The Norwegian Krone Weakens: Impact on Wages and Welfare

While the summer holidays are fast approaching, there are few rays of light warming the Norwegian krone.

On Tuesday afternoon, you have to pay NOK 11.89 for one euro and NOK 11.15 for one dollar. Since 2013, the krone has weakened by around 60 percent against the euro.

The collapse of the krone greatly exceeds the value of the salary. Nettavisen has taken a closer look at this with the help of fund manager Holberg. They have looked at how the real wage development has been if we correct for the krone exchange rate against the euro.

The contrast is enormous compared to European workers. A table from Holberg shows that adjusted for the krone exchange rate, Norwegians’ wages are only 74 per cent of what they were 10 years ago (see the graph below).

Nuanced image

– We made these graphs back in April when salary negotiations were underway. There was a lot of talk about real wage developments, but we were puzzled by the short-term picture. We have drawn up cycles over several years, and then the picture becomes much more nuanced, says portfolio manager Ole-Andreas Grendstadbakk in Holberg to Nettavisen

– There is a striking difference in the development before and after 2013?

– Norwegian wage earners had a fantastic development in the years 2001 to 2013. Most of this growth came early in the period. Then huge investments in oil and gas were the driver.

– Then we had the oil crisis in 2014. That was the turning point, replies Grendstadbakk.

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– This means a sharp decline in real wages

– Researcher in finance and macroeconomics, Espen Henriksen, we see that the weak Norwegian krone has resulted in a dramatic decrease in wages for Norwegian industrial workers. What is your comment on that?

– What you point out is precisely the essence: A weak krone means a sharp drop in real wages for everyone who receives a salary in Norwegian kroner. It therefore means that we get lower welfare, says Henriksen to Nettavisen.

A weak krone can be good for Norwegian export companies. Norwegian goods are relatively cheaper compared to foreign goods. But:

– It is quite obvious that a fall in real wages is good for employers and the owners of export companies. In principle, we could just as easily have had a wage settlement where we had negotiated a sharp cut in wages.

– This is tantamount to a sharp decline in prosperity for the vast majority, Henriksen emphasizes about the weak krone.

Back to normal

Grendstadbakk is concerned with looking at developments over long periods of time. The weakening from 2013 is about returning to normal over many decades.

– The ten years from 2003 to 2013 were absolutely fantastic. We must not forget. In the past ten years, European wage earners have been able to keep up to a greater extent. The Europeans were dissatisfied with the first period, then the Norwegians were “super happy”, nuances Grendstadbakk.

– Is it unrealistic to compensate the devaluation of the krone with a correspondingly higher wage increase?

– Yes, we wouldn’t have had a chance. This goes straight into the discussion here at home about productivity. In the first period, the Norwegian economy fired on all cylinders, it did not in the second.

– We are unable to follow up on previous growth. In the first years we went up the trail, but then the others have caught up with us. If we go even further back in history, we find lost decades. This is not abnormal, points out Grendstadbakk.

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– We do not know

– What will be the most important thing for the crown to be able to show muscle again? asks Nettavisen Henriksen.

– We really don’t know why it has fallen so sharply, but we do know that Norges Bank’s interest rate policy has a bit of a say. What is decisive, however, is what we economists call the “risk premium”. It means that international investors demand more Norwegian kroner for every Swiss franc.

Henriksen points out that a number of factors can affect the “risk premium”. Unpredictable taxes are probably even more harmful than high taxes. Another hypothesis could be a lack of focus on long-term prosperity in political decisions.

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– Not waterproof by Spetalen

– Do you think Øystein Stray Spetalen is right that “foreign investors have lost faith in the Norwegian market”?

– Let me put it this way: What he says is “interesting”. It may be something that should be looked at more closely. But I don’t think he has watertight cover to claim that this is the only reason for the weak crown.

– Finally, does it make sense to talk about what might be a “normal level” for the krone in the future?

– No! There is no such thing as a “normal level” or “equilibrium level” for the krone that differs from what the rate is right now. The central point is that a strong and stable krone exchange rate would have been good for Norwegian welfare. Structural measures should therefore be sought that can contribute to just that.

Seeing

– Do you in Holberg have any good explanations for the long-term weakening of the krone?

– We read and analyze like everyone else. As an interest rate manager, I use to say that if interest rates are difficult, you haven’t tried currency. There will be a lot of speculation, and all explanations may be possible.

– We have no idea, but it is probably the sum of everything. Political risk and interest rate differences could be two of several explanations, replies Grenstabakk.