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EUROPEAN UNION

Nobel laureate Krugman slams Bundesbank’s Weber as risk to euro

Nobel Prize-winning US economist Paul Krugman launched a withering attack on Monday on Axel Weber, the head of Germany's central bank and the most likely successor to European Central Bank President Jean-Claude Trichet.

Nobel laureate Krugman slams Bundesbank's Weber as risk to euro
Photo: DPA

Krugman said that appointing Bundesbank boss Weber as head of the Frankfurt-based ECB would be “a risk for the euro” in an interview with German business daily Handelsblatt.

“Weber worries about inflation even when there is no inflation … if you are looking for someone who targets zero inflation while unemployment rises to 13 percent, then Weber is definitely the right man,” Krugman said.

The German is seen as the front-runner to replace Trichet when the latter’s term runs out in late 2011 and is well known as a monetary policy “hawk,” meaning he favours policies designed to keep inflation as low as possible.

“I would rather see an ECB president who pays more attention to deflationary dangers and to the risk of a long period of stagnation,” said the US economist, in comments published in German.

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ECONOMY

Swedish economy to grind to a halt as interest rates kick in

Sweden faces an economic slump next year that will see economic growth grind to a complete stop, Sweden's official government economics forecaster, has warned.

Swedish economy to grind to a halt as interest rates kick in

Sweden’s National Institute of Economic Research, which is tasked with tracking the business cycle for the Swedish government, warned in its quarterly forecast on Wednesday that greater than expected energy prices, interest rate rises, and stubborn inflation rates, Sweden was facing a significant downturn. 

The institute has shaved 1.6 percentage points off its forecast for growth in 2023, leaving the economy at a standstill, contracting -0.1 percent over the year. 

The institute now expects unemployment of 7.7 percent in 2023, up from a forecast of 7.5 percent given when in its last forecast in June.

“We can see that households are already starting to reign in their consumption,” said Ylva Hedén Westerdahl, the institute’s head of forecasting, saying this was happening “a little earlier than we had thought”. 

“We thought this would have happened when electricity bills went up, and interest rates went up a little more,” she continued. 

The bank expects household consumption to contract in 2023, something that she said was “quite unusual” and had not happened since Sweden’s 1990s economic crisis, apart from in the immediate aftermath of the Covid-19 pandemic. 

This was partly down to a five percent reduction in real salaries in Sweden in 2022, taking into account inflation, which the institute expects to be followed by a further two percent fall in real salaries in 2023. 

If the incoming Moderate-led government goes ahead with plans to reimburse consumers for high power prices, however, this would counterbalance the impact of inflation, leaving Swedish households’ purchasing power unchanged. 

The institute said it expected inflation to average 7.7 percent this year and 4.6 percent in 2023, both higher than it had forecast earlier.

Sweden’s Riksbank central bank this month hike its key interest rate by a full percentage point, after inflation hit 9 percent in August, the biggest single hike since the 1990s. 

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