After feeling the effects of the financial crisis, the European economy is out of a negative growth pattern, boasting 0.4% growth in the third quarter. Matthew Saltmarsh for The New York Times reports that other factors that signal a turnaround include a stronger currency and growth in countries such as Germany and France. (Why it takes more than a stronger currency for growth to resume).

Recovery in the region as a whole is mixed, though. Unemployment remains startlingly high in some areas, wages have stagnated and lending still needs a push to operate at full strength, Terence Roth and Christopher Emsden for The Wall Street Journal report. Greece, Finland and Spain are still contracting.

Although these economies continue to struggle along, industrial countries centered in the region’s economic core are setting the pace for an overall recovery. (Sweden has been a recovery leader). To play the recovery with ETFs, look for those areas that are sitting above their long-term trend lines (the 200-day moving average). Europe can be accessed via either broad, regional ETFs or some strong single-country funds.

For more stories about Europe, visit our Europe category.

• iShares MSCI Germany Index (NYSEArca:EWG): up 19.2% year-to-date

• iShares MSCI EMU Index (NYSEArca:EZU): up 28% year-to-date

• SPDR Dow Jones Euro STOXX 50 (NYSEArca:FEZ): up 25.8% year-to-date

• iShares MSCI Sweden Index (NYSEArca:EWD): up 62.3% year-to-date, one of the best

• iShares MSCI Austria Index (NYSEArca: EWO): up 67.9% year-to-date

Sweden’s government upgraded its economic outlook to an expected contraction of 4.9% this year, followed by 2% growth next year and unemployment estimates for 2010 were lowered to 10.7% from 11.4%, as stated in BusinessWeek. (Sweden’s improved economic forecast)

Current government stimulus measures have been a contributing factor for the more optimistic outlook, but the measures are calculated to incur a $4.7 billion budget deficit in 2010, increasing 3.8%, from 2.2% this year. Furthermore, the government will also reduce income taxes by $1.45 billion.

According to the National Institute of Economic Research, household pessimism about the Swedish economy is moderating, inching up to 7.5 in October from 5.6 in the previous month, and business confidence rose to -1 in October from -13 in July, according to RTTNews. Manufacturing confidence also increased to -12 from -20. All economic indicators were above economists’ expectations.

Sweden’s Riksbank left key rates unchanged at 0.25% and the Central Bank stated that the repo rate will remain low until fall 2010, report Paul Hannon and Robb M. Stewart for The Wall Street Journal. Any inflationary worries are negligible since annual inflation forecasts are well below target.

For more information on Sweden, visit our Sweden category.

• iShares MSCI Sweden Index (NYSEArca: EWD): up 59.8% year-to-date

Max Chen contributed to this article.

NIER, a state-sponsored institute which produces economic forecasts for the government, says it will raise Sweden’s outlook. The forecast for 2009 has been raised by a few tenths of a percent, while they see GDP growth in 2010 coming in around 2%. Their previous forecast called for a 5% contraction in 2009 and growth of 1.5% in 2010, reports Reuters. (Read on as to why Sweden’s banking system is an example).

Lending support to an upgrade is that consumer confidence improved in October, along with business confidence. Conversely, pessimism about unemployment and personal finances has declined, reports RTT News. (Five reasons to watch Sweden).

For more stories about Sweden, visit our Sweden category.

• iShares MSCI Sweden Index (NYSEArca: EWD): up 50.9% year-to-date

• Sweden is a fiscally strong country and is up 33% this year so far. With a scant 1% weighting in the MSCI World index, the single-country ETF is a better way to get  exposure to this country.
• Carl Delfeld for The Stock Advisors says that about half of the ETF focuses on financials and industrial earnings. Ericcson Telecom Company is a top holding at 15%, with about 40% of all telephone calls worldwide going through an Ericcson system.
• Consumer and business confidence, as well as retail sales, are climbing up off of recent lows.
• Analysts believe that the banks will try and stave off inflation for as long as possible.
• Overall, relative valuations and a strong market with momentum could keep Sweden attractive and perhaps a steady bet.

• iShares MSCI Sweden Index (EWD): up 45.2% year-to-date

For m ore stories about Sweden, visit our Sweden category.

Fitch Ratings Ltd. calculates that Swedish bank writedowns for Eastern Europe could cost Sweden 5% of its GDP, even if there is no devaluation in the region’s currencies, report Niklas Magnusson and Aaron Eglitis for Bloomberg. Loan losses reduce the income credits of the current account and would increase the government’s borrowing requirements.

All told, Swebank AB and SEB AB, the largest banks in the Baltics, have loaned more than $48 billion to the region, or respectively 17% and 13% of total loans. The banks will potentially need to write down $21.5 billion to $37.9 billion for this year and the next.

After a series of stress tests, Swedish banks show adequate levels of capital, writes Anna Molin for The Wall Street Journal. But the banking atmosphere is sill steeped with pessimism; as a result, equity investors could insist on banks holding more than the current 7% of Tier 1 capital.

In other news, General Motors (GM) is selling Saab to the Koenigsegg Group, a new firm that is backed by Norweigian and U.S. investors, according to Reuters. Founder Christian von Koenigsegg is fairly optimistic about Saab earning a positive cash flow after 2010 and he will be reshaping the company for the long-term.

• iShares MSCI Sweden Index (EWD): up 16% year-to-date

For more information on Sweden, visit our Sweden category.

Max Chen contributed to this article.

In what looks to be the country’s worst recession in more than half a century, Sweden’s Central Bank cut its benchmark interest rat to a record 0.5%, reports Johan Carlstrom for Bloomberg. The Swedish krona gained against the euro after the announcement.

It is estimated that the economy will shrink 4.5% this year and grow 1.3% next year. Deflation is expected to average 0.3%. Joblessness will climb to 8.9% this year and will continue to advance to 10.7% next year.

The government has promised $5.2 billion, or 1.5% of GDP, in spending on measures to boost job creation, which include tax cuts, infrastructure, schools and research. Further spending may go up to $7.27 billion in 2010.

Some economists think the Swedish Central Bank is being too cautious and should reduce interest rates further, write Joel Sherwood and Katie Martin for The Wall Street Journal. Some expect rates to reach 0.25% while the Swedish Bank SEB projects a 0.1% rate.

The Swedish Central Bank may resort to unconventional policies measures, like quantitative easing, as a last-ditch effort to protect the economy if interest rate cuts do not deter deflationary pressures.

• iShares MSCI Sweden Index (EWD): up 11.2% year-to-date

• CurrencyShares Swedish Krona Trust (FXS): down 6.4% year-to-date

Read the disclosure, as Tom Lydon is a board member of Rydex Investments.

Max Chen contributed to this article.

Countries such as Latvia, Estonia and Lithuania are too precious to let fail, over the past decade, Sweden has plowed billions of kronor into their tiny but booming neighbors across the Baltic Sea. Deep recessions are hitting these countries as the Baltic states are experiencing economic hardship similar to the sub-prime mortgage mess hitting the United States, reports Carter Dougherty for The New York Times.

The Swedish banking crisis in the 1990s was defeated and this feat alone gives bankers the confidence that they can pull this off again. Because these countries are new democracies, Sweden feels a responsibility to try and help them out. In its deep sense of ownership of the Baltics, Sweden’s own financial self-interest and a broader desire in Europe to avoid a new East-West divide are driving Sweden to spend more money.

It’s more evidence that Sweden has embraced globalization by keeping its borders open and engaging in extensive worldwide trade, says The Exception magazine. Leif Pagrotsky, a Swedish politician, says that the government has been able to support strong employment, rising real wages and growing services.

Will Sweden’s citizens agree with the Prime Minister’s decisions? And will this attempt to rescue the Baltic nations amid the financial pullback work? Time will only tell.

• iShares MSCI Sweden Index (EWD): down 7.7% year-to-date 

The recession has provided a forum for companies playing out a Darwinistic-styled scenario of the most fit. Companies have the chance to obtain greater efficiency and to take away market share from the incompetent, reports Jim Jubak for MSN Money.

Investors can see the early indications of efficiencies that some companies have implemented so as to come out of this recession better of than competitors.

• Dividends. While most companies are cutting dividends, a few are ignoring the trend. The board of directors at Monsanto (MON) have voted to increase its company’s dividends by 10%. It has also reported earnings higher than forecasts and has raised its forecast for the rest of the year. The ETF Market Vectors Agribusiness (MOO) is up 3.1% in the last month with holdings of 9.4% in MON.
• Hiring. As more companys are laying off workers, Teva Pharmaceuticals (TEVA) has been hiring an additional 100 workers for its Jerusalem facility. The ETF iShares MSCI Israel Index (EIS) is up 4.4% in the last month with holdings of 24.4% in TEVA.
• Stable capital investments. Savvy companies are looking at the long-term by investing during a recession. Intel (INTC) is investing in personal computers for every slowdown and now is no different. The ETF Technology Select Sector SPDR (XLK) is up 0.9% in the last month with holdings of 4.8% in INTC. BNSF Railway (BNI) has announced that it would spend $2.7 billion to upgrade tracks, signal systems and freight cars, and to buy 350 more locomotives. The ETF iShares Dow Jones Transportation Index (IYT) is down 12.1% in the last month with holdings of 12.1% in BNI.
• Acquiring. US Bancorp (USB) was busy buying up Downey Savings and Loans, and PFF Bank and Trust back in November. The ETF iShares Dow Jones U.S. Regional Banks (IAT) is down 29.5% in the last month with holdings of 20.1% in USB.
• Fewer future competitors. Ericsson (ERICY) CEO Carl-Henric Svanberg plans on picking up share from Nortel and Motorola. Because its competitors would be weakened, Ericsson could add to its 40% share in the sector. The ETF iShares MSCI Sweden (EWD) down 7.3% with holdings of 14.3% in ERICY.

So, what’s their plan?

The Nationalization Plan. In the early 1990s, Sweden’s banks were nearly bankrupt. However, the government managed to act quickly that ultimately led to taxpayers making money, says Carter Dougherty for The New York Times. These former officials now say it’s the only way the United States can solve its own crisis.

Sweden placed the troubled assets of its banks into a “bad bank,” where they could be held and sold over time as conditions improved. By contrast, the United States has bailed out banks without receiving large equity stakes in return.

Unemployment. Meanwhile, Sweden is still grappling with the effects of the current credit crisis. It has been announced that Sweden’s unemployment rate rose from a less than expected 6.2% in November to 6.4% in December, according to Forbes. It is calculated that unemployment was elevated by 5,000 in December.

The main consensus is that the upward trend for unemployment is likely to continue into 2009.

Tax Breaks. After the announcement of the unemployment rate, Sweden offered companies a two-month tax respite to ease small company’s financial strains, reports Joel Sherwood for The Wall Street Journal. This move was made in light of the eminent risk of bankruptcies in the coming months and to deal with liquidity issues.

• iShares MSCI Sweden Index (EWD): down 8% for the last month

The country’s central bank met today, two weeks ahead of schedule, for a monetary policy meeting where an interest rate decision will be published, reports Joel Sherwood for The Wall Street Journal.

The Bank of England and the European Central Bank also are set to announce interest-rate moves today. Riksbank said as of Thursday, a new decision will be in effect. The meeting was originally scheduled for Dec. 16, but any improvement will not come too soon.

The economy slid into a recession in the third quarter on weakened demand for exports, reports Johan Carlstrom for Bloomberg.

A 1% rate cut is expected, with more cuts into 2009, taking the repo rate to 1.25% into the next year. A one-point rate cut today would be the largest since the bank adopted an inflation target 15 years ago.

• iShares MSCI Sweden (EWD): down 52.2% year-to-date; whether a rate cut of this size will be enough to reverse course in the fund remains to be seen.