The Nordic economies' only sin is that they are small. Taken together, they make up only 24 million people -- about two thirds the size of California. Yet, with a combined GDP of over $1 trillion, they punch far above their demographic weight. India has 50x the Nordics population, yet its economy is 30% smaller.
The Nordics are both lucky and smart. With a population of only 4.6 million, tiny Norway -- as the world's third-biggest oil exporter after Saudi Arabia and Russia -- is the ultimate lucky "trust fund" baby. Yet it is also smart, saving 80% of its revenues into a petroleum fund to benefit future generations. Culturally, the Nordics may be the most open countries in the world. Danes and Swedes often use English for business meetings. Finland's Nokia has used English as its official language since the mid-1980s. English-language films and television are hardly ever dubbed. OMX Group, the Nordic exchange operator, lists brand names on its exchanges that are familiar to Americans: Nokia (NOK), Ericsson (ERIC) and Volvo (VOLV). As much as 30% of large Nordic stocks are owned by foreign investors, of which the largest chunk are British and U.S.
The Nordic Model: The Real European Boom
The economies in the Nordic region are surging, driven by strong consumer demand, robust exports and recent changes to free up local labor markets. The Swedish economy grew at a robust 4.4% in the third quarter of 2006 -- producing the country's best year of economic growth since the 1970s. Other Nordics are not far behind. Increased trade with Eastern Europe is boosting Finland's economy. Property investment in Denmark is expanding at double-digit percentage rates. Norway's oil-driven economy is growing at record levels. Labor market reforms have helped push unemployment to near record lows in all three countries.
The contrast with the Euro-zone -- of which only Finland is a part -- is stark. While headlines in Europe trumpet the late-year surge in the Euro-Zone that propelled annual growth to 2.7% for 2006 -- a "remarkable year" according to the European Commission -- the Nordic economies are growing at almost twice that rate.
This explains the persistent Nordic skepticism about wholehearted participation in the EU. The aloof Nordics have long felt that they are better off and better run than the average European country. That's why they prefer to stay out of the Euro-zone and sing to their own macroeconomic tune.
The Nordic Model: Grand Illusion?
Some Nordics let all the adulation from "Old Europe" get to their heads. A year ago, Per Nuder, Sweden's then-finance minister, noted how Sweden had combined "the highest taxes in the world" with a fast-growing and open economy that was flexible and innovative. "The bumblebee is obviously flying," he noted, smugly.
Nuder had missed the joke from neighboring Finland: "The Swedish welfare state is like a Volvo without tires: it is a great car, but it doesn't work." High taxes had driven some Nordic companies, such as Sweden's IKEA and Tetra Pak, to move their headquarters abroad. The OECD estimated that unemployment in Sweden was around 17% -- worse than France and much higher than the official government figure of 4.3%. State-run training schemes, part-time jobs, other government programs and prolonged sick leave have skewed the numbers beyond recognition. A report on Sweden by McKinsey observed that unless the country kick-started its lagging private sector productivity, its welfare system would leave the nation bankrupt in 20 years.
The Nordic Model: A New Look for 2007 and Beyond
But to their credit, Swedes recognized that the bumblebee needed new wings. Last September, the Swedish people elected a center-right government led by Fredrik Reinfeldt, who has promised to shake up the Nordic model with a series of market-friendly reforms. These reforms include selling off state-owned stakes in Swedish companies, tackling high unemployment by getting people off benefits, and cutting taxes for companies so that they can afford to hire more people.
The results have been nothing short of startling. Tax cuts and reduced unemployment benefits have already increased both labor demand and supply. Retail sales in Sweden jumped 10.9% in December from a year earlier. That's almost 6x the growth in the "booming" Euro-zone. Increased employment during the next few years will push the country's economic growth rate to even higher levels.
The coming years will be among the most exciting ever for the Nordic economies. The Swedish stock market will boom, as will the Swedish iShares ETF (EWD). Higher interest rates and strong economic growth will strengthen Nordic currencies including the Swedish krona (FXS) and Norwegian krone. The revamped Nordic Model will continue to serve as a model for the rest of Europe -- as well as keep the Nordic countries well-represented in global Top Ten lists -- for many years to come.