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

Germany and France both reported increases in growth and the numbers have convinced some analysts that Europe’s economy is recovering, perhaps even faster than that of the United States’, reports Charlie Parker for Citywire.

There are some risks, though:

• Some economists think, however, that the improved numbers may not be a show of overall economic strength but rather a fall in imports as exports remain the same, which would come up as a stronger net trade.

• The unemployment rates in Germany and France may also be misleading because of the larger public sector. It is seen that the fall in production in Europe did not reflect an equal fall in unemployment. The economies could suffer later from the excess weight.

• The European Central Bank has cut its benchmark interest rate to a record 1% low and begun a $86 billion program of buying assets, writes Simon Kennedy for Bloomberg. Officials are regarding the economic recovery with caution and won’t be reversing their policies any time soon.

• The ECB projected that the European economy may contract 4.6% this year and contract 0.3% in 2010. Deutsche Bank estimates a 1.3% contraction next year and UBS AG predicts 2.1%.

One way to access the European market is through the PowerShares FTSE RAFI Europe (PEF) ETF. PEF, currently up 42% year-to-date, tracks the performance of the largest European equities in the FTSE RAFI Europe Index, which normally invest 90% of its total assets in securities that comprise the Index and ADRs based on securities in the Index, as stated by InvescoPowerShares. The ETF has 526 holdings with an expense ratio of 0.75%.

• Country allocations: United Kingdom 30.6%, France 14.7%, Germany 13.3%, Italy 7.6%, Switzerland 6.4%, Netherlands 5.8%, Spain 5.3%, Sweden 4.0%, Ireland 2.6%, Belgium 2.5%

For more information on Europe, visit our Europe category.

Max Chen contributed to this article.

The fund’s components are the 30 largest and most liquid companies in the Scandinavian region. The top sectors are financials, industrials, technology and health care.

Global X CEO Bruno Del Ama says that from an investor’s point of view, the Nordic region is a stable economic environment. “All the countries are rated AAA. Historically, that region has produced higher returns than its neighbors,” he points out.

Del Ama also points out that these countries have a strong emphasis on higher eduction, training and techonlogy adoption.

An actively managed mutual fund already targets the Nordic region, but the index behind the ETF has been trouncing the mutual fund. The FTSE index has had a 9.4% annualized return in the past five years, compared with the mutual fund’s 7.51% in the same time period, writes Murray Coleman for Index Universe.

• 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.

The Federal Reserve said it would expand its balance sheet to include another $750 billion of agency mortgage-backed securities, $100 billion in agency secrities and $300 billion in longer-term Treasury securities over the next six months.

After the announcement, foreign currencies rallied and ultimately brought the rally seen in the U.S. dollar to a grinding halt, leading to its biggest daily drop in more than two decades. Yesterday, the dollar fell 3.8% against the euro and 3.6% against the pound.

The long-term value of the dollar is now being questioned by some officials at Asia’s top think tanks, reports Reuters. Will the dollar remain a key global currency when all is said and done? Asia hopes that any decline in the dollar will be gradual to avoid more shocks to financial systems. For the time being, many market participants believe that the latest stimulus could lead to a prolonged decline in the dollar’s value.

If this is true, we could be looking at upswings in foreign currency ETFs in the near future. Watch the trend lines to see if this bears out, though. Note that these funds have already popped above their 50-day moving averages, and in some cases, the 200-day.

• WisdomTree Chinese Yuan (CYB): up 0.4% in the last week

• WisdomTree Dreyfus Brazilian Real (BZF): up 3.2% in the last week

• CurrencyShares Swedish Krona (FXS): up 9.1% in the last week

• CurrencyShares Swiss Franc (FXF): up 1.2% in the last week

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