Abstract
The economic recession is receiving continuous media attention worldwide yet what is essentially occurring today is a more general international crisis leading to unemployment, further social exclusion and anti-integration tendencies, to name only a few of the consequences. In times like these, argues the author, actions taken by individual nations to combat such issues are simply not enough. Although many people readily blame globalisation for their everyday problems, it may in fact be the much-needed solution to combat problems which are common to all states. Reinfeldt thus concludes that development in a number of fields can be achieved only by integrating different economies and cultures.
The world is facing its worst economic downturn since the 1930s. What began as problems in a number of American financial institutions has now spread to almost every corner of the world. The crisis is affecting global financial markets as well as the financial outlook of individual nations. It strikes a blow against multinational corporations and corner stores. It brings worries to our labour markets, workers and families.
As the international financial crisis sweeps across Europe, we also see a growing risk of mobilisation among the forces that wish to undermine the very idea of European integration. In the face of an unprecedented economic crisis that affects all Member States at once, policymakers run the risk of putting European solidarity and cooperation aside in favour of short-term national interests, succumbing to the demands of special interest groups.
The crisis also highlights systemic weaknesses and the way in which local events can have devastating global effects. Something that started with American homeowners defaulting on mortgage payments has led to an erosion of confidence in the international financial markets. We are also reminded how greed affects people; a small group takes advantage of the absence of common traffic rules in the financial markets and creates a situation in which everyone must share in their failure.
A downward spiral has thus taken form, beginning in the US market and drawing in the rest of the world. Businesses have been devastated by a shortage of credit, important investments are being cancelled and, as orders dry up, employees are being laid off. Pessimism is growing as consumption dwindles and revenues decrease.
The current crisis is more global in character than anything we have seen before. But does this provide an argument against globalisation, in favour of nations closing their doors to protect themselves and minding their own businesses?
I would claim the opposite. In today's world, nations are more closely linked than ever before. If this were not true, what we have seen in economic and political progress, increased trade and improved living standards over the last decades would never have been possible. Progress in all these areas is the result of globalisation. The global problems we face today, therefore, require global solutions.
The example of Sweden, my own country, proves this. It is sparsely populated, relatively small and dependent on trade with other nations. Our economy is tightly linked to European markets, but also dependent on global markets. With exports accounting for as much as 52.4% of GDP, the benefits of globalisation for my country are obvious.
Free trade and open markets have provided favourable conditions and a sound basis not only for economic growth, but also for increased knowledge and interaction among people. At the same time, when an international financial crisis impacts my country–-as with the looming global recession–-the negative effects are tangible.
However, this is not the first time Sweden has faced problems of this kind. In the early 1990s Sweden experienced its own financial crisis and ensuing recession. With a widening budget deficit, the situation was dire. The government found itself in a position of having to make major budget cuts.
As taxes increased, the quality of important welfare services decreased. While Sweden was trying to counteract the recession, its national debt rose to 76.6% of GDP. The need to put public finances in order dominated the Swedish political debate for almost a decade. However, the structural reforms put in place during this period created a stable foundation for the Swedish economy, preparing us to tackle the effects of the international financial crisis now upon us in a different way.
A clear parallel between the earlier crisis in Sweden and today's global crisis is excessively optimistic lending based on real estate-backed securities rather than on solvency. The differences between the two crises, however, are decisive. Unlike the current global crisis, the Swedish crisis was a national one. Several Swedish banks had substantial insolvency problems due to major credit losses in the domestic market. Due to insufficient information on the banks’ credit portfolios, foreign investors’ confidence in the Swedish banking system was destroyed. Today's crisis is global; the challenge is to restore confidence in the financial system, where problems are rooted in complex financial instruments held by many banks in many countries.
Although today's crisis differs from the one we had to deal with in the 1990s, the earlier crisis taught us that we need to do our homework properly–-a lesson which we are benefiting from today. The crisis of the 1990s provided a window of opportunity to carry out a number of reforms that solved some of Sweden's most acute problems. A consensus emerged on the need to improve the framework and goals of economic policy:
the budget process was reformed;
clear targets for inflation and public finances brought greater stability to the Swedish economy and helped balance public finances;
the credibility of our monetary policy was strengthened when the Riksbank (Sweden's Central Bank) was guaranteed independence in 1999;
a tax reform was implemented, amending the worst parts of the Swedish tax system;
the pension system was reformed.
In the early 1990s Sweden had three serious economic problems to solve: first, to balance public finances and reduce indebtedness; second, to achieve a new path to higher growth; and third, to restore full employment.
The structural and fiscal policy reforms helped solve the first two of these problems. In macroeconomic terms, the Swedish economy was in better shape at the end of the 1990s than it was at the beginning. Public finances were consolidated and were among the strongest in the Organisation for Economic Co-operation and Development (OECD) area. The inflation rate had dropped below the level of other EU countries. Growth was to be very strong over the next 10 years.
Solving these problems was not easy, however, and nothing could be achieved overnight. The crisis in Sweden demanded that we stay on track even though other countries claimed they had better ways to achieve prosperity. This vigilance has been especially important in recent years.
The economic boom we witnessed before the current crisis expanded the scope of government reform. Some political leaders, however, were more interested in improving their next opinion poll results than in improving conditions and shouldering responsibility to meet the recession everybody knew was coming but no one saw.
The Swedish government did not listen to those who advised it to spend all its money right away. Instead, it improved labour market conditions and put forward reforms to strengthen the business sector for the long term. These measures allowed it to meet the current economic downturn with one of Europe's most expansive budgets while still conforming to provisions of the Stability and Growth Pact.
In the plan for European economic recovery presented by the Commission at the end of November 2008, governments are urged to promptly stimulate their economies by 1% of GDP. In line with the Commission stimulus plan, the European Council has approved a recovery plan based on measures corresponding to about 1.5% of EU GDP. In total, the Swedish Government's measures amount to approximately SEK 40 billion, or about 1.3% of GDP.
I see a worrying trend in some discussions of economic policy. The view that money is a free commodity, readily available to anyone, has put us in the situation we are today. Yet some governments seem to be adopting that view, increasing spending and knowingly creating budget deficits that go well beyond the limits set out in the Stability and Growth Pact.
The present situation poses a serious threat to the credibility of the Pact. It is essential, therefore, that we immediately begin to discuss how to return to our medium-term objectives. Experience has taught us that when clear targets for inflation and public finances are set aside, a new crisis will emerge–-one that will effectively force governments to cut spending on important welfare services.
The real issue is governments’ efforts to spend their way out of the crisis when the focus should be on fixing the financial markets. Stimulus package after stimulus package can never replace the central role of these markets in providing capital to businesses.
Indeed, in its Economic Survey of the Euro Area 2009, the OECD pointed out that the current episode of financial instability has highlighted the need for adequate regulation of financial activity. Reaction to the crisis must avoid undermining longer-term objectives. The long-range challenges that remain include achieving fiscal sustainability, improving macroeconomic resilience and raising living standards–-all by enhancing structural reforms in European markets.
Today, Europe faces three interconnected challenges. We must restore confidence in the financial system for the economy to recover. We must meet the recession needs with reforms that strengthen the labour markets so as to guarantee continued growth. And finally, we have to focus on the long-term challenges ahead of us–-in particular, combating climate change. If the latter issue is appropriately addressed, it can help meet the first two challenges.
All these challenges require that our individual nations be in good shape so that we can act together as a strong European Union. The reason for this is clear: Europe's strength is dependent on individual Member States acting together. Joint strength will always be determined by the strength we can deliver as individual Member States.
In times of crisis we must always remind ourselves of the need for European cooperation. We can rebuild it by using as a foundation the common values shared by Europeans. The principles of transparency, openness, free trade and cooperation can together become a powerful force for continued European integration.
Common European regulation of financial markets can be a model for other nations to follow. It can be seen as a type of micro-globalisation in which forums are established for governments to discuss joint challenges and coordinate responses to them. Such responses include focusing on removing border obstacles, working together enabling people to live in one country and work in another, and identifying new areas where cooperation benefits all parties.
In the wake of the financial crisis, one area where Europe must act together, and as individual Member States, is in tackling rising unemployment. I believe that a sound European strategy for job growth should be built on five pillars.
First, make work pay. There is a direct link between participation in the labour market and the difference that job income makes in the economy. Consistently implementing a major employment tax credit for low- and medium-income earners provides incentives for people to move from exclusion to inclusion in the labour market.
Full employment is not viewed with scepticism by parties on the European centre-right. But there is a well-founded view that governments, while claiming to address that goal, are unable to make the right decisions that create incentives for increased inclusion in the labour market.
Instead, they tend to favour inefficient and blunt labour market training programmes to improve unemployment figures. A government truly committed to the policy of full employment, however, possesses one of the most powerful tools for dealing with the current recession. By setting a clear goal that every able person should participate in the labour market, the government can focus on creating incentives for continued growth.
Second, make it more worthwhile and easier to hire staff. Besides implementing reforms aimed at increasing incomes for those who work, we must also do our utmost to lower the barriers for those who are most detached from the labour market. It is therefore imperative to encourage more employers to take on new employees. In particular, this will mean trying to increase the demand for labour with relatively low productivity and weak connections to the labour market.
An effective tool for reaching this goal is the introduction of reforms that offer employers tax relief equivalent to the social security contributions they make for new employees who had been unemployed or outside the labour market for a long time. By giving employers incentives to hire people who are further away from the labour market, we deal with the widespread exclusion of such people in society.
Third, offer better matching of workers and programmes. In the case of Sweden, the former active labour market policy was designed to produce low unemployment figures by ‘hiding away’ people who were able to work in programmes created to run alongside the regular labour market. The programmes maintained high enrolment volumes and placed too much emphasis on training and measures that served to reduce the labour supply.
Fourth, make it more worthwhile and easier to start and run a business. Europeans are well educated and quick to adopt new technologies. The business sector is innovative, undertakes extensive research and development and has a strong financial capacity. Even so, it is important to make continuous improvements in the overall business climate in order to maintain the strong position of European business in the increasingly integrated world economy. Focusing on reform measures for more jobs, higher employment and lower unemployment is, of course, important. Lower unemployment and less exclusion will lead to increased welfare.
Fifth, continue to work towards integrating the European economies. Europe has proven its ability to think outside the box, particularly in the Lisbon Strategy. Still, this strategy can only be as effective as Member States allow it to be. A fully integrated internal market is still far off, and the economic stability of the European Union is uncertain due to massive increases in public spending in the wake of the economic recession. These stimulus packages run the risk of increasing the level of protectionism, not only against the outside world, but also against other Member States. It is in times of crisis that the will to work together is tested.
But protectionism is not the only threat to continued European integration. We also see how demands are made to close borders instead of opening them. It is easy to understand how those who have just lost their job to another EU citizen or someone from another part of the world feel threatened by deeper integration. Offices closing, factories shutting down and production moving to other parts of the world–-these are trends that we have seen for several decades.
If globalisation is to enjoy continued broad support among citizens, policymakers must be able to guarantee that growth will continue in other sectors of the economy, and that the quality of new jobs created corresponds to that of jobs lost. The challenges posed by this ‘creative destruction’ are very real. But by cooperating we can find the tools necessary to lay the foundation for growth in other markets. This leads me to the third of the challenges introduced above: climate change.
Global warming is real. It is already happening. No one these days can remain unaffected by the reports and pictures of the phenomenon. These show us the very serious consequences that lie in store for our planet and for future generations if we do not succeed in formulating a policy for long-term sustainable development.
Sweden has a long tradition of taking an active and assertive role in shaping environmental policy, and it intends to continue to do so with renewed vigour. An important task of this renewal is to expose the myth that growth is the enemy of the environment. Sweden is living proof that the opposite is true; the Swedish economy has grown by 44% since 1990 while emissions have declined by 9%.
On this basis, we have formulated an environmental policy in which climate targets are linked to credible measures that do not conflict with growth and jobs. We believe that investments in research and new technology, together with fiscal and regulatory revisions, can pave the way for development in which the environment becomes a lever for new enterprises and new jobs. This model promotes both climate care and growth.
However, an important starting point for a credible climate policy is to acknowledge that the 0.2% of world greenhouse gas emissions produced by Sweden does not in itself constitute a global problem. In practice, our national actions will have no global impact unless they are also accompanied by efforts to unite the world around joint action. We therefore recognise the need to supplement our national actions with an endeavour to seek global solutions and international cooperation.
An important part of this effort will be to get more parties to join negotiations towards a new climate regime after 2012. The EU must show that it is willing and able to take responsibility for this, and that it is possible to work together to achieve the ambitious goals we hope to establish in Copenhagen later this year. The environment will become one of the main issues facing the Swedish EU Presidency later this year.
Taking the lead in talks must go hand in hand with a willingness to take the lead in action. To enable Europe to take a leading role in fighting global climate change, the decisions of the European Council in March of 2007 were of great importance. Even though they were not enough, the decisions set a very strong example; they showed that all EU Member States could agree on an independent commitment to reduce their emissions of greenhouse gases by 20% by 2020 and by 30% within an international agreement, while also increasing the share of renewable energy.
I believe in showing leadership at the national level by setting a good example, and at the international level by acting to unite Europe and the world behind joint climate commitments. How, then, is climate linked to the financial system? Financial markets provide capital needed to realise inventions and business ideas. If this capital does not reach new segments of the market, new businesses that can provide unique assets to the economy will never succeed.
Without investments in green technology, smarter ways to handle our limited resources will never proliferate. We will lose the opportunity to turn the challenge of climate change into an opportunity for continued growth. According to recent research, in 2050 the market for green technology could potentially have a total value of three thousand billion US dollars and employ more than 25 million people. Strengthening the financial system, therefore, will provide adequate tools for combating climate change as well as restoring economic stability.
In my view, the relevant areas for future work are the following: strengthened international financial institutions, a review of the international rules and standards and enhanced cooperation between authorities. I would also argue that regulations for the financial market and its players should be few but efficient. Above all, the regulations must be not only shaped, accepted and followed in Europe but also endorsed globally.
The Bretton Woods Institutions will be of great importance in achieving this, since they are forums for international cooperation and deliberation on global problems, and they represent all countries. We should strengthen and make full use of them. However, the institutions can function effectively only if their member countries allow them to do so. It is therefore imperative that all Member States commit to the commonly agreed instruments and abide by the same standards.
It is important that any governance reforms of the Bretton Woods Institutions are legitimate, inclusive and transparent. To ensure the legitimacy of reforms, decisions should be made and discussions held in the established governing bodies of these institutions. The legitimate reform processes that are already under way within these institutions should be respected. Most importantly, new regulations must not be rushed. Reform will need time and consideration and it must secure broad support among the entities affected by it.
An international crisis demands an international response. Yet an effective framework for dealing with these issues is missing. In response, several world leaders have recognised the need to reform global institutions. Sweden will be an active participant in this work. The Presidency of a union comprising 27 Member States and approximately 500 million people needs to prioritise economic stability.
As mentioned earlier, this work must be carried out in close cooperation not only with EU institutions but also with global institutions and regional players. Again, it is important that any governance reforms of the Bretton Woods Institutions are transparent and that decisions are made in the established governing bodies of these institutions.
But while the cold winds of the financial crisis blow across the globe, the principles of transparency, free trade, cooperation and openness run the risk of being questioned. Old ideas about closed borders and protectionism as a shield against foreign influences threaten to be dusted off and presented as rational policy alternatives.
In times like these, it is easy to surrender to those who demand trade barriers or who claim that short-sighted national interests must come first. But these people forget why the European Union was once founded. They forget that closed borders and mistrust have been experienced before. Such responses did not work in the past, and we realised that in a number of fields, continued development could only be achieved by integrating our different economies and cultures.
In today's world we all have a choice: spin the wheel of fortune or learn to navigate. Individual nations and their actions will always be important, even in a globalised world, but our ability to find solutions to our common problems will demand increased international cooperation.
Footnotes