Northern lights

29 September 2000

The millennium celebrations may be over, but the Scandinavians are still flying high. Economic growth is outpacing most of Europe, inflation is under control and public finances are in good shape. The current upturn is likely to be sustained, thanks to the blossoming IT sector, which is putting the Nordic countries at the forefront of the mobile phone/internet revolution and reducing their reliance on traditional industries.

Attitudes to the euro still differ sharply, although Denmark could soon join Finland in adopting the single currency if the September referendum delivers a Yes vote.

Economically, Finland is steaming ahead.

Gross domestic product (GDP) will expand by an estimated 5-6 per cent this year, up from a growth rate of 3 per cent in 1999. The strength of the economy is largely the result of an export boom fuelled by phenomenal growth in the electronics sector, headed by telecoms equipment manufacturer Nokia, and boosted by the weak euro. Helping to maintain the country's competitive edge is its centralised wage bargaining process, which has been successful in muting wage demands.

Strict controls on government expenditure are improving public finances.

Finland's medium-term stability programme, covering 1999-2002, proposes no real increases in central government spending, and aims to secure a structural surplus in central government accounts by the end of the period. Benefiting from the buoyant economy, the government expects to see a surplus of FM 12,600 million ($1,907 million) next year, double this year 's figure.

All the funds will go towards reducing government debt, which stands at more than FM 400,000 million ($60,545 million), equivalent to about 45 per cent of GDP.

Unemployment, at 10 per cent, is perhaps the country's biggest problem, although it has almost halved since 199394, when Finland had one of Europe's highest jobless rates. Unemployment is mostly structural. Many without jobs have the wrong skills for the economy's current needs, or they live in the wrong place, or are over 50. There is a big shortage of skills in the high-tech sector, a problem that could become worse as the greying population balloons.

Inflation is running at 3.7 per cent, which is higher than most European countries, although recent interest rate hikes by the European Central Bank should help to dampen the upward pressure on prices.

Sweden is also enjoying the fruits of a rapidly expanding IT sector, which is bigger and more diversified than Finland's, embracing everything from e-commerce to internet consultancy. The IMF predicts economic growth will be close to 4.5 per cent this year and 3.5 per cent in 2001, fuelled by robust domestic demand and higher exports. Sweden's competitive position remains strong, with real wage settlements broadly matching growth in productivity.

This should produce a modest current account surplus, forecast at 2.6 per cent of GDP in 2000 and 3.2 per cent in 2001.

Adjustment Financial adjustment efforts carried out during the mid- and late 1990s are paying off. Core inflation is running at around 1 per cent and a general government budget surplus, equivalent to 2.8 per cent of GDP, is forecast for 2000. Strong budget balances and privatisation receipts are forecast to lower the general government debt burden to 47 per cent of GDP by 2003, from 66 per cent in 1999. Employment growth should sustain its current momentum and lower the unemployment rate to below 4 per cent in 2001.

Denmark's story is somewhat different.

The country has entered an economic slowdown following several years of robust growth. The government has been engaged in fiscal tightening since mid-1998 to curb growth in private consumption. This, combined with weaker external demand, achieved a soft landing for the economy in 1999, with growth subsiding to about 1.6 per cent, less than half the average of the previous four years. As a consequence, the current account has moved back into surplus, real wage growth has receded and inflation is beginning to ease.

Challenge Now, the major challenge for policy-makers is to recoup the loss of market share suffered by Danish exporters. To this end, continued fiscal and wage restraint will be crucial in maintaining the external position and returning the economy to higher growth rates on more balanced terms. Efforts to raise the labour participation rate will also be necessary to protect public finances from the pressures of a rapidly ageing population. Unemployment has shrunk to about 5.5 per cent from 12 per cent in the early 1990s, but still remains above the EU average.

As one of the world's leading oil exporters, Norway faces very different dilemmas from its Scandinavian neighbours. Volatile oil prices in 1998 and early 1999 caused the exchange rate, government budget and external accounts to fluctuate widely and created difficult circumstances for managing macroeconomic policy. Last year, the economy slowed sharply as the oil price decline coincided with policy tightening by the government and central bank in response to economic overheating in 1997 and 1998. GDP growth in the mainland economy was 1 per cent, down from 3.2 per cent and 4.4 per cent in 1998 and 1997 respectively.

Today, the picture is rosier, with growth recovering on the back of the rebound in oil prices since mid-1999, less stringent fiscal policy and lower interest rates. GDP is forecast to expand by at least 2.4 per cent in 2000. Windfall gains in oil income will enable the government to post a record budget surplus of NKr 133,000 million ($14,777 million) this year, up from the NKr 79,000 million ($8,777 million) originally envisaged in the 2000 budget. Despite this wash of liquidity, the government is raising interest rates and introducing big spending cuts to contain inflation amid the recovery of output and consumer confidence. A steep rise in labour costs is among the biggest threats. Strikes among private sector workers this year, following unions' rejection of negotiated wage packages, will push up wage costs by about 3.75 per cent against an original government forecast of 3.25 per cent.

In foreign affairs, the Scandinavian countries are still deciding how European they want to be. In the past decade, Sweden voted to join the EU, as did Finland. Denmark rejected the Maastricht Treaty in one referendum and accepted it in a second, while Norway decided to stay out altogether.

Finland was the only Scandinavian country to take the plunge and join the first wave of countries adopting the euro on 1 January 1999. Next in line could be the Danes, who will be heading to the polls on 28 September to vote on euro entry.

The Yes campaign is backed by all the main centre political parties and by almost the entire Danish business establishment, a majority of trade unions and most of the media.

Nevertheless, opinion polls indicate the vote is balanced on a knife-edge. The political consequences of a No vote could be dramatic, both in Denmark and the wider EU. It would probably stop the Swedish government going ahead with moves towards a referendum on its own on euro-membership, and would also have a knock-on effect in the UK, where a Danish No will play heavily in any campaign. Some say it could even undermine international confidence in the currency. If Danish voters decide for participation, it shouldn't take long before the country is ready to join the club. As a member of the exchange rate mechanism, its currency and interest rates have moved in step with those in the eurozone for many years, and technical preparation towards unification has been extensive.

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