Finansdepartementet
Economic policy in Europe
Minister for Finance Anders Borg
November 5, 2013
Finansdepartementet
Global growth prospects
• More stable recovery but subdued growth expectations in
the near term
– Euro zone out of recession, but fragmented financial systems
and high levels of public debt hamper growth
– United States: Economic activity is gradually picking up
supported by recovery in housing market
– Emerging markets are expected to grow at a slower pace
• More stable recovery but downside risks remain
– Uncertainty surrounding US fiscal policy could harm global
recovery
– Risk for continued financial turbulence in emerging markets due
to expectations of tapering of US monetary policy
Finansdepartementet
-6
-4
-2
0
2
4
6
8
10
Emerging markets USA Euro area Sweden
IMF: Global growth in low gear GDP growth rate, per cent. Forecast from 2013
Source: IMF
Finansdepartementet
Unit labour cost Index 2009 = 100. Source: OECD
Terms of trade Per cent of GDP, Forecast for 2014. Source: OECD
Interest spreads to German 10 year bonds Per cent. Source: Ecowin
0
5
10
15
20
25
30
35
40
2010-01 2010-07 2011-01 2011-07 2012-01 2012-07 2013-01 2013-07
Spain Greece Ireland Italy Portugal
-12
-10
-8
-6
-4
-2
0
2
4
6
2010 2011 2012 2013 2014
Portugal Greece Italy Spain Ireland
Improved fiscal conditions Public deficits 2010 and 2014. Per cent of GDP.
Source: EU-Commission
-30,9
80
85
90
95
100
105
110
2009 2010 2011 2012 2013 2014
Spain Greece Ireland Italy
-15
-10
-5
0
5
Irel
and
Gre
ece
Un
ited
Kin
gdo
m
Po
rtu
gal
Spai
n
Fran
ce
Net
her
lan
ds
Ital
y
Au
stri
a
Ger
man
y
Bel
giu
m
Fin
lan
d
Den
mar
k
Swed
en
-31
2010
2014
Finansdepartementet
Fragmented financial systems
hamper recovery in crisis countries
• Weak financial system
with bad assets impair
transmission of
expansionary monetary
policy
• Restricted credit
availability to private
sector hampers
investment and growth
Source: IMF World Economic Outlook , 2013
Finansdepartementet
Restoring household and business
confidence in the banking system
• Reveal banks’ bad assets and suppressed balance sheets
– Asset quality review and ECB stress tests in 2014
• Pan-European bank supervision
– Single Supervisory Mechanism
• Higher capital requirements increase resilience of the
banking system
– CRR / CRD 4 enter into effect in 2014
• Effective and orderly handling of banks in distress
Finansdepartementet
Bank assets, percent of GDP,
December 2011
Source of funding, Swedish banks
House prices since 1995 Household debt to disposable
income ratio, 2012
Source: OECD Source: OECD
Source: ECB, Swiss national bank and Riksbanken
Source: Riksbanken, Statistics
Sweden Swedish krona Foreign currency
304 285
223
195 194
168
146 135 134
124 121 108 101 100 92 87
74
Finansdepartementet
Sweden: Policies for financial stability
and increased supply of housing
• More robust financial system
– Stonger supervision
– Higher capital and liquidity requirements
– Minimum risk weights for mortgages
• Efficient crisis resolution mechanisms
• Housing market reforms
– Rent-setting for new appartments and sub-letting
– Faster planning processes for new developments
– Improved incentives for new-builds (e.g. in Stockholm)
Finansdepartementet
Long term growth – a challenge for
Europe
• Highly regulated product and service
markets
• Rigid labour markets
• Sub-par performance of education systems
• Lack of entrepreneurship and innovation
• Under-investments in infrastructure and
research
• Heavy tax burdens on labour and capital
Finansdepartementet
Structural labour market problems in
Euro area NAIRU (USA) and NAWRU (EZ)
Källa: CBO and European Commission
4
5
6
7
8
9
10
11
12
97 99 01 03 05 07 09 11 13
USA Euro area
Finansdepartementet
High levels of public debt in Europe
EU15 except Luxembourg Source: EU-commission autumn forecast 2013
Public deficits 2014. Per cent of GDP
Public sector debt 2014. Share of GDP, per cent
0,1
-1,2
-1,7
-1,9
-2,0
-2,3
-2,6
-2,7
-3,3
-3,8
-4,0
-5,0
-5,3
-5,9
Ge
rman
y
Swe
de
n
Den
mar
k
Au
stri
a
Gre
ece
Fin
lan
d
Bel
giu
m
Ital
y
Ne
ther
lan
ds
Fran
ce
Po
rtu
gal
Ire
lan
d
Un
ite
d K
ingd
om
Spai
n
42
44
61
75
76
77
95
97
10
0
10
1
12
1
12
7
13
4
17
6
Swe
de
n
Den
mar
k
Fin
lan
d
Au
stri
a
Ne
ther
lan
ds
Ger
man
y
Fran
ce
Un
ite
d K
ingd
om
Spai
n
Bel
giu
m
Ire
lan
d
Po
rtu
gal
Ital
y
Gre
ece
Finansdepartementet
Eurozone economies in need of
structural reforms
• Reforms to strengthen public finances
– Raise retirement age and reduce inflow to early retirement
– Impose stricter conditions surrounding unemployment benefits
– Reduce indexation of government expenditures
– Broaden tax-bases
• Reforms to increase long-tem competitiveness
– Increase incentives to work
– Invest in education and training
– Improve infrastructure, conditions for R&D and entrepreneurship
– Increase flexibility in labour and product markets and reduce red tape
– Improve efficiency of tax systems and public expenditures
Finansdepartementet
Sweden: Growth enhancing policy
agenda
• Budget bill 2013: Strengthen Sweden’s
competitiveness
– Investments in infrastructure, research, education and
lower corporate tax rate
• Budget bill 2014: Increase domestic demand
and improve youth employment prospects
– Lower income tax rates, reduced fees for unemployment
insurance, youth labour market reform
Finansdepartementet
0
10
20
30
40
50
60D
anm
ark
Fran
krik
e
Fin
lan
d
Bel
gien
Gre
klan
d
Sver
ige
Öst
erri
ke
Ital
ien
Ned
erlä
nd
ern
a
Po
rtu
gal
Sto
rbri
tan
nie
n
Irla
nd
Tysk
lan
d
Spa
nie
n
2000 2011
-8
-6
-4
-2
0
2
4
Sw
ed
en
Fin
lan
d
Sp
ain
Ge
rman
y
Ire
lan
d
Gre
ec
e
De
nm
ark
Ne
the
rla
nd
s
Belg
ium
Au
str
ia
Un
ite
d K
ing
do
m
Fra
nce
Ita
ly
Po
rtu
ga
l
-8
-6
-4
-2
0
2
4
Sw
ed
en
De
nm
ark
Fin
lan
d
Gre
ec
e
Ge
rman
y
Be
lgiu
m
Fra
nce
Irela
nd
Un
ite
d K
ing
do
m
Ita
ly
Au
str
ia
Ne
the
rla
nd
s
Sp
ain
Po
rtu
ga
l
-20
-15
-10
-5
0
5
10
Sw
ed
en
Fin
lan
d
Un
ite
d K
ing
do
m
Ne
the
rla
nd
s
Ge
rman
y
Au
str
ia
Po
rtu
ga
l
Be
lgiu
m
Fra
nce
Ita
ly
Public expenditures As per cent of GDP
Tax burden Change 2000 – 2011 as per cent of GDP
Implicit tax rate on capital Change 2000 – 2011 in per cent
Implicit tax rate on work Change 2000 – 2011 in per cent
Source: Eurostat
Source: Eurostat
Source: Eurostat Source: Eurostat
Finansdepartementet
GDP-growth Average GDP-growth 2007–2012, percent
Real disposable income Percentage change 2007–2012
Source: OECD
Source: Eurostat Source: Eurostat
Active population, aged 15−74 Percentage change 2006Q3−2013Q2 (s.a.)
Employed population, aged 15−74 Percentage change 2006Q3−2013Q2 (s.a.)
Source: OECD
7,0 6,8
5,3 5,2 4,9 4,2
3,7 3,6 3,4 2,5
0,9 0,5
-1,1 -3,6
-6
-4
-2
0
2
4
6
8
Bel
gium
Sw
eden
Aus
tria
Spa
in UK
Net
herl
ands
Ital
y
Fran
ce
Ger
man
y
Gre
ece
Finl
and
Irel
and
Den
mar
k
Por
tuga
l
8,6 6,3 5,4 5,1
2,4 2,2 1,2 0,6
-2,5
-4,4 -9,1
-13,6 -15,5
-19,0
-25
-20
-15
-10
-5
0
5
10
Ger
man
y
Bel
gium
Sw
eden
Aus
tria
UK
Fran
ce
Net
herl
ands
Finl
and
Ital
y
Den
mar
k
Irel
and
Por
tuga
l
Spa
in
Gre
ece
1,4 1,2 1,1 0,8
0,5 0,5 0,4 0,1
-0,1 -0,2 -0,4 -0,5 -0,9
-3,0 -4
-3
-2
-1
0
1
2Sw
eden
Ger
man
y
Aust
ria
Bel
gium
Net
herl
ands
Fran
ce
Finl
and
UK
Irel
and
Spai
n
Den
mar
k
Port
ugal
Ital
y
Gre
ece
19,1
11,5
6,5 5,5 4,9 4,7 3,5 3,1 1,7
0,3
-1,3
-4,2 -8,3
-24,6
Sw
ede
n
Fin
land
Belg
ium
Fra
nce
De
nm
ark
Germ
any
UK
Austr
ia
Irela
nd
Port
ug
al
Ne
therl
and
s
Spain
Ita
ly
Gre
ece
Finansdepartementet
Conclusions
• More stable growth prospects in near
term for Europe, but large remaining
challenges
• Functioning of banking systems must be
improved
• Need for structural reforms to
strengthen long-term growth