16 January 2013

Anders Borg: Perspectives on the European crises from a small open economy

The Swedish Minister of Finance spoke about the underlying causes of the crisis, as well as the factors to be taken into consideration when confronting the challenges involved in handling the crisis.

Challenges for fiscal policy

Over the last few months we have been debating whether austerity or growth should be the main road for fiscal policy in the current environment. I will take a pragmatic approach to this question. Clearly, there is no simple solution that applies to all countries. But let me emphasise two key considerations.

Secure confidence in the economy

The first point is that governments must at all times secure and safeguard the credibility of economic policy among households, firms and markets. Disorderly public finances generate uncertainty that push up borrowing costs and dampen consumption and investment.

The UK has paid close attention to the timing of fiscal consolidation, letting the fiscal balance improve gradually and in a manner that facilitates long-term growth. A weaker policy could have caused a general increase in the market's risk premia and have made both firms and households more reluctant to spend and invest. The UK has had room to manoeuvre and has used it wisely.

By contrast, countries in worse condition have no choice but to act rapidly because they have to restore credibility and confidence in their economies and bring down borrowing costs if they are to get back on an even keel. In particular, struggling EU Member States need to fulfil the commitments they have already made. And they need to do so at a pace that is adequate to restore market confidence.

Confront fundamental problems

The second point is that handling the crisis is not primarily about how well we manage short-term stabilisation. Instead, the crucial issue is our readiness to confront more fundamental questions that will determine long-term growth prospects and the scope for our European social model.

While Europe is bogged down in fiscal problems, the global economy is undergoing rapid change. Emerging economies in Asia and elsewhere are lifting hundreds of millions of people out of poverty. The powerful structural transformation taking place around us will shape our economies for decades to come. It brings great potential but also formidable challenges. Europe will need to adapt to increasingly tough competition at all levels of the value chain.

Promote jobs and growth

Structural reforms that improve the functioning of the economy are the key to improved growth and employment prospects in Europe. Europe cannot afford to postpone necessary reforms.

The European welfare state model is under increased pressure also from within. Ageing populations will significantly increase demand for welfare services over the coming decades. To address this challenge, debt levels will need to not merely stabilise but come down significantly, and one key factor in bringing down debt levels within the foreseeable future is to boost growth.

Europe needs to focus on reforms that increase productivity, raise competitiveness and set the stage for long-term economic growth.

Continued reforms are needed to ensure well-functioning institutions and a higher degree of competition, free and open worldwide trade as well as deregulation of national monopolies, product markets and regulated sectors, not least in domestic service sectors.

Pension and social security reforms will be required in many Member States to assure sustainable public finances. The functioning of labour markets must be improved in order to reduce long-term unemployment and social exclusion.

An open and growth-oriented Europe

From a Swedish perspective, it is obvious that we have much to gain from the UK playing a strong role in Europe. It is in our interest to safeguard an open and growth-oriented Europe. As a strong non-euro member with a sound pro-growth agenda, the UK can play a key role for long-term growth fundamentals.

A UK that turns its back on Europe would weaken both Europe and Britain. The relations and connections between our European nations run deep, with large mutual flows of investment, trade, capital and labour.

It is now time to harness the strength of the single market and our shared European institutions in a way that supports a speedy recovery and a solid long-term trajectory.

Swedish policies to weather the crisis

What policies have enabled Sweden to weather the crisis? Sweden is a small open economy, and exports make up a large share of our industrial production. This makes us vulnerable to external shocks. Sweden was hit hard when international trade flows plummeted in the wake of the global financial crisis that began in 2008. Between 2008 and 2009, our GDP fell by more than 6 per cent. Since then, we have seen the beginnings of a recovery, but the crisis is far from over.

Sweden is clearly affected by the crisis, but compared to many other countries we have done relatively well throughout the worst economic crisis since the great depression of the 1930s. What explains Sweden's performance?

Strong public finances

One important explanation is strong public finances and responsible fiscal policy. Sweden entered the crisis with large surpluses and relatively low debt, reflecting responsible fiscal policy during the run-up to the crisis. When the recession hit, Sweden had enough fiscal space to provide some support to the economy without jeopardising fiscal sustainability. Credibility was a prerequisite for such an expansive fiscal policy.

Sweden's public finances are among the strongest in Europe. This year, EU Member States are expected to run deficits of on average 3 per cent of GDP with average debt levels at 90 per cent, while Sweden is expected to run a deficit of just over 1 per cent and have a debt level around 40 per cent.

Strong fiscal institutions play an important role in boosting credibility. Sweden reformed its fiscal framework in the mid-1990s and has gone from being among the worst in Europe to among the best. And our public finances have followed course.

Structural reforms have improved the functioning of the economy

The deterioration of public finances in many countries not only reflects costly bail-outs and ineffective spending in the face of weaker demand, but also significant increases in unemployment during the crisis years.

Sweden's strong public finances allowed for expansionary policies that stabilised demand without jeopardising our credibility. It should also be underlined that the expansionary fiscal programme in Sweden was heavily based on structural reforms that improved the functioning of the labour market.

The structural policies that the Swedish Government has pursued since 2006 rest on several cornerstones:

• First, strengthen the incentives to work and improve the functioning of the labour market.
• Second, make it easier, and less expensive, to hire and more attractive to start and run businesses.
• Third, improve the quality of the education system.

Sweden has weathered the crisis well not just because we entered the crisis with sizeable fiscal buffers, but also because the Government stuck to sound policies in the throes of the crisis.

Full speech

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