1. GLOBALIZATION & IT How will Europe and Sweden cope with the challenges of the 21st century? Klas Eklund Chief Economist SEB SACC, Oct. 1999

2. GLOBALIZATION New markets: The greatest economic transformation in the history of humankind From trade… …through free capital markets… …to rapid diffusion of new technology Means new challenges to the old industrialized world No control room for the MoF Tough limits on fiscal and monetary policy

3. ALSO STRUCTURES CONVERGE The Anglo-Saxon free market model has triumphed …over the planned economy, the welfare state and the “Asian model” Increasing pressure for deregulation and free markets Tax structures converge as tax bases turn more mobile Single currency in Europe… … and currency boards and dollarization elsewhere Cultural trends spread rapidly Conclusion: We are truly becoming one world

4. IT: A NEW INDUSTRIAL REVOLUTION The third industrial revolution - after steam and electricity/internal combustion engine We ain’t seen nothin’ yet Speed & accessibility will give new patterns of communications and production A “new paradigm” of growth may be possible... …but creative destruction will be painful …both on the micro and macro levels

5. THE NEED TO RESTRUCTURE The network economy promotes free exchange of information Flatter organizations and flexibility Low inflation …all of which puts pressure on the rigid European economies …who suffer from inert labour markets, high taxes and small nation states EMU may help, but is not enough

6. EUROSCLEROSIS AND EMU Europe has been successful in crushing inflation - but not in promoting growth and employment EMU will increase economies of scale, enhance transparency, stiffen competition - and raise growth The euro has started weakly - but it will strengthen. And it has already created a huge bond market The euro-zone is not an optimal currency area. Thus risks - if markets do not become more flexible The long-term imperative: Cut taxes, deregulate and improve education.

7. A POLITICAL WILL FOR REFORM Globalizations increases pressure to reform Single market and single currency sharpen the need Increasing M&A activities Tax harmonization - downwards New policy signals –Blair & Schröder: The third way –Even Jospin is shaping up Conclusion: The potential is there - as well as the obstacles

8. SWEDEN IN PAIN The old Swedish model: Big business, big government, big unions The model cracked in the 1970’s Slow growth, devaluations and inflation in the 80’s 1990’s: The great water-shed: Over-heating, currency crisis, rate hikes, banking crisis, depression, unemployment, budget chaos The grim realization: We are not God’s chosen people! Forced gradual adaptation

9. GRUDGING ADAPTATION 1990-91: Deregulation of credits and currency markets 1991: Exhaustive tax reform 1992-94: Restructuring of banking system From 1993: Floating exchange rate 1994-95: Cuts of compensation levels 1995: EU membership 1995: Independent central bank, with inflation target 1995-96: Fiscal tightening against the deficit 1996: Pension reform 1996: Budget reform, with expenditure ceilings

10. THE RESULTS Well consolidated banks Current account surplus Budget surplus Low inflation Low interest rates Gradually diminishing unemployment Rapid productivity growth And now, finally: Consumption returns But a nagging uncertainty: Are these results sustainable?

11. THE POLITICAL SCENE SDP used to have a hegemonic position Threatened as the model cracked, communism collapsed and the tax ceiling was reached SDP has gradually shifted to the middle …but without a change of rhetoric Creates confusion among the rank and file - and lower popular support Poor election results But the opposition is split between right and left, which means SDP can still stay in power Now: Persson leans left - for how long?

12. THE STRUCTURE WEF: Sweden ranks high on technology, infra-structure and management. Low on public sector and taxes. Swedish export industry is extremely competitive But the base and renewal of manufacturing is in doubt A rigid labour market, stiff legislation for small firms Mobile tax bases puts pressure on tax revenue A growing exodus caused by high taxes, geography and lack of highly educated people But also inflow of investments into manufacturing A ray of hope: Growing software and culture sectors The financial sector: Modern and hi-tech after deregulation - but M&A loom on the horizon

13. ADVANCED IT AND FINANCIAL SECTORS Sweden is one of the most wired nations on earth Extremely successful exports of music, culture, computer games, telecommunications and software The financial sector’s technical sophistication is second only to the US Internet banking has reached further than anywhere else SEB: at the forefront –Successful internet site - expanding portal –Electronic trading station –We move the market place to the customer

14. THE SWEDISH ECONOMY TODAY: STRONG GROWTH Strong growth, driven by both exports and consumption: After a decade, private consumption rebounds Lower unemployment Budget surplus suffices for both tax cuts & debt reduction Higher but still moderate inflation Tighter monetary policy ahead The risks: Fiscal policy and wages. Will Sweden slip back into its old bad habits again?

15. GDP GROWTH

16. FORECASTS 1998199920002001 GDP2,64,03,83,5 Export6,96,66,14,5 Private consumption2,43,14,44,1 Savings rate3,82,72,43,3 Unemployment6,55,55,04,5 Wage costs 3,83,84,44,6 Current account1,91,41,10,6 Inflation (CPI) 0,40,41,92,8 Genl govt balance1,92,63,02,5

17. BUDGET DEFICIT/SURPLUS

18. FISCAL POLICY (bln SEK) 20002001 Earned income allowance820 Adjustment of threshold1,51,5 Lower tax on rental prop.0,80,8 “Expert” tax0,040,04 Double taxation07 Wealth tax03 Local government grants510 Other58 TOTALca 20 ca 50

19. PRO-CYCLICAL FISCAL POLICY Also after tax cuts, there will be a rapid amortization of debt Fiscal policy becomes more expansionary in a period of strong consumption-lead growth. The policy mix is risky - but still, tax cuts are needed Conclusion: The pressure on the Riksbank is increasing But with a floating exchange rate the Riksbank is free to counteract inflationary pressures

20. WHAT OUGHT TO BE DONE? Dampen consumption growth: –Tax cuts to stimulate savings (capital income & wealth taxation) Increase potential GDP growth & and capacity: –Improve business climate, stimulate investments (double taxation & coperate taxation Increase labour force: –Stronger incentives to work (duration and level of unemployment benefit levels, marginal taxes, union strength etc) Long term: –Tax reform to stimulate entrepreneurs, higher quality in education Conclusion: Structural problems not dealt with fully

21. INFLATION Inflation will rise: –Strong global and domestic demand –Tight labour market –Expansionary fiscal policy –Low real yields But not as much as it used to: –Global and technological pressure –Monetary regime more credible –Transmission mechanism more efficient –Structural improvements Pipeline indicators benign Conclusion: Inflation increases - but not much

22. MONETARY POLICY The Riksbank is uncertain –Optimistic inflation propensity –More dependant on pipeline indicators The Riksbank will be cautious –Takes time to change forecast –Pedagogical problems –Symmetric target –Uncertainties regarding fiscal policy –… and the Executive Board is split Pre-emptive, careful move later this autumn, but next year gradual tightening will follow Substantial tightening needed (275 bps)

23. REPO RATE FORECAST

24. INFLATION FORECAST

25. SHORT REAL RATE

26. EMU MEMBERSHIP POSTPONED Sweden outside the first member group, for domestic political reasons Prime Ministerial fast track last winter became blind alley after SDP defeat in EU parliamentary elections Party leadership governed by tactical considerations - but in the long term membership is unavoidable SDP will say: “Yes, but later” (UK Labour position) Earliest decision in 2002 election or later referendum Conclusion: ERM off the agenda for now Floating exchange rate will stay

27. FINANCIAL MARKETS Stronger krona –High growth, expansionary fiscal policy and tighter monetary policy –Credible economic regime –The krona is undervalued Stable bond yield spread to Germany –Sweden outside EMU, slightly higher inflation –but strong fundamentals The yield curve will flatten - next year –Riksbank timing is crucial

28. THE KRONA

29. THE YIELD CURVE

30. SWEDISH RISKS The window of opportunity may not be exploited Structural transformation may be stopped Even more expansionary fiscal policy Too high wage increases The Riksbank reacts too little and too late But even so, Sweden looks strong - at least for the foreseeable future...