Fiscal discipline, financial supervision and impaired assets are major challenges facing the Swedish EU Presidency. Anders Borg, Sweden’s finance minister, spoke to Europolitics and offered a little advice from Stockholm on how to deal with the banking crisis.

What is the Swedish Presidency’s top priority in the financial arena?

The most important issue is whether we will be able to deal with the crisis in the autumn. Hopefully we have now seen the worst and we’re in the stabilisation phase. A large part of the framework for dealing with the crisis is in place – the different state guarantees and so forth – but I think we should be cautious and ready to act if the problems come back. We should be aware that the banking systems in several member countries are still very fragile. But obviously, if we’re looking to the medium term, it’s a very clear priority from our side to be able to bring the de Larosière dossier to a political agreement.

The first signs of discord have emerged on financial supervision. Can you see this becoming a party or country political issue?

It’s quite obvious from a political perspective that a political agreement is necessary. We have seen the breakdown of the financial system on a global scale, with a magnitude that cannot be compared to anything since the Depression. We have to draw conclusions from this, and the obvious conclusion is that we need to strengthen the supervisory authorities. It’s also clear that we need to have compromises and a pragmatic approach here because the financial centre in London is extremely important for Europe as a whole – it’s the financial centre of Europe. There will be very complicated discussions, but with a very strong political commitment to reach an agreement.

Does Sweden have any advice on how to deal with the current crisis, having experienced similar turmoil in the 1990s?

I do think that it’s extremely important that we underpin this European structure with national institutions. That made us efficient in dealing with the banking crisis. Sweden has set up a stability fund and a permanent crisis management authority, so the financial sector is bearing the costs of the financial turmoil and the instability it has created. But even with a better supervisory structure and a better early warning system, it’s quite clear that we could also have financial turmoil in the future.

What’s your position on bad banks?

We did it in the early 1990s. The state took over banks, and those banks were divided into one ‘good’ part and one ‘bad’ part. We recapitalised the ‘bad’ part and by keeping it on the same balance sheet we were able to regain 95% of the money after five years. To compare, in the Japanese experience they regained only 1% of what they put into the banking system after five years. So there can be a role for bad banks, but I think it should be seen as an integrated part where you’re ready to take over a bank and yet cover stock in a bank that has lost a substantial part of its capital and therefore its solvency is put into question.

The Commission is advising EU countries to be prepared to increase spending and yet warning them about exit strategies. Is there a conflict here?

What is necessary to do in a period of crisis must be done. There has been a need to expand the public sector balance sheet to be able to cope with the extreme contraction that we have seen in the credit sector. It’s very important that we get back to the medium-term objectives for sustaining public finances. We believe that the Stability and Growth Pact is a well-functioning framework so we need to work within it, and, if anything, strengthen its role. What we are now seeing is a huge number of countries running deficits above 3% of GDP, so if we don’t want to be in a position where we are coming into the next downturn with very weak public finances, it’s necessary that we eventually start to restructure public finances. Having said that, there is very significant resource underutilisation in 2009 and 2010. A credible medium-term perspective will bring us more flexibility in the short term.

So you wouldn’t be in favour of temporarily relaxing the Stability and Growth Pact and allowing member states more budgetary room?

There should always be a correspondence between the kind of deficit that you’re speaking about and the kind of restructuring which is necessary because most of the countries in Europe need to show either a balance or small surpluses in the medium term. But we should be cautious with fiscal restructuring in 2009 and 2010 because we have a low degree of resource utilisation and increasing unemployment.

Has the crisis highlighted an imbalance between rich and poor member states?

There should be a strong sense of solidarity in the EU. Many of the countries will run into similar crises at some period in their history. It’s very important that we stand in solidarity with other countries, but it’s also important that countries that are going through these kinds of problematic periods deal responsibly with them and start to reconcile their public finances.

Will Sweden be joining the eurozone any time soon?

The Swedish public has become more positive towards the euro but it’s still an open question whether there is a clear majority for joining. If it would be possible for us to join, it would be on the requirement that we can also reach a broad-based political agreement on the issue. The Social Democrats, who are currently in opposition, have been clearly signalling that they are very sceptical towards a new referendum in the short term.

“We should be cautious with fiscal restructuring in 2009 and 2010 because we have a low degree of resource utilisation and increasing unemployment”