Norway Ready to Cut Budget If Krone Too Strong, Premier Says

Norway’s Prime Minister Erna Solberg said her government is ready to cut its budget proposal should the exchange rate prove too strong for exporters to stay competitive.

“If the Norwegian krone starts to appreciate more, we have to cut back on our budget,” Solberg said today in an interview in Oslo. “One of the long-term goals of this government is to make sure there is competitiveness for our non-oil businesses so they become better. And one of the areas for competitiveness is investments and the exchange rate.”

Solberg’s government, which took office last month, today unveiled a set of proposals that targets using more of the nation’s oil wealth to cover the cost of tax cuts and spending on infrastructure and education. Use of Norway’s $800 billion sovereign wealth fund will be equivalent to 5.7 percent of trend mainland gross domestic product, up from an estimated 5.2 percent for this year, the government said.

Central bank Governor Oeystein Olsen has also deployed policy to tame the currency. Olsen, in an interview last month, said the krone played a role in his rate decisions, a stance that has helped drive down the currency by about 11 percent against the euro this year.

The krone slumped as much as 1.5 percent against the euro to 8.2318, the lowest since Oct. 29, 2010. It was down 1.2 percent as of 3:58 p.m. in Oslo. Versus the dollar, it dropped 1.6 percent to 6.1442. It was the biggest loser of the major currencies tracked by Bloomberg.

Lehman Brothers

Still, since the end of 2008 -- the year Lehman Brothers Holdings Inc. failed -- Norway’s krone has gained 18 percent against the euro. The currency remains 28 percent overvalued, according to a purchasing power gauge compiled by the Organization for Economic Cooperation and Development.

Solberg said her readiness to adjust the budget goes in both directions, and that she’ll add to spending if Norway’s main trading partners don’t recover according to forecasts.

“It will depend quite a lot on what happens in Germany and Sweden,” she said. “Germany and Sweden are our two biggest export markets for traditional goods.”

Legislators and central bankers in Scandinavia’s richest economy have struggled to calibrate policy to contain krone gains without fueling record household debt and property prices. As the euro area fought through its debt crisis, western Europe’s largest oil exporter emerged as a haven. While that helped keep unemployment below 4 percent, it also fueled the risk of overheating.

Solberg’s minority coalition, which ousted a Labor-led government in September elections, still needs the support of the two smaller parties to pass its budget proposal.

“I’m sure that they will be tough but I think they will be manageable,” she said. “The first comments made by Liberals and Christian Democrats have been quite positive toward our budget.”

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