Swedbank was founded in 1820, as Sweden’s first savings bank was established. Today, our heritage is visible in that we truly are a bank for each and every one and in that we still strive to contribute to a sustainable development of society and our environment. We are strongly committed to society as a whole and keen to help bring about a sustainable form of societal development. Our Swedish operations hold an ISO 14001 environmental certification, and environmental work is an integral part of our business activities.

1. To the Point
Discussion on the economy, by the Chief Economist July 2, 2010
Cecilia Hermansson
Chief Economist
Economic Research Department
+46-8-5859 7720
cecilia.hermansson@swedbank.com
No. 5
2010 07 02
Time to create growth-oriented fiscal policy
The global recession and financial crisis have put pressure on politicians to
act in a responsible manner. As many advanced countries must consolidate
budgets and reduce debt, demand is likely to dampen. Thus, fiscal policy
must be carried out in a way that sustains growth prospects as much as
possible. This means finding the right balance between cutting expenditures
and increasing taxes, and safeguarding areas that contribute to higher
medium- and long-term growth, viz., infrastructure, education, and
innovation, so that increased productivity can compensate for some of the
loss in demand. There is also a “quality dimension” in the area of growth that
involves looking for more sustainable growth in a social, economic, and
environmental perspective.
The quality dimension of growth
In a prosperous society, the view is from time to time expressed that there is
too much focus on growth. Why would growth and increased consumption
be better than the opposite? some ask. And why so much focus on the details
on GDP growth, when the real issue is how to steer the economy in a
balanced way, away from debt and environmental degradation?
At the same time, actors on the financial markets are concerned with the lack
of growth, and turbulence is increasing. With the debt-stricken advanced
economies, and with the need for deleveraging in both the private and the
public sectors, how can growth be sustained, and - if not - what are the
implications for financial assets?
So, is there too much fuss about growth – or too little?
I believe that growth is important. Without growth, it will be difficult to
safeguard employment and welfare. We must try to measure growth even if it
is difficult, and at the same time bring in the quality dimension. At this stage,
it is not possible to continue building societies in the western world by
increasing debt. Better living standards must come from higher value in
production, and from investments and consumption that lead to sustainable
development. By investing in environmentally friendly technology, the
economy is expanding, and so is growth. There is a market for “responsible
investments (RI) “ that is growing.
The concerns on the financial markets are also valid. The challenge is to
maintain the recovery in the world economy – or the advanced economies –
while withdrawing stimulus measures. At the same time, sovereign debt and
fiscal deficits have reached proportions that creditors are no longer prepared
to support, and therefore budget consolidation is a must for those countries
that are highly indebted and lack a reasonable balance between revenues and
expenditures in their budgets. With austerity measures, growth will be
dampened, and the risk for a new recession increases, especially in Europe.

2. To the Point (continued)
July 2, 2010
2
Chart 1: GDP-growth in major economies
2000-2010
Source: Reuters EcoWin
00 01 02 03 04 05 06 07 08 09
Procent
-12.5
-10.0
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
12.5
15.0
Japan
China
US India
Germany
Russia
Chart 2: Developments on financial and
commodity markets 2008-2010
Source: Reuters EcoWin
jan
08
apr jul okt jan
09
apr jul okt jan
10
apr
75
100
125
150
175
200
225
250
275
300
US
Government
Bond 10 yr
S&P500
Commodity
index (USD)
Economic Research Department
SE-105 34 Stockholm, Sweden
Telephone +46-8-5859 1000
ek.sekr@swedbank.com
www.swedbank.com
Legally responsible publishers
Cecilia Hermansson
+46-8-5859 7720
The quality dimension of fiscal policy
Fiscal policy, too, must have a quality dimension. The challenge going
forward is to implement economic policies that combine budget consoli-
dation with growth-oriented measures. This is quite a task. Studies show that
growth is better maintained with cuts in expenditures than increases in taxes.
In the US, politicians have been used to cutting taxes and increasing
expenditures, but soon they will have to do the opposite. In Europe, the need
to consolidate budgets is more accepted, but there is a risk that, for example,
Germany – with a decent fiscal stance – becomes too frugal, thereby
worsening the prospects for Europe’s economic developments.
When focusing on reaching reasonable sovereign debt levels, the Maastricht
criteria threshold of 60% of GDP is often used. The advanced countries are
approaching levels above 100%, so the need to deleverage does exist, espec-
ially when taking into account rising health care expenditures and the nega-
tive impact of demographics on labour markets. Such high levels risk crowd-
ing out the private sector in the medium term and threaten to bring along
higher interest rates. Another and equally important reason for deleveraging
is that, if creditors are not prepared to finance a country’s sovereign debt, the
lack of new private loans to roll over existing debt could lead to default,
rescue packages, and debt restructuring. The rescue package for Greece is an
example that shows how contagion to other countries creates turbulence.
When countries deleverage and consolidate budgets, growth will be affected
negatively since household incomes dampen and demand is held back; this
also affects companies and employment. There are those who believe that
austerity will increase growth prospects, but I believe they have overlooked
the fact that it is more difficult to get positive growth effects when all
countries simultaneously implement contractionary policies, and when
interest rates already are low. Not all countries can export themselves out of
the crisis when demand weakens all over the world.
The negative effects could remain in the medium and long term, which is
why lower growth would have to be compensated for by higher productivity.
This is also why fiscal policy must be growth oriented. By safeguarding
investments in infrastructure, education, and innovation, there is a possibility
of enhancing growth in the medium term. Value added in production will
come from new technology and ideas, so the budgets for infrastructure and
research need to be safeguarded in both the governments’ and the companies’
budgets. This would be acting, as we said above, “in a responsible manner!”
Cecilia Hermansson
To the Point is published as a service to our customers. We believe that we have used reliable sources
and methods in the preparation of the analyses reported in this publication. However, we cannot
guarantee the accuracy or completeness of the report and cannot be held responsible for any error or
omission in the underlying material or its use. Readers are encouraged to base any (investment)
decisions on other material as well. Neither Swedbank nor its employees may be held responsible for
losses or damages, direct or indirect, owing to any errors or omissions in To the Point.