 2019. Overall, despite high corporate debt levels firms generally face limited risks of financial distress. Although Sweden’s corporate-debt-to-GDP ratio is high compared to other EU countries, other indicators show that financial risks are overall limited. Corporates have significant equity cushions, with a debt-to-equity ratio that is already at a quite low level (around 42 % as of Q2 2019, compared to about 60 % on average for EU countries) and continues to fall (Graph4.2.10). In addition, the gross corporate savings ratios remains high at around 13 % of GDP. Thus, on the whole the corporate sector is in a position to reduce leverage should that be needed. While some segments, such as commercial real estate (Section 4.2.1), appear more vulnerable, the financial stability concerns stemming from corporate debt seem limited. Graph 4.2.10:Leverage, Non-Financial Corporations Source: European Commission 4.3. Labour market, education and social policies 4.3.1.Employment and skills The labour market performs well, but the economic slowdown has a cooling effect. The employment rate grew in 2018 to 82.4%, maintaining one of the highest levels in the EU (EU average 73.2%). However, signs point to a slowdown in 2019, with employment declining to 82.1% in the second quarter of 2019. Employment levels vary between various socio-economic groups, from 60.5% among non-EU born women to 87.4% among native-born men. Temporary contracts are slightly more prevalent than on average in the EU (15.0%; EU average 14.1%). Labour shortages and skills mismatches persists, and the integration of foreign born into the labour market remains a key challenge. Unemployment is slowly increasing, also for young people. While unemployment was below the EU average in 2018 (6.3%; EU average 6.8%), it was above the EU average in Q3-2019 at 6.9%. The main reasons for this increase were weak job growth and an increase in the labour force, with more people far from the labour market. Youth unemployment increased sharply from 17.4% in 2018 to 19.9% in Q3-2019. The rate of young people neither in education, employment nor training was among the lowest in the EU in 2018, at a rate of 6.1% (EU average 10.4%). However, this number has seen a decrease in 2019, falling to 5.5% in Q2-2019. While long-term unemployment remains among the lowest in the EU, it is set to rise. It was at 1.1% in 2018, well below the EU average of 2.9%. The Public Employment Service (PES) predicts that long-term unemployment will reach its highest level since the 1990s in the coming years (Arbetsförmedlingen, 2019a). This is due to a weaker labour demand, increased structural transformation, the composition of the unemployed and fewer subsidised jobs. In the first half of 2019, for the first time since records began, more women than men were registered with the PES as unemployed for more than 12 months. The weakest development has been among foreign-born women lacking primary education. Labour shortages persist, despite the economic slowdown. In the construction and services sectors shortages are the highest in the EU (European Commission, 2019d). In a survey 37% of private employers and 60% of public sector employers reported recruitment problems (Arbetsförmedlingen, 2019a). The PES expects a continued shortage in the coming years, despite the slowdown in the economy. Shortages are particularly pronounced in education, health care, social work, ICT, industry and construction. Sweden has a high number of ICT specialists compared to other EU countries, at 6.6% of total employment. However, 5.4% of Swedish enterprises (EU 4.6%) report that it is hard to fill vacancies with specialist ICT skills. In the ICT sector, more than 50% of employers report a shortage affecting growth (Arbetsförmedlingen, 2019b). In the public sector, the shortage has declined from record high levels in 2017 due to the recruitment of more support positions. The labour shortage is also affected by the housing market. Almost one in five (19%) employers state that difficulties in finding accommodation affect the responsiveness to their recruitment offers (Svenskt Näringsliv, 2019). Demand for people with low levels of qualification is very limited. The share of the population in elementary occupations is 5.4%, the lowest in the EU. The disparity between the employment rates of workers with primary, secondary and tertiary education remains high. In 2018, the employment rate of the low qualified was 62.3%, compared to 89% of people with tertiary education. The employment gap (19.2 percentage points (pps)) between non-EU-born and native-born for the low qualified is the second highest in the EU, and well above the EU average of 1.7 pps. People with disabilities are also at a disadvantage. While their employment level of 52.6% (2017) is above the EU average of 50.6%, the employment gap between people with and without disabilities is wider than the EU average (30.9 pps vs EU average 24.2 pps). Their unemployment level, 20.3%, is also higher than among people without disabilities (4.7%, 20-64 years). Graph 4.3.1:Employment rate by country of birth (20-64 yrs) Source: European Commission The employment rate of the foreign-born remains low. In 2018, the employment rate of non-EU-born, at 66.1%, above the EU average of 64.4%, but it was 20.2 pps lower than that of native-born Swedes. This is the largest gap in the EU (EU average 9.4 pps). The employment gap is 16.1 pps for the highly educated, which is also above the EU average (11.7 pps). The rate of over-qualification among 20-64 year-olds is much higher for non-EU-born (34.4%) than for native-born Swedes (12.2%), suggesting entry barriers for highly educated migrants to jobs for which they would be qualified. On average, 42% of 25-54 year-olds in Sweden who were not born in the EU have a high level of education, while 34% have a low level of education. To overcome potential barriers, a new ‘intensive introduction year’ within the establishment programme is being introduced. It will include training (such as social orientation, Swedish language training, and labour market education) and new measures (such as mentorships and certificates of knowledge documenting professional and language skills). Among non-EU-born women, the employment gap is wider still. The employment rate of non-EU-born women is 60.5%, compared to 85.0% among the native born, due to both higher inactivity and unemployment. Non-EU-born women have an unemployment rate of 18.7% (3.9% among native-born women): this difference is the highest in the EU, pointing at a shortcoming in otherwise excellent performance on SDG5, ‘Gender equality’. While the activity rate of non-EU-born women is significantly higher than the EU average (73.9% vs 63.6%), it is still 13.7 pps below the rate among native-born women. Thus, foreign-born women are a particular focus of government and PES efforts. However, women with temporary residence permits are less likely to register with the PES for introduction activities than are women with permanent residence permits (Wickström Östervall, 2019).

The successful labour market integration of non-EU-born residents remains high on the political agenda. Sweden has a well-known tradition and track record of integrating newly arrived migrants into the society, which has contributed to social cohesion. Recent research (Calmfors and Gassen, 2019) comparing the integration experience across the Nordics concludes that an efficient policy response to ease barriers to entering the labour market consists of a mix covering education and training, active labour market policy, incentives through social benefits and appropriate wage levels. The authors argue that stronger efforts to educate could have a great potential to improve immigrants’ employment opportunities, and lifelong learning could be especially effective in the long run for non-EU-born women, the group that is farthest from the labour market today. Graph 4.3.2:Employment rate by citizenship Source: European Commission Box 4.3.2: Monitoring performance in light of the European Pillar of Social Rights The European Pillar of Social Rights is a compass for a renewed process of upward convergence towards better working and living conditions in the European Union. It sets out twenty essential principles and rights in the areas of equal opportunities and access to the labour market; fair working conditions; and social protection and inclusion. Sweden performs well on most of the indicators of the Social Scoreboard supporting the European Pillar of Social Rights. The employment rate is among the highest and the gender employment gap among the lowest in the EU. The level of digital skills among the population is very high. The good overall results reflect Sweden’s advanced welfare model with an active labour market policy, robust social protection system, and long-standing and well-established social dialogue. However, increasing the labour market participation of the low skilled and foreign-born, in particular women, remains a challenge. While income inequality is below the EU average, it has increased in recent years. There has been a sharp increase in the early school-leaving rate. While remaining slightly below the EU average, the share of early leavers from education and training has been growing since 2014, with a sharp increase in the past year. Students born abroad are more likely to leave school early. There is a continued rise in influence of the socio-economic background of students on their educational performance, as shown by the recent PISA results. Sweden continues to improve its policies to facilitate labour market integration. The public employment services have long been implementing policies to make the labour market more inclusive and to encourage education and training. A new intensive year for newly arrived is being developed, which would combine existing measures with new targeted measures. The new measures will consist of a new form of internship, mentorship and a certificate of knowledge after the completed year. The measures used during the year would be adapted to individual, local and regional needs and conditions, and industry representatives and other stakeholders will play