2014
Speech Stockholm 11 August 2014 Anders Borg, Minister for Finance Speech at the international conference 'The Great Recession - Moving Ahead'
On the 11 August 2014, Minister for Finance Anders Borg held a speech at the international conference 'The Great Recession - Moving Ahead' hosted by the Swedish Ministry of Finance. Researchers and civil servants attended the conference to exchange experiences and lessons learnt from the serious financial and economic Download crisis the world economy has undergone. Presentation slides: The great recession - moving ahead (pdf 315 kB) 2013
Speech The Eurofi Financial Forum in Vilnius 13 September 2013 Anders Borg, Minister for Finance Speech at the Eurofi Financial Forum in Vilnius Check against delivery
'Resilience in the financial sector' It is a great honour for me to have the opportunity to give the concluding remarks at this conference. Meetings that bring together academic expertise and representatives from financial institutions and policymaking are important for the development of the financial sector. I understand you have had fruitful discussions on numerous topics, including the implications of the current changes in fiscal regulations for the Nordic-Baltic region. Today I would like to reflect on some of Europe's economic challenges, starting briefly with the need for structural reform and then turning to the importance of a sound financial system. Without financial stability, European economies will never get back on track. I will also touch on some of the progress that has been made in the Baltic countries, specifically Lithuania. The global financial crisis that broke out in September 2008 had an immediate impact on the world economy. Europe was hit harder than most regions, as was Sweden. Some countries have taken the opportunity offered by the crisis to make important but difficult reforms to regain confidence, stability and growth. I am thinking not least of the three Baltic economies. Financial markets have stabilised and their view of the future has improved dramatically over the course of this year. There are signs of improvements in the real economy, but the signals are mixed and the economic situation in Europe is still fragile. However, the improvement in financial market conditions has not yet fed through to the real economy. Bank lending is still restrictive in many EU Member States, and low policy rates have not translated into low interest rates for corporations and households. The prospects for economic growth in Europe in 2013 and 2014 are meagre. Europe still has to overcome some quite fundamental challenges. These relate both to the real economy and the financial sector. Firstly, the crisis has exposed major structural problems in several economies. Many countries are characterised by weak competitiveness and strictly regulated labour and product markets. One important challenge is to increase growth potential by undertaking major structural reforms aimed, for example, at increasing labour supply and improving productivity. These reforms will by and large determine the long-term growth potential of Europe and thus the standard of living of its citizens. In the short term, it is important that all countries contribute to recovery by making wise use of what fiscal space there may be. But really stimulating a long-term European recovery will require painful structural reforms. Competitiveness adjustments in terms of labour costs are gradually taking place in most euro area countries. Still, in many countries, reforms for growth and employment have been too limited. Efforts in all Member States, regardless of their fiscal space, should therefore focus on implementing structural reforms to increase employment and further strengthen competitiveness. Key areas include tax reform to make work pay, and educational reform. Even though income tax rates have fallen in the EU over the past decade, European rates are still high. Moreover, a few countries need to take a hard look at their pension systems and labour markets. Secondly, and the main topic today, we obviously need to become better at preventing and managing financial crises. There is a clear link between sound financial systems and sustainable, long-term growth of the real economy, and there will be no recovery without financial stability. Although much has been done to strengthen financial stability since the trough of the crisis in 2008, there is still more that needs to be done to prevent future financial crises. Restoring household and business confidence in the banking system is a prerequisite for getting the European economy back on track. And in order to restore confidence, banks' bad assets and suppressed balance sheets must once and for all be fully revealed. The importance of this cannot be underestimated. I therefore welcome the asset-quality reviews and balance sheet assessment that the European Central Bank has embarked upon, and which will precede the launch of the Single Supervisory Mechanism. A clear lesson from the crisis is that the regulatory framework for banks did not adequately identify systemic risks in the financial sector. One reason for this was an excessively narrow supervisory focus on individual financial institutions. Along with a transparent and realistic assessment of banks' assets, the supervision of financial institutions therefore needs to be improved. And the much talked-about stress tests must fulfil the criteria of actually being stress tests, rather than the non-credible exercises they have tended to be in the past. Furthermore, the financial system needs a larger cushion. Financial institutions must have more and higher quality capital. Economies with a large banking sector relative to GDP are more vulnerable than others, and they therefore need even larger capital cushions. Consequently, an important feature of the new capital requirement framework that will be implemented in the EU next year is that Member States may implement stricter capital requirements than the minimum levels of Basel 3 and CRD 4. Finally, when a financial institution is in distress, policy makers and authorities must be able to handle the situation in an effective and orderly way. The Banking Recovery and Resolution Directive, which is presently being negotiated in Brussels, aims to ensure that authorities have sufficient tools to dismantle institutions in ways that minimise repercussions to the rest of the financial industry and the economy. This means maintaining the financial system and access to basic financial services for households and businesses even if individual financial institutions collapse. A key element of the proposed directive is that shareholders, some creditors and the banking sector should bear the cost of rescuing failing banks, rather than governments and taxpayers. The situation we have seen across many Member States during the crisis, where profits are privatised while losses are socialised, is unacceptable. I therefore fully support the 'bail-in' approach, but I wish to stress that it is essential that Member States are given sufficient room to manoeuvre in order to handle a financial crisis as cost-efficiently as possible. Bail-in serves as an important tool. However, there is a risk that a bail-in approach may fail to work when a financial crisis spreads quickly throughout the financial system. It is therefore necessary that governments have the legal right to recapitalise banks and temporarily take over ownership of distressed financial institutions. In this context, let me also stress the crucial importance of the ECB's extensive lending arrangements to the European banking system, and its government bond-buying programme under the Outright Monetary Transaction scheme. Such backstops are necessary to suppress potential stress in financial markets. The sharp reduction of bond yields in several Member States since August last year reveals the importance of the ECB's measures. Improved financial conditions have in turn facilitated a gradual improvement in the real economy, which will hopefully gain momentum next year. Let me briefly touch upon some of the structural reforms carried out in Lithuania. The country's determination to implement necessary but painful reforms may serve as inspiring example for other Member States. In the area of fiscal discipline, forceful measures have been taken. This has been necessary in order to reduce the public deficit and improve long- term sustainability of public finances. Notable reforms include the pension reform, improving fiscal sustainability in the long term, and a strengthening of the fiscal framework. Lithuania has made considerable progress in restoring competitiveness. This is illustrated by a substantial reduction of the current deficit and an improved ranking in international competitiveness indices, such as the Global Competitiveness Report by World Economic Forum. Lithuania's story is impressive and shows the economic rewards of hard work and strong commitment to good economic policies. In conclusion, I would like to leave you with a few issues that Europe must deal with effectively to improve the prospects for long-term growth, jobs and competitiveness. Let me just emphasise the importance of credible fiscal policy and a reliable financial system. Both are cornerstones to achieving robust long-term growth in production and employment. Credible fiscal policy and a reliable financial system are interdependent. The ability to use fiscal policy effectively hinges upon whether fiscal policy is deemed credible by financial markets. And sound and healthy banks are a necessity for each and every household, for major corporations and for small and medium-sized businesses. Financial stability and long-term sustainability of public finances are therefore necessary conditions for a solid recovery of EU economies. EU Member States have taken several measures in order to prevent and manage future financial crises. These measures now need to be implemented and used in ways that secure financial stability. When it comes to asset quality reviews and stress tests, it is important that even unpleasant truths come to the surface. If we do not face up to these problems today, the risk is they will come back to haunt us. Thank you! Speech Washington D.C. 18 April 2013 Anders Borg, Minister for Finance Speech at Peterson Institute for International Economics
Anders Borg discussed the continuing impact of the European crisis at the Peterson Institute on April 18, 2013. Download Presentation slides: Re- thinking fiscal policy: constrained activism (pdf 161 kB) Speech 28 February 2013 Anders Borg, Minister for Finance Speech at Higher School of Economics in Moscow
Speech by Minister for Finance Anders Borg, February 28 2013 at Higher School of Economics in Moscow on the subject of "An open and dynamic economy". Download Presentation slides: An open and dynamic economy (pdf 376 kB) Speech London School of Economics 16 January 2013 Anders Borg, Minister for Finance Speech at the London School of Economics
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Introduction It is a pleasure to be here at the LSE today and to speak at an institution that has long been at the forefront of economics and social sciences in general and that has such a rich history of bridging the gap between academia and policy making. The title of today's lecture is "Perspectives on the European crises from a small open economy". I will talk about some of the underlying causes as well as what I believe to be factors to be taken into consideration when confronting the challenges involved in handling the crisis. In particular, I will focus on structural problems that Europe needs to address in order to improve the conditions for a sustained recovery. I will also touch upon some of the recent political developments in the European Union. 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. Next, 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.
Challenges for fiscal policy 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. But let me emphasise two key considerations.
1. Secure confidence in the economy 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. By contrast, 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. 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. This brings me to my next point.
2. Confront fundamental problems The second point is that 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.
Europe's problems run deep The crisis has exposed the structural problems in many countries in Europe that where hidden during the boom years. Not all Member States have embraced globalisation and economic openness equally. For countries that failed to do so, the run-up to the crisis was characterised by declining competitiveness, overly regulated labour and product markets, and an absence of structural reforms to promote growth and jobs. Since the year 2000, growth has averaged 1.4 per cent in the EU and 1.2 per cent in the euro-zone. This is less than the UK and OECD average, and well under Sweden's average growth rate of almost 2.5 per cent. Southern Europe has been losing competitiveness for a long time. In terms of relative unit labour costs, Portugal, Spain, Italy and Greece all saw a loss of competitiveness of 20-30 per cent compared to Germany over the past decade (2000-2010). Since then, Spain has recovered about half of that deterioration. The real effective exchange rate for Italy, on the other hand, has hardly improved at all. Clearly, much remains to be done.
Promote jobs and growth Structural reforms that improve the functioning of the economy are the key to improved growth and employment prospects in Europe. Europe cannot afford to postpone necessary reforms. The European welfare state model is under increased pressure also from within. Ageing populations will significantly increase demand for welfare services over the coming decades. To address this challenge, debt levels will need to not merely stabilise but come down significantly, and one key factor in bringing down debt levels within the foreseeable future is to boost growth. Europe needs to focus on reforms that increase productivity, raise competitiveness and set the stage for long-term economic growth. Continued reforms are needed to ensure well-functioning institutions and a higher degree of competition, free and open worldwide trade as well as deregulation of national monopolies, product markets and regulated sectors, not least in domestic service sectors. Pension and social security reforms will be required in many Member States to assure sustainable public finances. The functioning of labour markets must be improved in order to reduce long-term unemployment and social exclusion. At the same time as public finances are restructured, it is also necessary to increase growth expenditures. Human capital formation through investments in education and R&D must be encouraged. Infrastructure spending must be scaled up. I mentioned earlier that the supposed trade-off between austerity and growth is a false dichotomy. Here is a case in point. Some of the most effective growth-enhancing structural reforms, such as pension and social security reforms, would strengthen public finances. And other, equally important, reforms, such as deregulation of labour markets or increased domestic competition, do not have a negative impact on fiscal balances or domestic demand.
Europe is at a crossroads I strongly believe in a growth-oriented and dynamic European Union. The integration of Europe has brought great benefits to our once-divided continent. Through the development of the single market and the social market economy, the EU has promoted growth, social cohesion and poverty reduction. The achievements of the European project must be safeguarded and reinforced. Europe is now at a crossroads. The crisis has exposed structural problems in many countries in Europe that were hidden during the preceding boom. It is now imperative that we work together to get Europe firmly back onto a sustainable growth path. Recent proposals aimed at building a fiscal union for the euro-area are far-reaching and can potentially threaten to build a permanent division of Europe. Solutions to Europe's common problems should be discussed, negotiated, and agreed on in settings where all EU-27 states are represented. Separate structures, or joint structures on an uneven footing, would undermine, rather than support, European integration. The crisis continues to pose formidable challenges for all of Europe. Our common interests - Europe's political, economic, and social development - remain the bedrock of the Union. EU and euro-zone cooperation have been crucial in dealing with the economic crises and turmoil of the past few years. We now need to facilitate a prompt economic recovery and make progress on structural reforms that boost productivity, competitiveness and long- term economic growth.
An open and growth-oriented Europe From a Swedish perspective, it is obvious that we have much to gain from the UK playing a strong role in Europe. It is in our interest to safeguard an open and growth-oriented Europe. As a strong non-euro member with a sound pro-growth agenda, the UK can play a key role for long-term growth fundamentals. A UK that turns its back on Europe would weaken both Europe and Britain. The relations and connections between our European nations run deep, with large mutual flows of investment, trade, capital, and labour. It is now time to harness the strength of the single market and our shared European institutions in a way that supports a speedy recovery and a solid long-term trajectory.
Swedish policies to weather the crisis What policies have enabled Sweden to weather the crisis? Sweden is a small open economy, and exports make up a large share of our industrial production. This makes us vulnerable to external shocks. Sweden was hit hard when international trade flows plummeted in the wake of the global financial crisis that began in 2008. Between 2008 and 2009, our GDP fell by more than 6 per cent. Since then, we have seen the beginnings of a recovery, but the crisis is far from over. Sweden is clearly affected by the crisis, but compared to many other countries we have done relatively well throughout the worst economic crisis since the great depression of the 1930s. What explains Sweden's performance?
1. Strong public finances One important explanation is strong public finances and responsible fiscal policy. Sweden entered the crisis with large surpluses and relatively low debt, reflecting responsible fiscal policy during the run-up to the crisis. When the recession hit, Sweden had enough fiscal space to provide some support to the economy without jeopardising fiscal sustainability. Credibility was a prerequisite for such an expansive fiscal policy. Sweden's public finances are among the strongest in Europe. This year, EU Member States are expected to run deficits of on average 3 per cent of GDP with average debt levels at 90 per cent, while Sweden is expected to run a deficit of just over 1 per cent and have a debt level around 40 per cent. Strong fiscal institutions play an important role in boosting credibility. Sweden reformed its fiscal framework in the mid-1990s and has gone from being among the worst in Europe to among the best. And our public finances have followed course.
2. Structural reforms have improved the functioning of the economy The deterioration of public finances in many countries not only reflects costly bail-outs and ineffective spending in the face of weaker demand, but also significant increases in unemployment during the crisis years. The crisis has hurt jobs in Sweden and unemployment has increased too, but the impact has been cushioned. Employment in Sweden is now back above the level before the crisis, while employment is some 2 per cent lower today in the EU then before the Lehman crash. Why has employment fallen in the EU and increased in Sweden? Sweden is a small, open economy. We are heavily oriented toward exports and Europe represents about half of our export market. As mentioned, Sweden's strong public finances allowed for expansionary policies that stabilised demand without jeopardising our credibility. It should also be underlined that the expansionary fiscal programme in Sweden was heavily based on structural reforms that improved the functioning of the labour market. In the 1990s, in the wake of another major economic crisis, Sweden succeeded in dealing with a number of important problems. But the labour market continued to perform poorly. For a long time it was characterised by weak development in private employment and growing social exclusion, with an increasing number of people on sickness absence or in early retirement. At the peak, close to a quarter of the working-age population were dependent on benefit systems linked to sickness or unemployment. The weak labour market performance in the 1990s and early 2000s was primarily due to serious long-term structural problems. Taxes that are too high, benefit systems that are too generous, labour market policies that are ineffective and employers' social security contributions that are too high have tended to make labour supply and demand too low. They also cause matching in the labour market to function poorly. The incentives to work or to move from part-time to full-time work were much too weak and it was too expensive to hire. In addition, the business climate was much too poor. Few people have been prepared to start a business and get it to grow rapidly. Being an entrepreneur has simply not been sufficiently attractive. The structural policies that the Swedish Government has pursued since 2006 rest on several cornerstones: First, strengthen the incentives to work and improve the functioning of the labour market. Second, make it easier, and less expensive, to hire and more attractive to start and run businesses. Third, improve the quality of the education system. Sweden has weathered the crisis well not just because we entered the crisis with sizable fiscal buffers, but also because the Government stuck to sound policies in the throes of the crisis. As a result of prudent policies, the Government has been able to maintain necessary safety margins throughout the crisis. When growth in Europe was once again dampened last autumn due to the crisis, Sweden was strong enough to inject energy into the economy, even though the crisis was into its fifth year. In the budget for 2013 we presented a programme to strengthen long-term growth. Infrastructure, lower corporate taxes and increased spending on research and development will make Sweden stronger as we go forward. Expenditure on infrastructure is set to double between 2006 and 2018. For the first time in more than 100 years, the Swedish Government will initiate the construction of a new mainline railway. Expenditure on research and development is also set to increase sharply, safeguarding Sweden's position as being a country where public and private spending on research and development is among the highest in the world - about 3.5 per cent of GDP. And the corporate income tax has been lowered from 26 to 22 per cent. These measures reinforce Sweden's position of strength.
Conclusion Let us not forget that European economic and political integration has brought prosperity and stability to all our countries. The crisis has highlighted some major structural problems in many countries in Europe that were less apparent during the preceding boom. The magnitude of Europe's problems is reinforced by market volatility and macro-economic uncertainty. But there is no fundamental reason why these issues cannot be addressed and solved in a way that improves the competitiveness of our European economy and thus also strengthens the global role that Europe can play. But doing so will require courage and determination from national leaders. Governments must secure and safeguard the confidence of households, firms and markets. States with deficits must pursue serious, substantial, and sustained fiscal consolidation, but the appropriate pace will vary from case to case. The Swedish experience offers two key lessons. First, the starting point for recovery must be to secure credibility and market confidence. Second, governments must also confront more fundamental issues that will truly determine long-term growth prospects and the scope for our European social model. In particular, Europe needs to focus on structural reforms that increase productivity, raise competitiveness and set the stage for long-term economic growth. 2012
Speech 07 May 2012 Anders Borg, Minister for Finance Speech at the International conference on fiscal consolidation and medium-term budgetary frameworks
On the 7 May 2012, Minister for Finance Anders Borg held a speech at the international conference on fiscal consolidation and budgetary frameworks hosted by IMF Fiscal Affairs Department and the Swedish Ministry of Finance. Download Presentation slides: Anders Borg - Sustainable fiscal policy (pdf 292 kB) Speech Washington D.C., USA 23 April 2012 Anders Borg, Minister for Finance Speech at Peterson Institute for International Economics
Anders Borg gave a presentation at the Peterson Institute for International Economics in Washington D.C. on April 23. The presentation focused on how reforms implemented in Sweden prior to the financial crisis, as well as current economic policies, has helped Sweden in its successful handling of the global financial crisis. The Download presentation also gives a view of the challenges that the Swedish economy is facing. Presentation slides: Stability, Cohesion and Growth (pdf 435 kB) 2011
Speech 06 December 2011 Anders Borg, Minister for Finance Speech at Copenhagen Business School
On the 6 december 2011, Minister for Finance Anders Borg held a speech at Copenhagen Business School on Europe's economic crisis, its causes and the economic development in Sweden." Download Presentations slides: Sweden and Europe's Economic Crisis (pdf 1.6 MB) Speech Washington D.C 26 September 2011 Anders Borg, Minister for Finance Speech at Carnegie Endowment for International Peace och National Democratic Institute for International Affairs
Speech by Anders Borg, September 26 2011 at Carnegie Endowment for International Peace och National Democratic Institute for International Affairs in Washington D.C on the subject of 'Economic growth, gender equality and development'. Related Press release: Debt crisis in focus when Anders Borg and Gunilla Carlsson meet leaders at IMF and World Bank summits
Download Presentations slides: Economic growth, Gender and Development (pdf 221 kB) Speech Munich Economic Summit, Munich 19 May 2011 Anders Borg, Minister for Finance Speech at the Munich Economic Summit
Speech held by Anders Borg, May 19 2011 at the Munich Economic Summit "Europe at a Crossroads: The Role of the State in a Globalised World" on the theme of " How Competitive is the Social Market Economy ". Download Presentations slides: " How Competitive is the Social Market Economy " (pdf 344 kB) Speech Institute for Monetary and Financial Stability 18 May 2011 Anders Borg, Minister for Finance Speech at Institute for Monetary and Financial Stability
Speech by Anders Borg, May 18 2011 at the Institute for Monetary and Financial Stability: "Ensuring Fiscal and Financial Stability in Europe - Lessons from Sweden". Download Presentation slides: Ensuring Fiscal and Financial Stability in Europe - Lessons from Sweden (pdf 492 kB) Speech International Bankers' Banquet, London 07 February 2011 Anders Borg, Minister for Finance Speech at the International Bankers' Banquet in London
Check against delivery Introduction Master, Wardens, My Lord Mayor locum tenens, Your Excellencies, Lords, Aldermen, Sheriff, Ladies & Gentlemen, Thank you for inviting me to speak tonight at the International Bankers' Banquet in Guildhall. It is a great honour and privilege to be here and to address such an informed and distinguished audience. And thank you for a wonderful dinner. The last time I visited this beautiful room was in September 2009, on a rather different occasion, namely during the intense discussions of the G-20 meeting in London. When my fellow Ministers of Finance and I gather for our monthly Ecofin meetings in Brussels and discuss the economic outlook, we see a continent beset by economic and financial risks. GDP growth is uneven, labour markets are sluggish, and high bond spreads persist. And there is political uncertainty, both in Europe and on the southern shores of the Mediterranean. My own country, Sweden, seems to have weathered the recession rather well. Growth, at nearly 6 per cent in 2010 and forecast at close to 4 per cent in 2011, is among the highest in the OECD. The budget is predicted to show a surplus 2011 while debt is close to 40 per cent of GDP and dropping. Although unemployment is still too high, at around 8 per cent, it is falling and employment growth is encouraging. Employment growth in the private sector, at 2 to 3 per cent this year, is particularly encouraging. But through all the economic forecasts, the rising commodity prices, and whatever other pressing matters an unruly world thrusts upon us, my colleagues and I remain focused on three challenges that Europe must address to nurture its recovery. Three issues that we must deal with speedily and efficiently to ensure a sustainable growth trajectory. Three areas of concern that are paramount to our joint future prosperity. The first is the need to restore Europe's public finances to a position of strength. The second is the need to reform Europe's labour markets so that people can find work. And the third is the need to re-establish a stable financial system, with appropriate and effective frameworks for supervision, regulation, and crisis management. These three challenges were at the heart of the Swedish Presidency of the EU in the autumn of 2009, and I remain convinced that Europe's road to recovery must be paved with strong public finances, reformed labour markets, and a robust financial system. Making progress is of course complicated by strong interest groups, who often oppose changes beneficial to the broader society and economy in the longer run. As Ministers of Finance, we are the ultimate guardians of the public interest and public purse - at a national and European level - and will not be deterred by such opposition. Allow me now to illustrate in greater depth why these are the key steps on our European journey of recovery. Europe's weak public finances and the need for fiscal consolidation Ronald Reagan once joked, "I am not worried about the deficit. It is big enough to take care of itself." I think that few Ministers of Finance - or bankers for that matter -would dare joke about deficits today. We all know that the economic crisis and unprecedented fiscal measures, necessary to support the financial sector and limit demand shortfalls, have significantly weakened the state of public finances across the world and Europe. EU gross government debt rose, on aggregate, to 80 per cent in 2010 and will continue to increase. Deficits are being cut, but EU-27 net lending is still on average above the 3 per cent threshold set by the Stability and Growth Pact. Why then should we worry about big deficits and debts? First, the current situation is simply unsustainable for many states, as has been illustrated by developments in Greece, where debt is set to reach 160% of GDP next year. As debt accumulates, risk premiums on government bonds rise, and countries have to spend ever-larger amounts servicing debt repayments, thus crowding out welfare services and growth-generating investments. The tax increases and spending cuts that inevitably follow cause great pain, particularly to the poor. More generally, the uncertainty associated with this unsustainability ruins economic policy. Second, a future economic crisis is as much a certainty in life as death and taxes. If that next crisis comes before we are in a position to pursue a sufficiently expansionary fiscal policy or let our automatic stabilisers work, citizens will suffer immensely and government will lose its credibility as a guarantor of the welfare state and societal security. And we may well see another crisis by 2013 - five years after Lehman Brothers. Third, Europe's ageing populations, driven by low birth rates and rising life expectancy, will pose major economic, budgetary and social challenges in the years to come. Fewer economically active people will lead to lower economic growth and smaller tax revenues, while more retired people increases the costs of age-related transfers and services. Based on current policies, age-related public expenditure in the EU is projected to rise on average by 4.3 percentage points of GDP by 2060. To restore public finances, the EU must embark on serious, substantial, and sustained fiscal consolidation. For this kind of consolidation to be credible, governments must use all means available, which implies increasing taxes and reducing spending. Only focusing on expenditure cuts would excessively harm socio-economically disadvantaged groups, who rely extensively on the social programmes that would inevitably be slashed. This is neither politically desirable nor acceptable. Yet, only relying on tax hikes would massively distort incentives to work. Moreover, empirical evidence shows that fiscal consolidation based solely on higher taxes is not as effective and does not create as lasting effects as a balanced consolidation, with sizeable expenditure reductions. The trick is to find an appropriate balance between tax and expenditure adjustments. Reforming pension systems is often a key part of fiscal consolidation, to ensure that they are sustainable in the long run. This includes increasing the effective retirement age and linking retirement age and/or pension benefits to life expectancy; reducing early retirement schemes; and encouraging private savings to complement retirement incomes. Sound public finances also depend on credible and robust fiscal policy frameworks. Now, I realise that mentioning fiscal policy frameworks in an after-dinner speech should be banned, but bear with me for a moment, because they matter. A wide range of empirical studies show that countries with stronger fiscal institutions - including centralized policy-making, fiscal rules concerning deficits and multi-annual expenditure ceilings, and transparent procedures - achieve better fiscal outcomes, in terms of lower deficit and debt. Sweden reformed its fiscal framework in the mid-1990s, since the previous system was among the worst in Europe, as had been illustrated by poor outcomes in public finance terms. We now have a robust system with a surplus target of 1 percent over the economic cycle, a multi-annual expenditure ceiling, a centralized top-down budgetary process, in which the Ministry of Finance has a strong co-ordinating role, and a statutory balanced budget requirement for local governments. All this of course has contributed greatly to Sweden having the EU's strongest public finances. The need to reform European labour markets Harry Truman once defined a recession as when your neighbour loses his job, and a depression as when you lose your own. Based on his definition, many across the EU, where almost 10 per cent of the working population are unemployed, would probably describe the downturn as a depression. Participation rates and hours worked have dropped, while youth unemployment has surged, in some countries up to 40 per cent. Clearly, European labour markets are in a weak state and are weak structurally. The consequences for society and individuals are enormous. For society it means huge costs, in terms of lost production and consumption, lower growth, and rising income inequalities. In Europe today, around 80 million people are estimated to live below the poverty line, which is much more than the entire population of the United Kingdom! For individuals and families it means alienation, loss of self-esteem, and often depression. All too many workers laid off never make it back to the labour market at all, instead retreating into social exclusion. The fates of these individuals is far too easily forgotten. Helping these outsiders return from their exclusion was and remains a key priority for my government. To improve Europe's labour markets, a broad set of policies making work more attractive must be enacted. This involves cutting income taxes, particularly for low-income groups, for example through the use of an Earned Income Tax Credit, as we have done in Sweden. It also entails reforming benefits systems, especially unemployment insurance as well as sickness and early retirement benefits, so as to reward returning to work. These types of structural reforms are crucial in reducing the poverty trap that often prevents inactive individuals from entering the labour market, let alone getting a job. As you can imagine, reforming benefits systems can be politically quite sensitive. However, in Sweden we have implemented these changes and the government was re-elected in September, with a greater share of the vote. Ensuring financial stability The final challenge that I would like to highlight concerns something close to all of your hearts, namely ensuring the stability of the financial sector in general and the banking sector in particular. Thomas Jefferson is reputed to have said that, "Banking establishments are more dangerous than standing armies." All of us in this room would of course dispute that statement. We would argue that a healthy, efficient, and well-functioning financial system is crucial to economic growth and stability. Yet we know that adverse shocks to banks and other financial institutions can have severe impacts on the overall economy. We also know that actual insolvencies, and overall investor panic over the financial situation, played major roles in triggering the recent recession. And that when credit dried up, the world trading system nearly collapsed, sparking fears of a financial crash not seen since 1929. The point of course is that banks, if badly managed and if imbued with a culture of excessive risk-taking, have the potential of doing serious harm. Limiting systemic risk is therefore a powerful rationale for financial regulation. Public credit guarantees and liquidity provisioning are essential backstops for preventing bank runs. However, these measures can become a disincentive for investors to monitor bank practices. Without market discipline, banks will have an incentive to take on more risk, expecting that some of their downside risk will be borne by taxpayers. Public backstops must thus be accompanied by regulations, such as for example adequately set capital and liquidity requirements. However, as you all know, the recent global financial crisis reflected an insufficient, incomplete and uneven regulatory landscape which allowed for unsustainable and reckless risk behaviour among actors in the financial system. Four regulatory weaknesses stood out particularly. First, banks had insufficient capital and liquidity requirements. This problem persists today, as a large number of banks in Europe remain insufficiently capitalised and exposed to non-performing assets. Though stress tests have been performed, they were not rigorous enough - as illustrated by the fact that Irish banks passed the test in the summer of 2010. European banks were said to be under-capitalised by 3.5 billion Euros, but in fact the costs in Ireland alone were over 35 billion Euros! Second, there was an incomplete understanding of the risks inherent in securitisation. Overly complex financial instruments, re-packaged and sold throughout the world, complicated proper risk evaluations and increased the distance between borrowers and lenders. Third, incentives were allowed to be misaligned, as remuneration schemes, including an unhealthy bonus culture, rewarded excessively risky behaviour. Harmful and irresponsible risk-taking was spurred on by an element of greed, that sought to maximise personal gains, without considering the social costs. Fourth, oversight mechanisms and supervisory institutions were inadequate to deal with financial institutions working across borders, particularly in the EU, where regional financial markets developed faster than the common market. As these regulatory shortcomings are only gradually being dealt with, it is fair to say that we still have a relatively weak European banking sector that has some way to go towards restoring its health. But that journey must be continued and completed. In terms of ensuring financial stability, I think it is useful to distinguish between crisis prevention and crisis management, i.e. measures designed to reduce the likelihood and severity of a crisis as opposed to principles and measures to deal with the crisis situation as it unfolds. The need for new, stronger rules and institutions has been a cornerstone in strengthening crisis prevention mechanisms in Europe. We have worked for greater regulation and the creation of powerful new European financial market supervisors to minimize the likelihood of costly public interventions in order to secure financial stability. Significant progress has been made, but more remains to be done. A better and more efficient financial market regulatory framework consists of several aspects, of which several are contained in the Basel III framework, which I of course hope and expect will be implemented globally. First, new rules for capital adequacy, requiring more and better capital, are crucial. They will make banks more resilient to losses in bad times and reduce the risk that households and businesses are affected by a constrained credit supply. The Swiss solution, to increase capital requirements for systemically significant institutions is particularly interesting in this regard and warrants further consideration in the Swedish context. Second, stronger rules for sufficient liquidity ratios are important, since even well-capitalised banks had problems borrowing during the crisis. Third, there must be an end to unhealthy compensation schemes. I strongly support the new common rules that promote a sound and sustainable long-term development of banks and prevent risky behaviour threatening the stability of the financial system. Now, I know there are some bankers - maybe even some in this room - who say that the time has come to turn the page and who feel that governments should implicitly accept a return to the old bonus-happy days. To them, I want to be absolutely clear: individuals' accumulation of wealth cannot come at the expense of society and its stability. As long as society continues to effectively subsidise banks through guarantees that allow them to borrow more cheaply than otherwise would be possible - which in turn contributes to the profits that helps pay for bonuses - we will continue questioning the size and design of bonuses. Excessive bonus pay-outs in the financial sector are perceived offensive by the millions hit hard by the crisis. And since it's public money, public attitudes matter. The financial crisis showed that national supervisors in isolation have little chance of solving a situation where a large cross border financial institution is failing. Since the 1st of January this year we have, as you know, a new financial supervisory structure in place in the European Union, with a systemic risk board and three European supervisory authorities. This proposal was presented in the autumn of 2009 during the Swedish Presidency of the European Union. As chairman of the Ecofin Council at the time, this was one of my priorities and I am pleased today that our efforts have resulted in this new structure being set up on time. I would now like to turn to crisis management and spell out some key principles that I feel should guide policy vis-à-vis dealing with failing banks - and which have guided our actions in Sweden during the crisis. We have had two banks run the risk of failing since autumn 2008. One was deemed of systemic importance and was hence taken over, whereas the other was not, as it was not considered systemically important. A fair solution to any banking crisis must include elements that counteract or mitigate moral hazard and protect tax payers - this is the lesson we have learned during this crises. An EU-wide resolution regime for banks is warranted, where the original owners, subordinated creditors, and possibly senior creditors - in that order - must take losses before tax payers money is injected. If the state provides capital and takes on risk, it should also be compensated for taking that risk, by taking over ownership. The bank's equity should be valued as of the situation at the time of the intervention and shareholders should be compensated only on that basis. The old shareholders should not have any influence on the resolution of the bank in such a situation. Otherwise we risk ending up with ineffective and - for the taxpayers - costly solutions. I therefore consider it crucial that a crisis resolution framework includes recapitalisation, also by the State, as a possible resolution tool. It is important to emphasize that state ownership is not an end in itself, but a means to restore confidence and absorb a potential increase in value as compensation for the risks and costs taken on by the government. This is what we did in Sweden with the Nordea bank during the banking crisis in the 1990s. I am convinced that the Swedish model for dealing with banks in crisis is quite successful. The Irish model, where bad assets are acquired at prices far above existing market prices at the time of take-over, risks destroying public finances, as we have seen, with Irish debt set to rise by 75 percentage points in three years. When the Swedish government has taken over a financial institution, we have demanded a bankruptcy evaluation and a considerable rebate on top of that, the so-called "hair cut", to minimise the impact on public finances. Another problematic model is based on the state, through public administration, taking over individual banks in trouble, without actually acquiring ownership. One serious disadvantage is that it implies that tax payers foot the bill and take risk, without benefiting from any future profits. The bank's share-holders can therefore survive the crisis without any losses. This effectively amounts to the privatisation of profits but the socialisation of losses, which in turn risks damaging the credibility of banks as well as the state's role in crisis management. This is particularly problematic if it allows the bank's management and owners to escape without any losses even if they have mis-managed the bank. Our message must be clear: those who own and run a bank, whose balance sheet and capital adequacy are severely damaged, should lose the right to run their bank. Sweden will therefore push for EU-regulation for failing banks that will allow the state to take over banks but where share-holders will be required help pay the costs of mis-managed banks. Conclusion To illustrate the underlying obstacle to reform - and to prove to you that I just don't quote former American Presidents, but also Prime Ministers of smaller European countries - I would like to quote Jean-Claude Juncker, "We know what we need to do, but we don't know how to do it and get re- elected." Reforming public finances, labour markets, and financial systems is politically difficult. A huge host of interest groups opposes each and every step on the way to real change. "Don't cut this expenditure, don't increase this tax, don't alter this benefit, don't impose this regulation," is the constant chorus we hear, particularly as the forces in favour of status quo tend to be better organized than pro-reform groups. This reflects the fact that the losses are concentrated to smaller groups, while the benefits are widely dispersed. Change is also painful, at least in the short run. Yet the policy proposals I have outlined are necessary for the stronger, richer, and more stable Europe that we all desire. We must therefore maintain the will and drive to reform. Throughout history we have seen that the willingness to change old structures tends to decrease with time, as the original crisis fades into history. As a result, necessary reforms have remained on the drawing boards and crises have recurred. I hope and trust this will not be the case this time. I therefore implore you to do your part as I promise you that we will do our part and remain vigilant. And finally, since I cannot finish without at least one reference to a British Prime Minister, I will leave you with a quote from the most famous of them all, Winston Churchill, "There are two things that are more difficult than making an after-dinner speech: climbing a wall which is leaning toward you and kissing a girl who is leaning away from you." I hope that listening tonight has been less difficult than both of those things. Master, may I now conclude and thank you for the invitation to come and speak to you today as I propose a toast to the Worshipful Company of International Bankers. and say loudly "The International Bankers". 2010
Speech Brussels 06 December 2010 Anders Borg, Minister for Finance Address to EPP Group Meeting at European Parliament
On 6 December Minister for Finance Anders Borg participated in the meeting "Financing Europe 2020", arranged by the EPP Group at the European Parliament. Mr Borg spoke about public finances in the EU Member States and about the measures that should be taken to deal with the problems of debt in Europe. Download Presentation slides: Financing Europe 2020 (pdf 307 kB)