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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.