Nordics in Global Crisis. Vulnerability and resilience

During the past two years, the world has experienced its most severe slump since the Great Depression in the 1930s. The Nordic countries have been hit harder than most other countries. Due to its sharpness and depth, the current global financial and economic crisis has initiated a wide debate on the supposed self-correcting properties of the market economy, on the need for more effective regulation and supervision of financial markets, and on the role of macroeconomic stabilization policies. It has led to a re-evaluation of the role of monetary and fiscal policy. It calls into question the virtues of unfettered globalization, underlining the need for global institutions and cooperation. It throws new light on the costs and benefits of the welfare state and its risk- sharing mechanisms. The crisis is opening up a broad agenda of essential policy issues for renewed consideration. This is a report on the global financial and economic crisis from the point of view of small open economies with particular reference to the Nordic economies. The report discusses a number of important questions: Why were the Nordic countries hit hard by a crisis, which apparently had little if anything to do with the stability of their own financial systems or with their competitiveness in global markets? What have the Nordics done and what could they do to alleviate the domestic consequences of the crisis? What are the lessons of the crisis with regard to monetary policy and the different choices of monetary regime across the Nordic region? Is there need and scope for expansionary fiscal policy in small open economies even though fiscal multipliers may be small and large budget deficits may threaten public debt sustainability? How can fiscal consolidation and a resumption of economic growth best be reconciled? Should the Nordic countries reconsider their outward-looking growth model in view of a more unstable global economy? Is the Nordic socio-economic model an asset or a liability in the light of the crisis? The report offers an in-depth analysis of the macroeconomic issues faced by small open economies in a turbulent world economy. It outlines the main elements of the policies that should guide the Nordic countries in their search for less vulnerability and more resilience.