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