Finland responded by devaluing its currency by 6 per cent. In Norway, industrial leaders and industry organisations also pressed in favour of a devaluation of the Norwegian krone. Norway’s finance minister Rolf Presthus characterised the Swedish decision as a serious setback for Nordic cooperation3, and chose not to change the value of the Norwegian krone. In much of the 1970s and 1980s, economic policy in Norway and Sweden lacked a long-term approach and credibility. This contributed to wide swings in production and employment. With a policy of low interest rates and devaluation, inflation became entrenched at a high level. Frequent devaluations in the period following 1976 could not prevent a weakening of the manufacturing sector in the long run. On the contrary, they proved to be self-reinforcing. The wide fluctuations culminated in a borrowing spree that started in the mid-1980s, first in Norway and then in Sweden. The borrowing spree was succeeded by deep economic crises. Both Norway and Sweden had to abandon their fixed exchange rate policy in 1992. Important reasons were freer capital flows, deeper financial markets and hence a surge in cross-border capital movements. Sweden switched to inflation targeting in 1993 and was among the first countries to introduce a system that would later become the norm for small and medium-sized economies. The Riksbank succeeded fairly quickly in anchoring inflation expectations and keeping inflation low and stable in Sweden. Norway followed suit in March 2001.
The high cost level in the Norwegian business sector is adapted to a situation where we are developing the petroleum sector and phasing in the use of petroleum revenues into the mainland economy. After a period, we will be able to cover a smaller share of our imports using current petroleum revenues and by drawing on capital in the Petroleum Fund. The Norwegian cost level will then have to be dampened, also compared with that of Sweden. Competitiveness may in the longer run be brought back to the level prevailing at the end of the 1960s before Norway became an oil nation. During such a period of adaptation, which may start in 5 or 10 or 15 years, a flexible exchange rate, with a fall in the Norwegian krone against the Swedish krona, will have to play an important role. Where do we stand today? Tariff barriers for trade in goods are low. The EU/EEA agreement also provides for increased trade in services. During the 1990s, capital mobility has increased to a level that is higher than 100 year ago. Free capital flows and free trade pave the way for high economic growth and prosperity, but also entail challenges. Competition has increased in many industries. Labour-intensive processes are being transferred to new EU member states such as the Baltic countries. Some multinational companies have streamlined various production processes and distribution and centralised them in the same location. Saab has been acquired by General Motors and Volvo by Ford.