Saturday, November 13, 2010

Blame Norway

Usually when surplus nations are blamed for global imbalances, it is China and/or Germany that are criticized. But now I see via Scott Sumner that Sweden is attacked for having a too high surplus (Sweden's annual surplus was SEK 232 billion in 2009, or somewhat below $35 billion). Its recommendations for reducing the surplus are the following:

"Its fiscal policy should be more expansionary; it should encourage currency appreciation; and it should open its domestic market to foreign goods."

Yet regarding the first point, fiscal policy is already relatively expansionary with both tax cuts (on pensions) and spending increases promised for next year. While it would be possible to do even more, too radical moves would endanger fiscal soundness.

Regarding currency appreciation, it is not clear how this should be done since Sweden's government has almost no foreign assets. It could increase foreign currency debt, but too much of that is risky. Raising interest rates would work, but that would also reduce credit demand, meaning that the trade surplus might not drop.

And as for the point about trade policy, that would be nice if it was possible, but it isn't since Sweden is part of the EU and the EU has a common trade policy.

If you want to criticize a Scandinavian nation whose government pursues a policy of artificially creating a massive external surplus, Sweden is not the appropriate target.

Neighboring Norway had a surplus of NOK 311 billion in 2009, or roughly $52 billion, about 1,5 times as much as Sweden. And unlike in Sweden, this surplus was largely the result of the massive purchases of foreign assets by its sovereign wealth fund, who holds assets of more than $500 billion. Relative to GDP, that is much more than China's foreign exchange reserves.

Norway's government should, both to reduce global imbalances and give its people a break stop or at least reduce its purchases of foreign assets and instead reduce the tax burden of the Norwegian people. Unfortunately, that is not likely to happen as only the "populist" semi-libertarian Progress Party advocates this and they unfortunately only got 22.9% in the latest election.

The politicians and pundits bashing China and Germany should devote some of their attention to Norway to pressure its government to stop or at least reduce its purchases of foreign assets, so that global imbalances can be reduced and incidentally the Norwegian people can have increased freedom.