Download Klas Eklund 2006-01-04

Klas Eklund
Is there a Nordic lesson to learn?
Euro am Sonntag 2006, Feb 5
The four Nordic countries – Denmark, Finland, Norway and Sweden – have recently shown
stronger economic performance than the core euro countries. Many Europeans now ask
whether there is a special “Nordic model” which should be emulated in other countries.
This answer is both No and Yes. There are some similarities between these countries – but
there is no common explanation why all four are performing well. They have different starting
points and are following different strategies. Nonetheless, certain conclusions can be drawn
from their recent history that may carry lessons for today’s sluggish Continental economies.
One obvious difference among these four countries is that they follow completely different
policy strategies vis-à-vis Europe. Norway is outside both the European Union and the euro.
The other three countries are EU members but with different euro strategies. Finland has
adopted the euro. Denmark is outside the euro but its currency is pegged to the euro in the
ERM. Sweden is outside the euro and has a floating currency. Consequently, in this area there
is no common denominator.
The richest Nordic country – Norway – largely bases its accumulating wealth on huge oil and
gas revenues, not on some kind of “Nordic model”. The other three countries also differ
among them. Denmark and Sweden are high-tax countries. Finland has much lower taxes.
And while all three are turnaround cases – from poor-performing to strong-performing
economies – they have followed different strategies. The Danes started their turnaround as far
back as the late 1970s, the Swedes and Finns not until the 1990s and in a more violent
fashion.
Denmark joined the European Union in 1973 and decided early on that a fixed currency was
necessary to overcome inflation and lack of economic policy credibility. A number of tough
austerity programs in the 1980s – notably the “potato cure” – made stability possible. At the
same time, labour market policy became more flexible.
In Sweden and Finland, the 1980s were years of high inflation and weak currencies. And
when both countries were hit by economic shocks in the early 1990s – Finland suffered from
the collapse of Soviet trade, and Sweden from high interest rates and a banking crisis – the
result was a severe recession with falling GDP levels and rapidly rising unemployment.
The numbers were astounding. In Sweden, the budget deficit peaked at 12 per cent of GDP,
and the central bank key rate reached 500 per cent. In Finland unemployment reached almost
20 per cent.
So, if there was a “Nordic model” in the 1980s, it definitely did not create good performance
or prevent deep recessions.
Since the mid-90s, Finland and Sweden have shaped up. The reason, however, is not that
taxes have been hiked or benefits have become more generous or any other such factor which
many people associate with a “Nordic model”. On the contrary, economic policy in both
Sweden and Finland since the mid-90s have been characterised by market liberal reforms.
The high inflation policy of previous decades has been replaced by inflation targets. The
sloppy budget practices have been replaced by strict budget rules; in both countries fiscal
tightening amounted to some 7-8 per cent of GDP in the mid-90s. Several markets have been
deregulated. Taxes have been cut, as well as benefit levels.
The important message is that both Finland and Sweden – mainly because the depth of the
recession – were able to push through comprehensive reform programs. In only a few years in
the mid-90s, a radically new macro-economic framework was put in place. This framework
has given both countries a stable low-inflation environment.
On top of that, Finland and Sweden were well positioned to reap huge benefits from the “new
economy”. They have world class IT and telecom companies, as well as a tradition of good
international management. The result has been rapid productivity growth.
In my mind, this success story is due more to the tough crisis management of the mid-90s
than to any “Nordic model”. Here, of course, is a lesson to be learned by Germany and other
continental European countries: a swift and resolute reform strategy yields better results than
a wishy-washy, drawn-out one.
This does not preclude that there are certain elements of a “Nordic model” which are
beneficial and could be emulated in other countries. All four countries have a tradition of
consensus-seeking policy solutions. Unions are positive towards new technology. And they all
– more or less – adhere to the view that sick leave and unemployment insurance systems
should be shaped in ways which are both generous and growth-promoting.
The way to attain this seemingly contradictory objective is that high benefit levels are paid out
only as transitional insurance; the benefit system should also include strong incentives to
rejoin the labour force as rapidly as possible – including strict controls to ensure that people
do not abuse the system.
Denmark has been quite successful in this respect. The combination of liberal labour laws – it
is much easier to hire and fire than in Germany – generous benefit levels and an active labour
market policy has become famous as “flexicurity” as it combines both flexibility and security.
In Sweden, labour protection laws are stricter than in Denmark, and the Swedish system
seems to be working less well. Actually, Sweden has become more like Continental Europe in
recent years, as a large number of people outside the labour market are now supported by
permanent subsidies. I see this as very unfortunate, and I regard the flexible Danish system as
superior to both the Swedish one today and the one dominant in Continental Europe.
Let me conclude:


There are some elements – especially in Denmark – of a “Nordic model” with generous
benefit systems which also stimulate work and which would make many countries in
Europe better off.
But these elements have actually weakened in Sweden during recent years and cannot
explain the good performance since the mid 90s.


Indeed, the main reasons for the strong Nordic performance differ between countries. In
Norway, it’s gas and oil. In Denmark, a 20-year old history of stable macro-economic
policy is paying off.
In Sweden and Finland, the recovery is based mainly on successful crisis management
some 10 years ago – but only after both countries had failed miserably for decades to
reform.
The policy lessons are both optimistic and pessimistic. Optimistic in the sense that it is
possible to create “flexicurity” and for crises-ridden economies to recover. Pessimistic in the
sense that is seems to take deep crises to trigger the necessary reform programs.
_______________________
Klas Eklund is Chief Economist of SEB, one of the leading banks in Northern Europe. With
headquarters in Stockholm, Sweden, the bank also has an extensive branch network in Germany and
the Baltic countries.
Mr Eklund is also a member of the Group of Economic Policy Analysis, a high-level team of
European economists chaired by the EU Commission President. Before joining SEB, he was UnderSecretary of State at the Swedish Ministry of Finance. His web site is www.klaseklund.com.