Digesting the fruits of EU membership

11 October 1996

IT IS a time of consolidation for the Nordic countries as they seek to sustain the economic gains of the past two years. Tight fiscal policies are still the order of the day in Finland, Sweden and Denmark, and efforts to liberalise the economy and create new jobs remain the priority. After the deep recession of the early 1990s the economies of the region are characterised by continued budget deficits, high public debt and widespread unemployment. There are also fears that the modest recovery may now be slowing. Even oil-rich Norway is expecting to enter a period of slower growth.

Sweden and Finland are also taking stock of their membership of the EU, which both countries joined in January 1995. 'Membership of the EU has given us new neighbours. We now need to define our relationships with them,' says an official at the Swedish Foreign Affairs Ministry. With the prospect of economic and monetary union (EMU) just around the corner in 1999, both countries are aiming to meet the Maastricht criteria for economic convergence and adoption of a common currency. But, whilst Finland has declared its aim of joining EMU in 1999, Sweden is delaying the decision. In Norway the government still has a sceptical public to persuade if it is to win the approval it seeks in another referendum on EU membership, due to be held in 1997. Norway is also due for a general election in 1997 which will be fought on the twin issues of Europe and the economy.

The Finnish government does not face an election until 1999 and popular support for the five-party coalition is holding up well. There has been steady progress on the economy. Gross domestic product (GDP) for 1996 is forecast to grow by about 2.5 per cent, inflation has dipped to less than 1 per cent and the exchange rate is stable after the dramatic devaluation of 1992. The weak market for forest industry products, which account for about a third of Finnish exports, means the government is looking at domestic demand as a source of growth despite the persistence of high unemployment. Official figures put unemploy ment at 16.4 per cent for 1996 which the government hopes to cut by 1 per cent next year through a combination of growth in the service sector and new training measures.

It is also taking aim at the budget deficit which will have to be slashed if Finland is to take part in the first wave of EMU. Prime Minister Paavo Lipponen intends to reduce spending by FM 20,000 million ($4,390 million) by 1999 by cutting everything from agricultural and industrial subsidies to welfare benefits. Although such policies are traditionally unpopular the Finnish government is carrying the public with it. 'The government easily reached agreement on next year's budget,' says Matti Pullinen, Ambassador at the Foreign Affairs Ministry. 'This has reduced uncertainty and increased confidence within business and industry.' The government budget deficit should fall to 5 per cent of GDP in 1997, the overall public sector deficit will be much lower at about 1.5 per cent and well within the EMU guidelines. Public sector debt will slightly exceed the maximum allowable of 60 per cent of GDP, but is expected to fall in 1998. Finland is also considering putting the markka in the exchange rate mechanism (ERM), despite the disastrous experience of shadowing it in the early 1990s.

Balancing budgets

Sweden is also using EMU criteria to determine its budget targets. It plans to reduce the deficit to 3 per cent of GDP by next year, and achieve a balanced budget by 1998. To this end Prime Minister Goran Persson introduced a series of measures this year, including steep tax rises, cuts in welfare programmes and drastic reductions in other spending. The government has said that if it is to meet its targets, spending cuts for 1997 and 1998 will need to be worth SKr 25,000 million ($3,770 million).

EU membership is still not popular in Sweden. 'Public opinion is increasingly sceptical,' says one Foreign Affairs Ministry official, 'but debate is focusing more and more on domestic issues.'

Such an emphasis derives from government attempts to slowly wean the country away from its post-war tradition of high public spending and generous welfare provision. The minority Social Democratic government is facing opposition from the trade unions to its latest attempts to reduce labour regulations which are blamed for impeding job creation unemployment is running at 7.5 per cent.

Slower growth

Many Swedes have yet to be persuaded that sacrificing worker protection is ihe recipe for future prosperity. Growth in GDP in Sweden is actually expected to drop to about 1.4 per cent this year, from 3 per cent in 1995. However, analysts expect that an easing of fiscal restraints in the run up to a general election will stimulate growth in 1997. As in Finland, inflation is almost dormant although it increased slightly in mid-year to 1.5 per cent and a further rise is expected in 1997.

Denmark has a rather different perspective on Europe, having been a member of the EU since 1973. 'Denmark is already adapted to an open economy and international competition,' says Kristian Birk, Head of Division at the Business & Industry Ministry. Further integration is not currently on the cards, however, and Denmark is not expected to participate in EMU in 1999, although it is likely to meet the convergence criteria on the budget deficit. The government's revised target for 1996 is for a deficit of 3.2 per cent of GDP and analysts predict a further reduction in 1997.

Growth has slowed this year, with GDP expected to increase by only 1 per cent, compared with 2.6 per cent in 1995. Domestic consumption has expanded at a constant rate of around 2 per cent since the beginning of 1995 and the slower growth is attributed to sluggish exports. However the government has been otherwise successful in creating a favourable economic climate. 'We now have a stable currency and low interest rates,' says Birk. 'The main concern now is a continuing high level of unemployment.'

Norway, by contrast, is looking forward to another year of steady economic expansion. The oil and gas sector was the driving force behind growth of 3.3 per cent in 1995, and the economy may expand by a further 4 per cent this year. Tight fiscal policies are being used to reduce the risk of overheating and growth may slow to 2-3 per cent towards the end of the decade.

Bolstered by its oil and gas revenues, Norway is in the enviable position of recording regular budget surpluses. The strong economic performance makes it that much harder to persuade a sceptical Norwegian electorate that its best interests would be served by membership of the EU. Nevertheless, that is what the government is proposing to attempt in the forthcoming referendum. For in Norway, as in the other Scandinavian countries, Europe is still the issue of the hour.

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