Sweden’s finance minister on the Portugal bailout, Europe’s recovery, and America’s budget mess

Sweden’s finance minister on the Portugal bailout, Europe’s recovery, and America’s budget mess

I had the change to sit down yesterdau with Sweden’s finance minister, Anders Borg, on the sidelines of the IMF Spring Meetings here in Washington. Borg described the meetings as the most "relaxed" that he’s attended since the start of the financial crisis. Then again, with Sweden raising its growth projections last week and predicting a budget surplus and falling unemployment, he can afford to be more relaxed than some of his colleagues. We talked about the reasons for Sweden’s surprising recent success (a combination of bad experience, luck, and good policy), why Sweden is reluctant to participate in a bailout of Portugal, and why he thinks U.S. politicians need to get real and raise taxes.

Our conversation is below the jump: 

How have this year’s IMF meetings been going?

If I compare it to the other IMF meetings and G-20 meetings that I’ve been in during the crisis, everyone’s much more relaxed now. Most countries, with some small exceptions around the Mediterranean, are in much better shape than they have been. So you don’t have the tension that people are under pressure from the economic crisis to the same extent.

Partly I think it’s a little bit of a pause before the really tough decisions. For example here in the U.S. when it comes to deficits — I know because we’ve done a lot of fiscal restructuring in Sweden that that will bring a lot of political tension — but we are maybe a year or two before the U.S. will really start to get serious about their deficits.

But it’s been probably the most relaxed meetings that I’ve been to since I’ve been coming here. People are very much interested in our experience because we tend to be such an outlier in Europe. Sweden’s latest growth number was 7.2 percent. The debt figures are coming down.  So people are interested in how this could be — it’s not a simple explanation.

So what is the explanation?

I think it’s a combination of bad experience, luck, and good policy. The bad experience is a real asset. What we went through in the early 90s means that around 97, 98 percent of the public agree we should have a balanced budget. The experience of fiscal restructuring is that it’s actually people who are less well off who are dependent on welfare, which means that they get a bigger part of the hurt when you do fiscal restructuring.  So that means that everyone says, "we don’t want to go back to the ’90s. We don’t want to go back to the ’80s and ’70s with inflation and disorder in the labor market. So the bad experience is an asset.

Also, it is a little bit to do with luck. We have a composition with manufacturing, high tech, and iron ore, that is very well situated in the kind of global markets that we now see. Our world market will increase on average 7 percent in the coming years. So we have very strong positioning, which is at least party luck.

The third reason is good policy. We did a lot of structural reforms in 2006 and 2008 with tax cuts, huge restructuring of our early retirement system, and a huge restructuring of our unemployment benefits. That has been a very strong supply-side force on the labor market. So when we went into the crisis, we thought we would have a deficit of some 4 percent.  But the underlying trends from these structural reforms have been so strong that we ended up with very close to a balanced budget.

What’s your sense of Europe more broadly? Do you think the crisis is nearing an end?

You have three different things going on at the same time. One is a very strong recovery in Northern Europe. It is not only Sweden that is growing. Estonia, Poland, Finland: all of these countries are forecasted to have around 5 percent growth next year.  Germany is obviously in a much stronger position. So, the northern part of Europe is growing very fast.

This could be an issue in a couple of years, because you still have a lot of problems in the south of Europe, which means that the [European Central Bank] will be very reluctant to raise interest rates. So there is a risk that we could have a more unbalanced development.

We have two really big problems to deal with: one is the banking sector. The recapitalization that is needed in Europe is substantial. Then you have the huge issue of public finances which is both shot-term and long-term. Short term, obviously it’s Greece, Portugal, and Ireland. That could be dealt with. The governments are doing the right things. They are increasing VAT rates and the retirement age and so forth.

The other problem is that the whole of Europe is now indebted. So the room for stabilization policy in the next downturn will be very limited. We could have a very severe and harsh crisis the next time we see a slowdown in the world economy.

So from what I understand, Sweden is not interested in participating in a bailout of Portugal?

We have participated in Latvia — which nobody else did but the Nordics, we participated in Iceland — which nobody else did but the Nordics, we participated in Ireland — it’s not as obvious why we should do that but we should always try to be working in solidarity. As for Portugal, I think there are still a lot of uncertainties to be answered by the Portuguese government before we make that decision. I would say that it’s more unlikely we would participate in the Portuguese case than in Ireland.

Why is that, exactly?

Well there’s a limited responsibility. Why did Spain not participate in Latvia? Why didn’t France help us with Iceland? Every country has a neighborhood where you can get the taxpayers to accept that we need to chip in. We’ll contribute more than a billion dollars through the IMF and EU funds. A billion dollars is quite a lot of money. But we will follow the situation closely and if we have the sense that this is systemic risk, we might have to contribute.

In previous meetings it has seemed like there was a tension between the U.S. pushing a more expansionist monetary policy and European governments favoring austerity measures. Is that tension still there?

For us to say that we would ever be over-expansionary, would be very difficult. The U.S. can be very expansionary. You have 10 percent deficit and interest rates are still hovering around 1,2,3, percent. It’s basically only the U.S. that could behave that way. For everybody else it would mean huge bond spreads.  To my mind, the U.S. is saying to the rest of us that we should be more expansionary, but we’re also on top of a huge U.S. debt. The markets will not punish the U.S., they will punish everybody else standing on top of that debt. I would be very cautious about running a huge debt like the U.S. because we are a small vulnerable country. That is true of many of these European countries.

Have you been following the budget debate here in the United States? What’s your sense as an outside observer?

When you look at fiscal restructuring — what the U.S. needs to do — it is very clear that they need to increase taxes and cut expenditures. The most obvious thing to do would be to introduce a VAT. Look at the U.K. They are run by a Tory government — they increased the VAT. Look at Greece — it’s a Social Democratic government, they’ve increased VAT. All of these countries have increased VAT because it’s a broad-based tax with low costs and limited impact on growth.

It’s also quite clear that the U.S. doesn’t have control over its healthcare sector. The cost control of Medicare and Medicaid doesn’t really work. We’ve all seen the Congressional Budget Office projections so it is quite obvious that you need to strengthen the revenue side, but also have much better control of the expenditure side.

I’m not sure to what degree people in Sweden are aware of this, but in U.S. political debates, your country is often used as a kind of code word for socialism, high taxes and a generous welfare state. Do you think this view Americans have of Sweden is still accurate?

During [the Moderate Party’s] period in government, we’ve cut taxes quite substantially. For ordinary people, we’ve cut them the most. We’ve also been restructuring our social welfare system. But our idea is that you can keep social cohesion by giving priority to education, healthcare. Everyone, regardless of income can get good healthcare and good education. We think that we are modernizing the Swedish model, making it more flexible, and trying to keep as much social cohesion as we can.