“The Norwegian Krone’s Fall: Causes, Consequences, and Solutions for a Sustainable Economy”

(This post was first published on Everythingwith which ABC Nyheter has a collaboration).

Our krona continues to fall on the foreign exchange market. Now the price for one euro is almost NOK 12.

A weak krone is good for our industry, but when it approaches total collapse, it creates problems for most people. For a small open economy like ours, a weak krone means increased prices and inflation. Then Norges Bank is forced to raise the interest rate more than necessary and makes life miserable for everyone who has a mortgage, and loses the purchasing power they get after hard salary negotiations.

In the past, the Norwegian krone followed the oil price. If the price of oil fell, activity in the Norwegian economy fell. Weakened krone value increased competitiveness and ensured that we got back on our feet. If it was too low, Norges Bank could raise the interest rate, so that the krone became more sought after on the international capital market.

This is no longer the case. Today, oil prices and interest rates are relatively high, while the krona just slides and slides – like a roller coaster.

How did we get here?

First of all, we have to look at the causes: Geopolitical unrest – read war – creates waves and unrest in the market. Then the investors on the international capital market look for a safe place to put their money. So why is the currency of the world’s most solid economy no longer a safe haven?

Instead of selling the krona, Norges Bank should buy it, so that demand rises – and so does the krona’s value.

Many will say we are too small, and that is not wrong. Because if we are a safe harbor, we are a narrow harbor. Not to get in, but out of. If you buy Norwegian kroner and it continues to weaken against other currencies, it can be very difficult to sell it. Investors are aware of that risk – and so are the logarithms, which now dominate the financial market.

The paradox is that the historically high gas revenues due to the war in Ukraine mean that Norges Bank has to sell Norwegian kroner to buy dollars, euros and yen, which the Oil Fund can invest abroad. Then they shoot the krone in the foot: Instead of selling the krone, they should buy it, so that demand rises – and so does the krone’s value.

Read more on Everything Climate and Energy

The futures market

Investors on the global capital market are looking ahead. Because if the Norwegian economy is healthy, it is totally dependent on oil. If we take away income from oil and gas, Norway runs a thunderous deficit. Both in trade balance and in operations. In addition, 98 percent of our economy is linear – which means that we are among the worst in the world to transition to a circular and sustainable economy. We use raw materials and throw them away, while others have a much greater degree of recovery and recycling.

Yes, the Oil Fund can top up with cash, but we do not create jobs and economic growth by drawing on the reserves. On the contrary. Then we create inflation and lower productivity.

We must also not forget that the international capital market is watching us closely. They see a Norway that will have major problems in reaching a 55 percent cut in greenhouse gas emissions within the next 6.5 years. They see a Norway that invests like never before in new oil fields, while the rest of Europe invests in renewables and has laid out a detailed plan to phase out gas – just as the EU countries have done.

If we continue the oil bonanza by constantly opening new fields, the risk of “stranded assets” – or lost investments in oil and gas – increases. In addition, the proposed wind power tax is almost a form of expropriation of industrial projects with large institutional investors. It does not ensure the will to invest – a will we may need when both the US and the EU launch their large and comprehensive support packages.

The market thus sees the contours of a Norwegian economy that is headed for a “hard landing” – with far lower exports, which means less demand for Norwegian currency. It also says something about our lack of will and ability to change.

What can we do?

There are several things we can consider. In the short term, we can, for example, send a signal to the market that we want to “peg” – or fix – the krone at a set value against the euro and dollar. It will send a signal to the market that Norges Bank will follow the euro interest rate and intervene in the market to defend the exchange rate. Iceland does this today and not least Switzerland, although with the opposite sign. It may cost us a lot, but with our huge savings we can afford it. The Danes, whose krone is now worth over 50 percent more than the Norwegian (!), have a separate agreement with the European Central Bank to defend each other’s currency in the market.

In the longer term, we must accelerate the restructuring of the Norwegian economy. Away from the climate-damaging petroleum sector and onto industries that the market believes in. Only when we really show that we have a feasible plan to convert to a sustainable Norwegian economy will the international capital market take us seriously. Only then will the market regain faith in the krona.

Then the Storting should change Norges Bank’s mandate to include climate risk, as both the European and British central banks have done. This means that monetary policy must contribute to keeping the climate stable, and within the Paris Agreement’s goal, in addition to the goal of keeping prices stable.

We have no time to lose. Neither for the krone nor the climate.

(Voices is ABC Nyheter’s debate section. Here regular and occasional contributors write about news-related topics. We also have a collaboration with the political online newspaper Altinget.no . If you are burning with an opinion or analysis, you can send the text to [email protected], and we will consider it).

Also read in the Alting: Mathilde Fasting: Yes to nuclear power and yes to Norwegian EU membership