The opposition parties call his policies “liberal”, but Swedish Finance Minister Anders Borg would rather use the word “pragmatic”. He came to the London School of Economics to offer some viewpoints on the Eurozone and the European Union from the seemingly stability and success of a country up north the recession-trapped Old Continent.
On Sweden having a good crisis.
These are challenging times for all of us here in Europe. We’re now looking at the fifth consecutive year in which European governments are preoccupied with financial turmoil, weak public finances, anaemic growth and high unemployment.
The outlook for 2013 is meagre, with sluggish growth and high unemployment in large parts of Europe, but the current situation does not bear close resemblance to the state of affairs in 2008. The collapse of Lehman Brothers sent shockwaves through the financial system. Credit markets and interbank lending dried up, world trade plummeted, and European governments faced the prospect of another depression, with years of negative growth and a possible implosion of the financial system.
On avoiding a Great Depression.
What happened next was that the economic downturn and the linkages between national banking systems and sovereigns contributed to transform the financial crisis into a sovereign debt crisis that at times has threatened to break Europe apart.
Important measures have been taken to manage some of the most pressing issues, in particular with regard to the regulation of financial markets. Here the crisis brought new insights and, equally importantly, impetus for reform. A key insight is that we have improved awareness of the need to monitor systemic risks, and to design the rules of the game so as to protect the financial system, not individual firms. Higher capital requirements for banks are an important step.
On more austerity versus more public investment.
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.
On his pragmatism.
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.
Bearing this in mind, there must be a basis of confidence with regard to the sustainability of public finances. Naturally, a delicate balance must be struck between strengthening public finances and restoring growth. But failing to safeguard credibility will result in neither of these two goals being achieved.
This is why it is erroneous to cast the policy choice in terms of a dichotomy between austerity and growth. The policy must depend on the situation and the circumstances in each country.
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.
Is that a warning to the austerity champion Troika?
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. Aggregate demand will react favourably to this restored confidence, whereas it is bound to be anaemic in its absence.
On core euro countries doing more to support weaker neighbours.
Countries in a stronger position do have the alternative to use fiscal policy to inject energy into the economy. Sweden agrees with the IMF and the OECD that countries with adequate fiscal space should use their strengths to support a sustained recovery.
Given the elevated risk levels, it is important even for countries whose position is relatively strong not to become complacent and abandon necessary safety margins that secure room for manoeuvre in the case of a protracted, or sharper, downturn. Particularly, governments in a stronger position should give priority to boosting growth and employment in a long term perspective.
On peripheral countries complaining about too harsh fiscal targets that would burn their economic engines.
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.
Rapid changes to the international economic landscape can have a major impact on entire sectors and regions and deal severe blows to those losing their jobs. We need to address the questions of how to reduce the risk of severe shocks and how to maintain our competitiveness on a basis of knowledge and quality, not low wages and poor working conditions.