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Europe urgently needs to narrow the productivity gap with the US or risk losing out on more growth, according to the head of Sweden’s central bank.
Erik Thedéen, governor of the Riksbank, told the Financial Times that Sweden’s economy had done better than the Eurozone in the past six years but lagged behind the US, in large part due to worse productivity growth.
“They are outperforming Europe, including Sweden — the productivity growth in the US has been much stronger. That is very important for European policymakers to try to address,” he said.
Thedéen’s comments will fuel the growing debate about how Europe can boost its competitiveness against rivals such as the US and China. Since 2000, productivity, as measured by real output per hour worked, has increased in the Eurozone and Sweden by almost 20 per cent and 35 per cent respectively, but has soared by almost 60 per cent in the US.
The Riksbank on Wednesday added to Europe’s growing divergence on monetary policy from the US as it cut interest rates for the first time in eight years, trimming borrowing costs to 3.75 per cent.
The Federal Reserve indicated last week that US interest rates would remain higher for longer, with its first cut delayed until the second half of the year at the earliest. The European Central Bank, however, has signalled it is likely to start cutting at its June meeting.
But while Europe weighs the economic impact of cutting rates before the Fed, the large productivity gap with the US is an increasing concern for the continent’s business executives and policymakers.
Nicolai Tangen, head of Norway’s $1.6tn oil fund, told the FT that Europe was less ambitious, less hard-working and more risk-averse than the US.
Improvements in productivity are seen as particularly important in Norway, Sweden and Denmark to maintain Scandinavia’s high wages and solid growth. But the countries have implemented few successful policy proposals to reverse the fall in productivity growth since the 2008 global financial crisis.
Thedéen said an unexpectedly strong US economy could present a bigger competitive challenge to Sweden than pressure on its krona currency because it would widen the productivity and growth gap that already exists between the two countries.
A stronger economy “could be more [of a concern] for the Swedish economy than the exchange rate”, he added. Some economists have suggested that a weaker krona may frustrate plans to cut rates in the EU member state twice more this year.
The Riksbank’s monetary policy has often assumed an outsized importance in global central banking circles. As one of the first central banks to raise rates after the financial crisis, it was accused by Nobel-winning economist Paul Krugman of “sadomonetarism”. Its tightening cycle was viewed by the Fed, which held interest rates in the same period, as a cautionary tale when Sweden suffered years of deflation.
Thedéen, who began his term as Riksbank governor last year after being head of Sweden’s financial regulator from 2015 until 2022, said there was no “institutional memory” from that period influencing current monetary policy, adding that the Riksbank was merely trying to “make the best possible assessment” of the current conditions.
The Riksbank had learned from a failure to anticipate the effects of the sudden rise in energy prices in 2022, when Russia cut gas supplies in the wake of its full-scale invasion of Ukraine, he said. Central banks were criticised for being too slow to raise rates as inflation soared.
There had already been “indications from the US” of rising energy prices feeding higher inflation, so he had learned “not to underestimate the effects on the world economy if something happens in the world’s largest economy”.
Thedéen said a slight delay in Fed rate cuts would “probably not be a big thing for us or the global economy”, but the Riksbank would be concerned if the US continued its strong economic performance and the Fed was forced to further postpone an easing in monetary policy.
But he stressed that all central banks were dependent on the signals coming from their peers.
“This time,” he said, “it happens that we cut before the Fed. [But] who knows? Maybe next time it will be the other way around”.