“As a socialist, I have always said that the market can’t regulate itself,” she said. “But even I was surprised how strong the failure was.”

These are the words of Norway’s Finance Minister Kristin Halvorsen from the political party Socialist Left (SV), which is part of the current centre-left government coalition in Norway. The words come from an article in the Global Business section of The New York Times, which praises the economic management of the Norwegian state, among other things  how it has stuck with its social democratic welfare model through boom and bust.

The global financial crisis has brought low the economies of just about every country on earth. But not Norway.

With a quirky contrariness as deeply etched in the national character as the fjords carved into its rugged landscape, Norway has thrived by going its own way. When others splurged, it saved. When others sought to limit the role of government, Norway strengthened its cradle-to-grave welfare state.

And in the midst of the worst global downturn since the Depression, Norway’s economy grew last year by just under 3 percent. The government enjoys a budget surplus of 11 percent and its ledger is entirely free of debt.

The debt free government is of course something the current centre-left coalition can’t take the credit for alone. The Norwegian government has passed between Labour, centre-right and centre-left governments for the last decade.  Since 1990, there has been a broad consensus in the Norwegian parliament for a programme of  national savings in a government pension fund, to preserve value for future generations and avoid “Dutch disease“. I mentioned this policy in an earlier post on this blog.

The description of Norway as always sticking with its welfare model is another issue, though. Norway did go through a phase of privatization of welfare, for example the schooling system, during the last government, but this was abruptly stopped by the centre-left Stoltenberg administration when it came into power four years ago. Of course this didn’t necessarily affect government expenditure.

If the right wing were to come into power in the upcoming parliament elections, we might see another shift in this policy. Although supportive of the need for government stimuli to the economy, their preferred stimuli come in the form of tax cuts rather than the countercyclic government expenditures the current government favours. Last week’s conservative party congress heavily emphasized this.

(Hat tip to Tromp for bringing this to my attention).

But as multiple people have blogged, this isn’t just a matter of the infamous tight-fistedness of Germany’s fiscal and monetary policy, born out of the ashes of Weimar; it’s genuinely harder for Europe to run a stimulative policy.  For one thing, they can’t coordinate a broad European policy, which means that any government will see substantial amount of any stimulus “leak” abroad–and also that there is great temptation to free ride.  For another, they aren’t the world reserve currency, so they can’t borrow on the same lavish, practically interest-free scale as the US Treasury.

I think she’s right on this one. The nature of the EU, especially after introduction of the Euro, is fiscal conservatism on the European level. It is the first time in EU history that intervention in fiscal policy on this scale is even a topic of discussion, and it’s clear that the member states with the biggest needs are the one with the least means – Eastern Europe. On the state level there is the freeloader problem to contend with – a side effect of the common market. It is hard for a government within a common market and a monetary union to spend taxpayers’ money without being able to guarantee that those taxpayers will benefit in terms of jobs at home. No single state wants to take the initiative without being sure the others will split the bill, so to speak. All of this is quite consistent with Le Maire’s and Sarkozy’s focus on pushing for international solutions. One could argue that the issue of “leaks” abroad is just as bad for the US, but it does have a different tradition from especially France and Germany when it comes to taking the position as world leader and accepting that “what is good for the world economy is good for the United States.”

[...] to give more economic oversight power to the International Monetary Fund, and more financial oversight to an institution that would derive from the Financial Stability Forum, a group that brings together senior representatives of national financial authorities, regulators, central banks and international financial institutions.

The French leader is pushing for the G-20 to endorse accounting rules that reduce boom and bust economic cycles, and to regulate hedge funds and rating agencies. He’s calling for rules that would force banks to disclose traders pay to regulators, which could in turn ask financial institutions to increase reserves if their compensation system encourages risk taking.

The French do seem to be taking a confrontational line to get international actors to work together. This might possibly just be a display from Sarkozy’s side to show his domestic audience that he is taking action, without having to dig too deep into France’s own coffers. His moral-religious rhetoric seems to support this theory.

The spectacular collapse of some of the post-communist tiger economies led to demands at an EU summit in Brussels for a rescue fund of €190 billion (£170 billion) to stop social collapse in the Eastern nations spilling over into the rest of Europe.

The plea, led by Hungary, was rejected in a bad-tempered meeting of the 27 European leaders, dominated by fears that Western EU countries would rather prop up their own large industries and jobs at the expense of the East.

Ferenc Gyurcsany, the Hungarian leader, openly raised the spectre of collapse in Eastern Europe and the creation of a new Iron Curtain.

“Central Europe’s refinancing needs in 2009 could total €300 billion, 30 per cent of the region’s GDP,” he said in a paper calling for a fund of €160 billion to €190 billion to be set up by the richer EU members.

“A significant crisis in Eastern Europe would trigger political tensions and immigration pressures. With a Central and Eastern European population of 350 million, of which 100 million are in the EU, a 10 per cent increase in unemployment would lead to at least five million unemployed people within the EU.” (timesonline.co.uk)

Yahoo! News doesn’t have quite the same bleak outlook:

However, EU leaders opted instead for a case-by-case approach to helping troubled countries in the region “on the basis of all available instruments,” according to a statement issued after the summit.

“This idea of dividing up into old member state countries, eurozone countries, non-eurozone countries, north against south, or east against west, that is clearly an approach we rejected,” said.

European Commission President Jose Manuel Barroso said it was the eastern European countries that had said “they do not want a programme just for them.” as “there is a great diversity of situations.” (news.yahoo.com)

So, the EU family has either let its poor eastern brothers out to dry, or it is just about to implement case-by-case help packages. If no action is taken at all, it could become a massive problem for the EU as the crisis is likely to spill over into the political sphere. Not only should we expect to see much less public support for the union, but also, as Professor Nouriel Robini writes:

Deeply unpopular austerity measures, including slashed public wages, tax hikes and curbs on social spending will keep fanning public discontent in the Baltic states, Hungary and Romania. Dissatisfaction linked to the economic woes will be amplified in the countries where governments have been weakened by high-profile corruption and fraud scandals (Latvia, Lithuania, Hungary, Romania and Bulgaria).

The political forces most likely to benefit from public disaffection are those running on populist platforms, which could disrupt efforts to battle the effects of the economic crisis. Latvia could be a case in point, as there are growing concerns that the coming election campaign might suspend the fiscal austerity measures required by the IMF bail-out package. Two other political hot spots that are at risk of early elections are Romania and Estonia, while Bulgarian national elections are due in mid-2009.

In sum, the crisis could put the E.U.’s free market rules under pressure. A big rise in support for populist and radical parties in the region could put social, structural and environmental reforms on hold and even call into question the economic and political model Eastern European countries have followed since the 1990s. (Forbes.com)

And should this come true, the EU is in great trouble. I have been a EU sceptic for quite a while, at least as far as Norwegian membership is concerned. But as much as I might dislike some aspects of the EU, I don’t want to see a massive economic downturn spreading all over Europe.