Lessons from our friends in the North

The secrets of the Nordic model that has appeared immune to the crisis engulfing the rest of Europe

By Alyson JK Bailes

The European Union’s southern member states – Greece, Italy, Spain and Portugal – have become the sick men of Europe, helping to turn the EU into one of the sicker regions of the world. In contrast, Denmark, Finland, Norway and Sweden have stood out by keeping much of their reputation and self-confidence intact, as well as retaining decent growth figures.

This has been achieved without swingeing budget cuts or reneging on social obligations. These countries still exhibit the combination of efficient production, high tax and high living standards that has been called a ‘third way’ or ‘Nordic model’ in the past, and which is now seizing attention again for its apparent crisis-busting properties.

The misfortunes of Iceland – the smallest Nordic country – arguably prove the rule. Under a series of centre-right governments it privatized most strategic sectors and let the banking industry expand practically free of regulation. These were deviations from the supposed Nordic model even if Icelandic social policies remained generous. In addition, Iceland’s adversarial political culture was and remains more American or British than Scandinavian in spirit: aggravating the risk of special interest groups manipulating policy, but also making it harder for the country to pull together in a crisis. 

Iceland aside, there is reason to ask what the Nordics may be doing right that the southern Europeans – and Irish – have got wrong. But how complete is this contrast? 

By their own reserved, consensus-loving standards, the Nordics have experienced major dramas since 2008. Denmark as well as Iceland saw landslides from Right to Left in post-crisis elections, producing governments that have struggled to maintain authority. In Sweden and Finland, new nationalist and anti-EU parties have achieved parliamentary representation. In Norway, the Breivik tragedy could hardly be blamed on the euro crisis, but it brought painful soul-searching over how a Norwegian could do such things and why the police responded so ineptly. 

In economic terms, too, the Nordics’ fast rebound after 2009 now shows signs of slowing. Swedish growth for instance fell from 5.7 per cent in 2010 to 4.2 per cent in 2011, while Finland and Denmark remained static. That Sweden became the first EU member to introduce a pro-growth budget in 2012 is noteworthy for the fact that its canny Finance Minister, Anders Borg, found it necessary.

Differences of ‘model’

Even so, enough evidence remains of Nordic economic robustness – Iceland aside – in the current crisis to make it tempting to talk of a potential ‘Nordic model’. The question is where to find it and by what means and measures can it safely be outlined. To a non-economist like myself, the economy seems to give no simple answers – at least, if all key features are included. For example, the Nordics are among the world’s top countries in terms of proportion of employees in public service. Norway has 34.5 per cent, and Denmark has 31.5 per cent, which makes Greece’s 20.7 per cent look fairly modest. (All data here and subsequently comes from the World Bank, Eurostat, and the CIA World Factbook.) External debts correspond to 180 per cent, 155 per cent, 141 per cent and 187 per cent of Gross Domestic Product in Denmark, Finland, Norway and Sweden respectively, compared with 217 per cent, 108 per cent, 174 per cent and 84 per cent for Portugal, Italy, Greece and Spain. Nordic national unemployment rates range from 3 per cent to 8 per cent compared to 10 per cent to 25 per cent in southern Europe: but levels like the latter could be found in outlying Nordic provinces, and Nordic figures would also be higher if fewer people were registered – often dubiously – as long-term sick.

Where the contrast seems undeniable is in the fact that Nordic taxes are not only high, but also effectively collected: and in the productivity of labour. The GDP added per individual hour worked ranges from $47 to $77 in the four Nordic states and only $25 to $44 in the four countries of southern Europe. There is no reason to suppose that this level of efficiency does not include public servants. This could partly reflect average levels of education that in the North are well above those of Portugal, Italy and Greece, though not those of Spain. One might also suggest that the Nordic version of corruption mainly involves collusion between private and public sector leaders that tends to bolster economic robustness, rather than the draining of resources into a large grey-black economy and foreign bank accounts. 

Fundamental structural differences, however, also matter. The Nordics have small populations (between 4 million and 9 million) and internal markets, combined with large industries and some large service sectors, for example Norwegian shipping and insurance. Only a small percentage work in agriculture and have all the mechanization they need, as well as collectivized marketing. Small and medium-sized enterprises are relatively unimportant. All this surely favours productivity and steady technological progress, while supporting external competitiveness. The share of exports in GDP ranges from 39 per cent to 58 per cent for the five Nordics as against 24 per cent to 35 per cent for the southern Europeans. 

Geography and geopolitics

Yet good exports mean nothing without good customers, and here we come to factors less under human control. With the exception of Iceland again, the Nordics sell mostly to Germany, to each other, to northwestern Europe and other northern hemisphere partners, including a positive trade balance with China. They have consciously limited their exposure to the EU market and, of course, only Finland uses the euro. Their investments abroad are similarly wide-ranging and only demanded quick rescue efforts in the Baltic States – Latvia, Lithuania and Estonia – which all went into crisis in 2008 but have swallowed bitter medicine to promote their own recovery. Geography thus helps explain why the European ‘contagion’ has not, or only gradually, touched Nordic economies; and also why Nordic politicians seem short of empathy for suffering southerners. 

In wider geopolitical terms, the Nordic states benefit from some of Europe’s most limited burdens and liabilities. They have no former colonies or even clients, now that the Baltic states stand on their own feet. They rely in practice on NATO, especially the United States, for strategic protection and can thus keep defence spending modest in proportion to GDP – up to 1.6 per cent for Finland and Norway compared with 3 per cent in Greece. They support relatively few foreign immigrants and are unlikely to face sudden, costly and socially destabilizing influxes. Terrorism, Anders Breivik apart, and major crime are virtually unknown.

Contrast Greece, next door to the Balkans, or Italy, Spain and Portugal, facing a poor and unstable Mediterranean region, and now confronting all the turbulence of the Arab Spring. If a new geopolitical horizon opens for the Nordics it will be the enhanced exploitation of the Arctic following ice melting, from which all of them hope to profit and which is most unlikely to generate conflict.

Corruption apart, it is not easy to pinpoint common Nordic political features. The countries range from being highly centralized to highly devolved, from those that respect central authority – especially in crises – to those that distrust it. Public-private sector togetherness is rather weak in Sweden and strong in Finland and Denmark. Since 2008, as noted, some nations have swung Left and some further Right. 

There is a theory that all small states share at least a certain flexibility and ease of changing course adaptively. That might help explain the Nordic ability to ride out the storm. But probably more important is that none of the Nordic states faced the 2008 crash unprepared. Sweden and Finland suffered serious crises in the early 1990s, when Denmark also had to bail out the Faroe Islands. 

Norway has never stopped thinking about the sustainability of its oil wealth and recently studied possible shocks from global interdependence. Lessons learnt in the process helped Nordic leaders to make rapid adjustments, while the Nordic people either saw the need for discipline or – cushioned by higher incomes and social protection – had a higher threshold of patience before going out and burning cars. Iceland once again is the exception, having paid heavily for ignoring lessons that it should have learnt from runs on its currency in previous years.

If this makes sense, longer-term prospects for the whole eurozone may depend less on specific economic or political models, and more on what the nations manage to learn, how quickly and how resolutely. Some of those lessons may certainly draw upon Northern examples. But short of towing Southern Europe into the Baltic region, the broader geo-political and geo-economic odds are against building another North as such.