Scandinavians are more indebted than Americans

Copenhagen: Quite pleasant. But not perfect.
Copenhagen: Quite pleasant. But not perfect.
Image: Reuters//Bob Strong
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Among the left-leaning chunk of the US populace, Scandinavian countries have an irresistible appeal. (You need only note the multiple references to Denmark in recent Democratic presidential debates.)

Indeed, there is much to be admired in the Nordic social welfare economy. Denmark, Sweden, Norway, and Finland regularly top rankings for quality of life, high gender equality, low income inequality and high-quality, relatively low-cost healthcare. And, yes, Legos are incredibly cool, too. (Lego is based in Denmark.)

But these countries aren’t paradise on earth. Like all economies, they have their own particular quirks and risks.

For example, Nordic households are shouldering even more debt than supposedly spendthrift American families, who have retrenched in the years following the financial crisis. For example, check out household debt as a share of disposable income, a widely used gauge of debt sustainability. (These numbers come from the OECD’s just-released economic outlook.)

This chart tells you that economic growth in countries such as Sweden, Denmark and Norway—as well as non-Nordic countries like the Netherlands and Ireland—has been fueled by a surge of debt-fueled consumption. Basically, it’s home buying, which has in turn spurred a huge increase in home prices.

So is Scandinavia doomed to a financial crisis? It wouldn’t be out of the realm of possibility. Sweden suffered a painful banking bust in the early 1990s. Denmark’s most recent housing bubble popped during the financial crisis.

But policymakers have been forcing banks to add cash to the capital cushions that are supposed to soften the blow next time from any downturn in housing prices. Highly capitalized Nordic banks hate this, by the way, because it makes it tougher to generate profits.

Policymakers also say that Scandinavian countries have other assets—savings and property—that make surging liabilities much less worrisome. At any rate, rock bottom interest rates mean that Nordic households can continue to carry this load for the foreseeable future. But it’s still worth pointing out, given the praise heaped upon the Nordics, that their economic model has potential problems.