Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Sweden and delivering a Council opinion on the 2018 Convergence Programme of Sweden
Date: 2018-05-23
Institutions: European Commission, Secretariat-General
Subjects: Sweden, economic policy, economic reform, employment policy, fiscal policy, housing, indebtedness, integration of migrants, labour shortage, stability programme

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   EUROPEAN COMMISSION  Brussels, 23.5.2018 COM(2018) 426 final  Recommendation for a COUNCIL RECOMMENDATION on the 2018 National Reform Programme of Sweden  and delivering a Council opinion on the 2018 Convergence Programme of Sweden  
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2018 National Reform Programme of Sweden 

and delivering a Council opinion on the 2018 Convergence Programme of Sweden 

THE COUNCIL OF THE EUROPEAN UNION, 

Having  regard  to  the  Treaty  on  the  Functioning  of  the  European  Union,  and  in  particular 
Articles 121(2) and 148(4) thereof, 

Having regard to Council Regulation (EC) No 1466/97 of 7 July 1997 on the strengthening of 
the  surveillance  of  budgetary  positions  and  the  surveillance  and  coordination  of  economic 
policies1, and in particular Article 9(2) thereof, 

Having  regard  to  Regulation  (EU)  No  1176/2011  of  the  European  Parliament  and  of  the 
Council  of  16  November  2011  on  the  prevention  and  correction  of  macroeconomic 
imbalances2, and in particular Article 6(1) thereof, 
Having regard to the recommendation of the European Commission3, 
Having regard to the resolutions of the European Parliament4, 

Having regard to the conclusions of the European Council, 

Having regard to the opinion of the Employment Committee, 

Having regard to the opinion of the Economic and Financial Committee, 

Having regard to the opinion of the Social Protection Committee, 

Having regard to the opinion of the Economic Policy Committee, 

Whereas: 

(1) 

On 22 November 2017, the Commission adopted the Annual Growth Survey, marking 
the start of the 2018 European Semester of economic policy coordination. It took due 
account  of  the  European  Pillar  of  Social  Rights,  proclaimed  by  the  European 
Parliament, the Council and the Commission on 17 November 2017. The priorities of 
the  Annual  Growth  Survey  were  endorsed  by  the  European  Council  on  22  March 
2018.  On  22  November  2017,  on  the  basis  of  Regulation  (EU)  No  1176/2011,  the 
Commission also adopted the Alert Mechanism Report, in which it identified Sweden 
as one of the Member States for which an in-depth review would be carried out. 

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OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
COM(2018) 426 final. 
P8_TA(2018)0077 and P8_TA(2018)0078. 

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The  2018  country  report  for  Sweden5  was  published  on  7  March  2018.  It  assessed 
Sweden’s progress in addressing the country-specific recommendation adopted by the 
Council  on  11  July  2017,  the  follow-up  given  to  the  recommendations  adopted  in 
previous years and Sweden's progress towards its national Europe 2020 targets. It also 
included  an  in-depth  review  under  Article  5  of  Regulation  (EU)  No  1176/2011,  the 
results  of  which  were  also  published  on  7  March  20186.  The  Commission’s  analysis 
leads  it  to  conclude  that  Sweden  is  experiencing  macroeconomic  imbalances.  In 
particular,  overvalued  house  price  levels  coupled  with  a  continued  rise  in  household 
debt poses risks of a disorderly correction. The already high household debt remains 
on an upward path. House prices have been growing at fast and virtually uninterrupted 
pace  for  about  20  years.  Negative  growth  was  recorded  in  the  last  quarter  of  2017. 
Still,  valuation  indicators  suggest  that  house  prices  remain  very  high  relative  to 
fundamentals.  Although  banks  appear  adequately  capitalised,  a  disorderly  correction 
could also affect the financial sector as banks have a growing exposure to household 
mortgages. In such a case, there could be spill-overs to neighbouring countries given 
the systemic financial interlinkages. In recent years measures have been taken to rein 
in  mortgage  debt  growth  and  increase  housing  construction.  However,  policy  steps 
implemented  so  far  have  not  been  sufficient  to  address  overvaluation  in  the  housing 
sector, and key policy gaps remain, particularly in relation to tax incentives for home 
ownership as well as the functioning of the housing supply and the rental market. 

On  27  April  2018,  Sweden  submitted  its  2018  National  Reform  Programme  and  its 
2018  Convergence  Programme.  To  take  account  of  their  interlinkages,  the  two 
programmes have been assessed at the same time. 

Relevant country-specific recommendations have been addressed in the programming 
of  the  European  Structural  and  Investment  Funds  for  the  2014-2020  period.  As 
foreseen in Article 23 of Regulation (EU) No 1303/2013 of the European Parliament 
and  of  the  Council7,  where  it  is  necessary  to  support  the  implementation  of  relevant 
Council  recommendations,  the  Commission  may  request  a  Member  State  to  review 
and propose amendments to its Partnership Agreement and relevant programmes. The 
Commission has provided further details on how it would make use of that provision 
in  guidelines  on  the  application  of  the  measures  linking  the  effectiveness  of  the 
European Structural and Investment Funds to sound economic governance8.  

Sweden is currently in the preventive arm of the Stability and Growth Pact. In its 2018 
Convergence Programme, the government plans to achieve a surplus of 1.0 % of GDP 
in 2018 and to continue to meet the medium-term budgetary objective — a structural 
deficit  of  1 %  of  GDP  —  throughout  the  programme  period.  According  to  the  2018 
Convergence  Programme,  the  general  government  debt-to-GDP  ratio  is  expected  to 
fall to 37.3 % in 2018 and to continue declining to 29.0 % in 2021. Economic growth 
and sound public finances are set to be the main drivers behind the declining general 
government  debt-to-GDP  ratio.  The  macroeconomic  scenario  underpinning  those 

SWD(2018) 225 final. 
COM(2018) 120 final. 
Regulation (EU) No 1303/2013 of the European Parliament and of the  Council of 17 December 2013 
laying  down  common  provisions  on  the  European  Regional  Development  Fund,  the  European  Social 
Fund, the  Cohesion Fund, the European Agricultural Fund for Rural Development and the European 
Maritime  and  Fisheries  Fund  and  laying  down  general  provisions  on  the  European  Regional 
Development  Fund,  the  European  Social  Fund,  the  Cohesion  Fund  and  the  European  Maritime  and 
Fisheries Fund and repealing Council Regulation (EC) No 1083/2006 (OJ L 347, 20.12.2013, p. 320). 
COM(2014) 494 final. 

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budgetary projections is plausible. Based on the Commission 2018 spring forecast, the 
structural balance is forecast to show a surplus of 0.7 % of GDP in 2018 and a surplus 
of 1.0 % of GDP in 2019, above the medium-term budgetary objective. Based on its 
assessment  of  the  2018  Convergence  Programme  and  taking  into  account  the 
Commission  2018  spring  forecast,  the  Council  is  of  the  opinion  that  Sweden  is 
projected to comply with the provisions of the Stability and Growth Pact in 2018 and 
2019. 

Household  indebtedness  has  continued  to  rise  from  already  high  levels.  Household 
debt  grew  by  7.0 %  in  2017,  reaching  about  86 %  of  GDP  and  184 %  of  disposable 
income  –  among  the  highest  levels  in  the  EU.  After  falling  somewhat  in  2016,  the 
average  debt-to-disposable-income  ratio  for  new  mortgage  borrowers  rose  again  in 
2017 to 411 %, a new high. The growth in household debt is driven mainly by higher 
mortgage  borrowing,  linked  to  high  house  prices  and  structural  distortions  favouring 
mortgage-financed  property  investment.  Debt  levels  are  unevenly  distributed,  with 
lower-income  and  younger  households  facing  particularly  high  debt  loads  relative  to 
their  incomes.  Sweden  has  implemented  several  macroprudential  measures  in  recent 
years.  Steps  taken  include  setting  loan-to-value  limits,  adjusting  banks’  risk  weight 
floors,  and  introducing  a  formal  mortgage  amortisation  rule  in  June  2016.  A  new 
strengthened  amortisation  requirement  for  high-debt-to-income  mortgages  came  into 
force  in  March  2018.  Sweden  has  also  adopted  legislation  to  strengthen  the 
macroprudential authority’s (Finansinspektionen) legal mandate. The new mandate is 
operational  from  February  2018,  allowing  the  authority  to  respond  in  a  more  timely 
manner with a wider range of potential measures to the risks associated with growing 
household debt. Macroprudential policy steps taken so far appear to have had limited 
impact  on  mortgage  lending  growth.  Gradually  limiting  the  tax  deductibility  of 
mortgage  interest  payments  or  increasing  recurrent  property  taxes  would  help  curb 
household debt growth, but the government has made no progress on this.  

In 2017 Sweden’s economy grew strongly by about 2.4 %, fuelled by robust domestic 
demand. Investment, driven by housing  investment,  grew by 6.0 %  (year-on-year) in 
the first three quarters, making a particularly strong contribution. Despite a sharp rise 
in  new  construction  in  recent  years,  there  is  still  an  ongoing  supply  shortage, 
particularly of affordable homes around major cities. Lack of available and affordable 
housing can also limit labour market mobility and the effective integration of migrants 
into the labour market and contribute to intergenerational inequality. 

After  two  decades  of  rapidly  rising  house  prices,  the  housing  market  experienced  a 
gradual  decline  in  autumn  2017,  but  prices  remain  above  fundamentals.  Key  drivers 
include  tax  incentives  favouring  home  ownership  and  mortgage  debt,  and  continued 
accommodative  credit  conditions  coupled  with  still  relatively 
low  mortgage 
amortisation  rates.  In  addition,  the  housing  shortage  is  linked  to  structural 
inefficiencies, including limited competition in the construction sector due to barriers 
to entry for small and foreign firms and the ability of large developers to control land 
resources. There are also barriers to an efficient usage of the existing housing stock. 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 
Swedish  authorities  are  continuing  to  gradually  implement  the  22-point  plan  to 
increase  residential  construction  and  improve  the  efficiency  of  the  housing  market. 
However, no significant policy action has been taken to introduce more flexibility in 
setting rental prices or to revise the design of the capital gains tax.  

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The  advanced  economy  needs  highly  skilled  workers  and  corresponding  labour 
shortages  emerge  in  sectors  such  as  construction,  education,  health,  science, 
engineering  and  information  and  communictaion  technologies.  In  this  context, 
challenges  remain,  such  as  integrating  the  people  with  a  migrant  background, 
especially  women,  into  the  labour  market.  The  employment  rate  of  non-EU  born 
women  is  considerably  lower  than  for  the  overall  population.  The  educational 
performance  gap  between  pupils  from  different  socioeconomic  backgrounds  is 
widening.  The  integration  of  newly  arrived  migrant  pupils  into  the  school  system 
warrants close monitoring, as does the growing shortage of teachers. 

In  the  context  of  the  2018  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Sweden’s  economic  policy  and  published  it  in  the  2018 
country  report.  It  has  also  assessed  the  2018  Convergence  Programme  and  the  2018 
National  Reform  Programme  and  the  follow-up  given  to  the  recommendations 
addressed  to  Sweden  in  previous  years.  It  has  taken  into  account  not  only  their 
relevance  for  sustainable  fiscal  and  socioeconomic  policy  in  Sweden  but  also  their 
compliance with Union rules and guidance, given the need to strengthen the Union’s 
overall  economic  governance  by  providing  Union-level  input  into  future  national 
decisions.  

In  the  light  of  this  assessment,  the  Council  has  examined  the  2018  Convergence 
Programme and is of the opinion9 that Sweden is expected to comply with the Stability 
and Growth Pact. 

In the light of the Commission’s in-depth review and this assessment, the Council has 
examined  the  National  Reform  Programme  and  the  Convergence  Programme.  Its 
recommendations  under  Article  6  of  Regulation  (EU)  No  1176/2011  are  reflected  in 
recommendation 1 below. 

HEREBY RECOMMENDS that Sweden take action in 2018 and 2019 to: 

1. 

Address  risks  related  to  high  household  debt  by  gradually  reducing  the  tax 
deductibility  of  mortgage  interest  payments  or  increasing  recurrent  property  taxes. 
Stimulate  residential  construction  where  shortages  are  most  pressing,  notably  by 
removing  structural  obstacles  to  construction,  and  improve  the  efficiency  of  the 
housing market, including by introducing more flexibility in setting rental prices and 
revising the design of the capital gains tax.  

Done at Brussels, 

For the Council 
The President 

9 

Under Article 5(2) of Council Regulation (EC) No 1466/97. 

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