Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Sweden and delivering a Council opinion on the 2019 Convergence Programme of Sweden
Date: 2019-06-05
Institutions: European Commission, Secretariat-General
Subjects: Sweden, economic policy, economic reform, housing policy, indebtedness, investment, money laundering, stability pact, stability programme, transport infrastructure

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   EUROPEAN COMMISSION  Brussels, 5.6.2019  COM(2019) 527 final  Recommendation for a COUNCIL RECOMMENDATION on the 2019 National Reform Programme of Sweden and delivering a Council opinion on the 2019 Convergence Programme of Sweden    
 
 
Recommendation for a 

COUNCIL RECOMMENDATION 

on the 2019 National Reform Programme of Sweden and delivering a Council opinion 
on the 2019 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 Commission, 

Having regard to the resolutions of the European Parliament, 

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) 

(2) 

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On 21 November 2018, the Commission adopted the Annual Growth Survey, marking 
the start of the 2019 European Semester for 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  21  March 
2019.  On  21  November  2018,  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.  
The 2019 country report for Sweden3 was published on 27 February 2019. It assessed 
Sweden’s progress in addressing the country-specific recommendation adopted by the 

OJ L 209, 2.8.1997, p. 1. 
OJ L 306, 23.11.2011, p. 25. 
SWD(2019) 1026 final. 

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Council  on  13  July  2018,  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  27  February  20194.  The  Commission’s 
analysis led 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 high household debt has continued to 
grow as a share of GDP. There was a correction of house prices in the second half of 
2017 and since then they have gradually stabilised. Nevertheless, valuation indicators 
suggest that house prices remain high relative to fundamentals. Although the banking 
sector appears adequately capitalised, a disorderly correction would negatively affect 
the financial sector given the large exposure to household mortgages. In such a case, 
there could  also be negative spill-overs to neighbouring countries given the systemic 
financial  interlinkages.  Structural  bottlenecks  for  housing  supply  persist  and 
construction output has weakened. Although steps have been taken in recent years in 
the macro prudential field to address mortgage debt growth, the impact so far appears 
limited.  Key  policy  gaps  remain,  particularly  in  relation  to  tax  incentives  for  home 
ownership and the functioning of housing supply and the rental market. 

On 26 April 2019, Sweden submitted its 2019 National Reform Programme and, on 29 
April  2019,  its  2019  Convergence  Programme.  In  order  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  ('ESI  Funds')  for  the  2014-2020 
period.  As  provided  for  in  Article  23  of  Regulation  (EU)  No  1303/2013  of  the 
European  Parliament  and  of  the  Council5,  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 ESI Funds to sound economic governance6.  

Sweden is currently in the preventive arm of the Stability and Growth Pact. In its 2019 
Convergence Programme, the government plans to achieve a surplus of 0.6% of GDP 
in 2019, which is expected to strengthen further over the programme horizon. Based 
on  the  recalculated  structural  balance7,  the  medium-term  budgetary  objective  —  a 
structural  deficit  of  1%  of  GDP  —  is  planned  to  be  overachieved  throughout  the 
programme  period.  According  to  the  2019  Convergence  Programme,  the  general 
government  debt-to-GDP  ratio  is  expected  to  fall  to  34.5%  in  2019  and  to  continue 
declining to 28.2% in 2022. Sound public finances and a stable economic growth are 
set to be the main drivers behind the declining general government debt-to-GDP ratio. 

COM(2019) 150 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. 
Cyclically-adjusted  balance  net  of  one-off  and  temporary  measures,  recalculated  by  the  Commission 
using the commonly agreed methodology. 

(3) 

(4) 

(5) 

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(6) 

The  macroeconomic  scenario  underpinning  those  budgetary  projections  is  plausible. 
Based  on  the  Commission  2019  spring  forecast,  the  structural  balance  is  forecast  to 
register a surplus of 0.5% of GDP in 2019 and 0.6% of GDP in 2020, above medium-
term  budgetary  objective.  Overall,  the  Council  is  of  the  opinion  that  Sweden  is 
projected to comply with the provisions of the Stability and Growth Pact in 2019 and 
2020. 

Household debt has continued to rise from already high levels. Household debt grew 
by 5.5% in 2018, reaching about 88% of GDP and 186% 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  a  decision  to  raise  the 
countercyclical  capital  buffer  for  banks  from  September  2019.  However,  the  policy 
steps taken so far appear to have had limited overall impact on the growth of mortgage 
lending  and  no  policy  action  has  been  taken  to  reform  the  tax  incentives  for  home 
ownership and mortgage debt. 

(7)  While  house  prices  declined  in  late  2017  and  have  since  been  broadly  stable,  this 
follows a long period of strong price rises, and valuations remain well above economic 
fundamentals.  Key  issues  include  tax  incentives  favouring  home  ownership  and 
mortgage debt, and accommodative credit conditions coupled with still relatively low 
mortgage repayment rates. Despite a significant increase in new construction over the 
past  five  years,  a  shortage  remains,  particularly  of  affordable  homes  around  major 
cities.  New  housing  supply  failed  to  reach  projected  near-term  needs,  estimated  at 
about 90 000 new homes per year for 2018-2020. This shortage is linked to structural 
inefficiencies, such as 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.  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 and can contribute to intergenerational inequality. 
The Swedish authorities are continuing to gradually implement the ‘22-point plan’ to 
increase residential construction and improve the efficiency of the housing sector. So 
far,  there  have  been  no  concrete  policy  steps  to  liberalise  tight  rental  market 
regulations and revise the capital tax on owner-occupied homes, although in January 
2019 the new government announced plans to introduce reforms in these areas, subject 
to preparatory inquiry work. 

(8) 

Labour shortages are emerging in some sectors, such as in construction, education and 
information  and communication technologies. Ensuring  a supply  of specialist human 
capital  is  vital  to  support  research  and  development  investment  as  well  as 
digitalisation.  Investing  in  education  and  skills,  including  digital  skills,  will  help  to 
address those challenges. So far, the educational outcomes have improved somewhat, 
but  there  is  a  large  and  increasing  educational  performance  gap  between  different 
social  groups.  Demographic  developments  will  lead  to  an  increase  in  the  number  of 
pupils,  exacerbating  the  present  shortage  of  teachers.  The  situation  of  non-EU 
migrants  and  their  descendants  and  the  effects  of  recently  adopted  programmes 
deserve  closer  monitoring,  as  the  school  integration  of  foreign-born  pupils,  and  the 
sustainable  inclusion  of  the  low-skilled  and  non-EU  migrants  (in  particular  women) 
into the labour market remain a challenge. 

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(9)  Maintaining investments in transport infrastructure can contribute to improved labour 
mobility,  regional  cohesion  and  housing  market  and  foster  Sweden's  long-term 
productivity  growth.  The  government  has  announced  considerable  investments  in 
transport  infrastructure  through  the  national  plan  for  infrastructure  2018-2029  to 
upgrade  the  different  transport  modes  (in  particular  railway  and  road).  The  plan 
contains  major  investments  to  develop  the  railway  system,  promoting  the  switch  in 
goods  transport  from  roads  to  railways,  thus  also  helping  to  reduce  emissions. 
Maintaining  high  levels  of  investment  in  research  and  development,  favourable 
framework  conditions  and  a  broader  innovation  base  are  key  to  securing  Sweden's 
position as innovation leader. Sweden's innovation model has traditionally relied on a 
limited number of large, globally active, technology companies. It would be important 
to create an environment that also nurtures the innovation potential of SMEs and start-
ups.  Sweden's  innovation  capacity  could  also  be  further  improved  by  increased 
collaboration between academia and SMEs. 

(10)  Preventing  money  laundering  has  become  a  priority  for  Sweden  against  the 
background  of  an  evolving  money  laundering  scandal  related  to  one  of  the  largest 
financial  institutions  in  the  country.  The  Swedish  and  Estonian  financial  supervisors 
have  started  a  joint  investigation,  together  with  their  Latvian  and  Lithuanian 
counterparts.  While  Sweden’s  anti-money 
framework  has  been 
strengthened  in  2017,  when  the  money  laundering  act  entered  into  force,  continued 
work  to  identify  and  correct  any  remaining  deficiencies  of  the  framework  remain 
important.  Challenges  remain  and  the  supervisor  still  needs  to  adopt  additional 
measures  and  guidelines  on  how  to  strengthen  supervision  in  this  area.  Attention 
should be paid to the effective implementation of these measures, once adopted. 

laundering 

(11)  The programming of EU funds for the period 2021-2027 could help address some of 
the  gaps  identified  in  the  recommendations,  in  particular  in  the  areas  covered  by 
Annex  D  to  the  country  report8.  This  would  allow  Sweden  to  make  the  best  use  of 
those funds in respect of the identified sectors, taking into account regional disparities. 

(12) 

(13) 

(14) 

In  the  context  of  the  2019  European  Semester,  the  Commission  has  carried  out  a 
comprehensive  analysis  of  Sweden’s  economic  policy  and  published  it  in  the  2019 
country  report.  It  has  also  assessed  the  2019  Convergence  Programme  and  the  2019 
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  2019  Convergence 
Programme and is of the opinion 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  2019  National  Reform  Programme  and  the  2019  Convergence 
Programme.  Its  recommendations  under  Article  6  of  Regulation  (EU)  No  1176/2011 
are reflected in recommendation (1) below. 

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SWD(2019) 1026 final. 

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HEREBY RECOMMENDS that Sweden take action in 2019 and 2020 to: 

1. 

2. 

3. 

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

Focus  investment  related  economic  policy  on  education  and  skills,  maintaining 
investment  in  sustainable  transport  to  upgrade  the  different  transport  modes,  in 
particular  railways,  and  research  and  innovation,  taking  into  account  regional 
disparities. 

Ensure  effective  supervision  and  the  enforcement  of  the  anti-money  laundering 
framework. 

Done at Brussels, 

For the Council 
The President 

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