Tal
Economist Conferences, Grand Hotel, Stockholm 5 mars 2008
Mats Odell, Kommun- och finansmarknadsminister

Positioning Stockholm as a regional financial centre

Mr Chairman, Dear friends of Sweden and of the Economist Intelligence Unit.

I don´t know whether this unit has anything to do with the magazine covers. The covers of the Economist are often smart and funny. They are intelligent - without having to say so.

Besides being minister for Local Governments and Financial Markets I am also Minister of Housing. In that capacity I took a special interest in an issue of the Economist that is now a year old. The cover picture is a painting of a house by the sea. It is coloured like the American flag. The house is reflected in the water. It looks like a broad arrow - pointing down and it is appropriately coloured in red. The trouble with the housing market, is the headline. The cover and the leading article in this issue said it all - well ahead of those who a year ago thought that "credit crunch" was the name of yet another breakfast cereal.

Now, the Economist is not here to assess just the Swedish housing market but the economy in general and the government in particular.
You have already heard from the prime minister and the finance minister. This afternoon you will hear from two other ministers in our four party coalition government. Those who have already spoken must have given you the impression that we all work well together. The two who remain will - I am sure - try to give you the same impression. So, you may ask, are they right?

Yes, they are. When it comes to economic policy the majority government of ours is at least as closely knit together as the previous one party minority government. We had an alliance already in opposition.

Why then do we not merge into one single party?
Many people on the non-socialistic side of the isle ask that question. But many more know that there have been - and still are - considerable differences between our parties when it comes to dividing issues such as nuclear power, childcare, foreign aid and as of late - marriage as an institution.

The topic for my speech today is less controversial. "Positioning Stockholm as a regional financial centre" is in my view a very realistic headline. My spin-doctor came up with an alternative title which read: "Positioning Stockholm as centre of the universe". I thought that was carrying it too far.

According to the Global Financial Centres Index (GFCI) - the one that the City of London puts out - Stockholm ranks surprisingly low on the list. My city is number 26 out of 40. London, of course, is number one followed by New York and Hong Kong.

I want to see Stockholm closer to the top. First I went for the quick fix. I asked for another index. My aides came up with the so called Worldwide Centres of Commerce Index. Mastercard puts it out. On that list Stockholm is ranked as number 17. That looked better to me until I noticed that Copenhagen holds number 15.

So let us put rankings aside for a while and look at what constitutes excellence in this field. We have studied what we are good at and what is missing always aware of the importance of a financial sector for the whole economy of a country. The Finance ministry´s Long-Term-Survey has recently produced a very interesting supplement on what is the essence of today´s subject. I see it as an important contribution to research in this field that this government will enhance. To those of you who can read Swedish I recommend the title Finansiella sektorn bär frukt (SOU 2008:12) or as I would translate it: The financial sector will bear fruit. It does bear fruit in the UK where the financial sector has grown to encompass almost five percent of the employed population and nine percent of GDP.

Corresponding numbers in Sweden are a mere 2.2 percent of employment and somewhat less than five percent of GDP. If we could rise to UK standards, we would create 100 000 new jobs in the financial sector, and add more than a hundred billion kronor or approximately eleven billion euros to our GDP on a yearly basis.
If we could establish Stockholm as a financial centre of the northern region of Europe encompassing the Nordic countries and the smaller Baltic countries I see no reason why we could not come close to the UK figures.

So let us briefly examine what we got and what we lack to reach such a goal.

It should be clear to all of us that the emergence of great financial centres follows the evolution in global finance, supported by technological development. The increase in financial activities follows the rapid expansion of international corporate activities, the industrial development of emerging economies and the deregulation of capital markets around the globe.

A global financial centre is often defined as a city where business is conducted between organisations from all over the world using financial instruments also from all over the world. Hence, where we have intermediaries between foreign providers of capital and foreign users of capital. A regional financial centre is - to my mind - less different in kind than in size and scope.

A review of theory and history of financial centres indicates that successful ones have a number of characteristics that I would call basic requirements. A strong legal system, including property rights, contract enforcement, a functional and credible court system, and bankruptcy processes. In sum - a regulatory environment that is trustworthy to each and every honest player in the market is an absolute must. That creates a level playing field between participants in all legal respects.

To that I would add other extremely important prerequisites such as a reliable and predictable tax system, availability of skilled personnel and economically strong and credible banks.

An open and competitive economic environment is also a necessary key to success. We have all seen how both trade and financial openness help financial centres grow. I stress openness but I also stress regulation. That sounds like a contradiction but it is not.
Unpredictable regulation intensifies informational asymmetry and distorts the level playing field. That may in turn limit external financing.

International financial centres must create new financial commodities and activity. Thus rational and transparent market regulations, together with a competitive financial system are important criteria for a financial centre to grow successfully.

Well functioning capital markets plays, as I indicated earlier, a vital role for the economy as whole. There is ample evidence that countries with competitive financial markets, enjoy more rapid economic growth than those that are less competitive in this regard.

The presence of foreign banks enhance domestic competition and innovation in financial services, and improves the functioning of the domestic financial system. This contributes to real economic growth.

Establishing an international financial centre has strong appeal for many countries. At the same time existing centres are attempting to increase their competiveness. This is something we should all welcome because it keeps bankers and others on their toes even after lunch.

Nevertheless we have to study the market trends. As far as I understand there is a trend of convergence with regional centres growing relative to global ones. Regional cities and centres are capturing an increasing share of international equity and financial services. This follows from the increased level of integration in international capital markets.

Regional centres have developed financial markets and infrastructure and intermediate funds in and out of their region, but have relatively
small domestic economies.

During the last few weeks I have had a chance to study two excellent examples of this trend while visiting the three Baltic States and some of the Gulf States. The Latvian economy is booming to a large extent due to a massive inflow of capital. I was told that the financial sector had grown fast and now encompasses more than six per cent of GDP.
Some worry that the inflows of capital have caused imbalances in the Latvian economy. Well, it seems that they are now coming in for a landing and I hope it will be a soft one.

In the Gulf the economy is still flying high fuelled by the soaring oil prices. Will there be a hard or soft landing? Nobody knows - there is no runway in sight. All this has created a real estate boom that is very impressive when you look at the architecture and the actual projects, but puzzling when you try to understand the economics of it all. The strive to build local financial hubs is also very interesting. That may be something for the future - something to help sustain growth even after most of the oil is gone.

Globalization and financial integration are two factors that increase the potential of regional financial centres. Again my conclusion is that competition among financial centres will increase.

So how should we grade Stockholm as a financial centre today and what are its prospects for tomorrow?

The judgement is yours, but I would challenge anyone who claims that Stockholm and Sweden lacks the basic requirements that I just mentioned. In addition to a strong and trustworthy legal and regulatory system I can not refrain from mentioning that Sweden usually ranks among the lucky few on Transparency International´s list. Corruption is not unheard of in our corner of the world but compared to many others we are Snowwhite.

I hope we will not deteriorate to a point where I would use the pun that Hollywood sex star Mae West made famous: "I was Snowwhite, she said, but I drifted".

When it comes to the issue of our tax system and its reliability and predictability I must touch on sensitive ground. Sweden has abandoned gift- and inheritance tax and as of late also wealth tax, but we can not guarantee that a new government would not reintroduce for example the wealth tax. The social democrats say they will if they win the next election which I hope they won´t. .

Our personal income taxes are high - we think too high - and we are lowering them. But when it comes to foreign experts who work here there is a possibility to get quite a relief for a period of three years.
As you have heard from Mr Anders Borg, the finance minister, we are fairly successfully fighting unemployment by lowering taxes in the lower brackets. It is our hope to also lower income taxes for those who are making more money and who generally speaking are more productive. That would increase the premium on education and hopefully make it easier for Swedish firms to attract talent from abroad.

On the positive side I hope you have noticed that transaction costs on the OMX stock exchange is among the lowest in the world. We would also like to lower clearing and settlement costs even before the European Union´s Target 2 securities initiative will take effect. One way that has been suggested is to set up a central counterparty for all the Nordic markets. I think it is an interesting idea, but ultimately this is something for the national CSD´s to discuss.
Looking outside the financial sector, we see that the infrastructure in Stockholm is good compared to many other hot spots around the globe. I am referring both to communication and to public transport. People here may complain about rents both for office space and for apartments. But rents are a fraction of what they are in London. And so is real estate.

Compared to global centres our financial markets are of course small. But the Nordic and Baltic region is big enough for a regional hub such as Stockholm - if we can prove ourselves worthy of our neighbours trust which I hope we can.

Studies and reports also show that Stockholm ranks high regarding such factors as level of education in the workforce and a group of factors summarized as quality of life. For those who love sailing I think the Stockholm archipelago is as close to heaven as you can come - without having a serious accident.

I have heard that some of our foreign friends say that Stockholm lacks a cosmopolitan atmosphere or as a young man put it some years ago: "Stockholm lacks the international pizzazz".

Well, I say, come again and look for yourself! It is not London or the Big Apple, but it is juicy enough.

Stockholm as a financial centre has potential although increased competition from neighbouring countries and from larger market places will challenge the position.

As I mentioned I have just returned from a trip to the Emirates, Qatar and to Kuwait. It is a swinging place as you may understand - at least when it comes to cranes. They are building and constructing at a pace which you can see nowhere else with the exception of China.

Since Borse Dubai together with Nasdaq will take over the Nordic exchange group OMX it was an excellent opportunity for me to meet with some important decision makers of the region and discuss how we together can build and develop Finansplats Stockholm for the good of the exchange group and the Swedish financial market. It was also an opportunity to discuss business opportunities for us there and for them in our region. I have been quoted in the FT as welcoming sovereign-wealth funds (SWF) to invest in our country. As the minister responsible for divestment of six state-owned companies I have during my trip also noted an interest in hearing about our privatization program where we are open to consider investors from all over the world.

Of course, we welcome international investors to take advantage of other opportunities in the Nordic region as well. Maybe real estate can be of interest or maybe infrastructure or why not the more traditional financial investments in the private sector. We hope that Swedish firms are welcome to branch out abroad and welcome when others want to cooperate with us like Volkswagen is doing when it takes control of Scania - one of the leading truck manufacturers of the world.

But when it comes to the SWF:s there is an important issue that must be discussed. We - like many other countries - demand a transparency that some of the SWF-funds don´t agree with. As you all know Mr Peter Mandelson, the European trade commissioner, has come up with a proposal for a voluntary code of conduct for SWF`s. It is setting standards of governance and transparency for such funds. We in the Swedish government have not discussed that proposal in detail. Nevertheless I am sure that this government looks favourably on the very idea. I can tell you that most of the SWF:s that I met with in the Gulf told me that while they asked for an appreciation and consideration of cultural differences they still looked favourably on the prospect of such a code. We in Europe should certainly state our case but we should also listen to them and not push too hard or they and their investments may turn elsewhere.

Thank you for listening!