Your Excellencies, distinguished guests, ladies and gentlemen.

I am very grateful for this opportunity to speak to such a distinguished audience with an interest in Norway. I am also happy to be here in Berlin, a city historical importance as a symbol of European reunion and reconciliation.

From Norway the distance to Berlin and Germany is short, both in geographical and cultural terms. Norwegian artists, students and scientists went to Germany for education and inspiration throughout the years. And they were well received. The painter Edvard Munch, for instance, had his break-through exhibition in Berlin in 1892.

The welfare state, which is a vital part of the Norwegian society, was originally a German invention - brought to life by Chancellor Bismarck. Today, Germans and Norwegians often share views both in foreign and domestic politics.

Economic ties between our nations have a long history. In 1350, the Hanseatic League established a trading post in Bergen. They brought dried cod fish from the north of Norway to the European markets. Later on, Germans provided both capital and know-how for developing Norwegian industries. Today, our economies are more closely linked than ever. Germany is Norway’s second largest trading partner (after Sweden).

I am invited here to give a presentation of the Norwegian economy and economic policy. I will discuss not only positive aspects of the Norwegian model, but also certain challenges.

My message to you tonight is threefold:

I will stress the fact that human capital is by far our most important national resource – not oil and gas.

But the petroleum sector is of course important to Norway. I will try to explain how the petroleum revenues affect our economy, and how fiscal policy is geared towards a sustainable management of our petroleum wealth.

My second message is that the Norwegian welfare model is effective – not only in securing welfare services to the public. It also contributes to labour participation, flexibility and high productivity.

Finally I will use this opportunity to address the links between a well functioning economy and the global environment.

In Norway, the Finance Minister is responsible not only for public finances and economic policy, but also for coordinating the government’s work on sustainable development. Climate change is a major concern in this context. I believe it is important that economic policy makers engage themselves in this topic.

Let me start with a brief introduction of the present government in Norway: It is a majority government of three parties: The Labour Party, The Centre Party and my own party; The Socialist Left Party. We came into power after the parliamentary election in September 2005. The three parties expressed a clear will to safeguard and revitalize the welfare state. I believe that this is the main reason why we won the election.

In order to fulfil these ambitions, a healthy economy is needed. Our economic policy aims at high labour participation, low unemployment and stable and sustainable growth.

A hundred years ago, Norway was among the poorer countries of Europe. By 1950 Norway had caught up with Western Europe. Today, Norway ranks among the richest countries in the world.

Norway is a small economy with strong traditions for open trade. Total exports correspond to about 45 per cent of GDP and total imports to about 28 per cent.

Our nation is blessed by nature in terms of energy resources – not only oil and gas, but also waterfalls. Access to relatively cheap electric power from waterfalls helped us build industries in the last century. Oil production started in 1971.

It may be tempting to jump to the conclusion that Norway’s success is based on the growing petroleum sector. It is true that Norway has benefited greatly from its petroleum resources. But I will argue that the good performance is not only about oil.

[Graph: Norwegian petroleum production]

Today, Norway ranks as the eighth largest oil producer in the world. We are the third largest oil and gas exporter. As you can see, the petroleum production will increase further until around 2010, and fall gradually thereafter. Oil production has already peaked, while gas will continue to increase for some years. Only about 30 per cent of the expected total resources have been extracted.

Norway is a large supplier of both oil and gas to the European market. We have seven large export pipelines for gas. Three of them are landed in Germany. Germany is both an important transit country and an important market for Norwegian gas, being the second largest gas market in Europe.

[Slide: Export of gas to Europe]

Currently, gas from Norway covers around 30 per cent of the German consumption and about 17 per cent of the total EU consumption. Norway is the second largest gas-seller to Europe after Russia. It is crucial for us to be a reliable supplier.

Lifted by high oil prices, the petroleum sector now represents close to 25 per cent of our GDP and more than half of our exports. Investments in exploration and field developments are at historically high levels.

But no more than 2 per cent of the labour force works in the sector.

[Graph: GDP per sector and employment per sector]

Despite petroleum revenues and a relatively large public sector, the major part of both production and employment is in the non-oil, private sector. The service sector accounted for some 51 per cent of GDP in 2005, and manufacturing for approximately 9 per cent. The manufacturing industries are highly export-oriented.

Fish is also an important export item. It is vital to a number of communities along the Norwegian coast.

However, the petroleum sector is far more profitable than other sectors, since it gives rise to a resource rent. The Government collects a large share of this rent by taxation and other instruments. The net cash-flow from petroleum activities goes into a special fund named the Government Pension Fund – Global. By law this fund has one expenditure line only; the annual transfer to the Fiscal Budget to cover the non-oil budget deficit.

[Graph: Market value of the Government Pension Fund – Global]

The fund is growing rapidly. At the end of November 2006, the value of the fund was around 215 billion euros, corresponding to 85 per cent of GDP.

The Ministry of Finance is responsible for the management of the fund. The operational management is carried out by the central bank of Norway. The bank invests the fund’s capital in accordance with guidelines issued by the Ministry.

We also seek to ensure ethical standards in our investments. The investments should not contribute to unethical acts as violations of fundamental humanitarian principles, serious violations of human rights, gross corruption or severe environmental damages. A set of mechanisms is established to promote these objectives.

The fund is exclusively invested abroad, spread over many countries and many companies. 40 per cent of the capital is invested in equities and 60 per cent in bonds. Some 5 billion euros are invested in German equities and 30 billon euros in German bonds. The fund acts as a financial investor with small ownership shares in individual companies. Average net real return on the fund since 1997 has been 4.4 per cent.

It has taken nature hundreds of millions of years to produce oil and gas. It is only recently that we have developed technology to exploit these resources and profit from them. We cannot allow ourselves to spend this fortune during one or two generations.

A new fiscal policy guideline was adopted in 2001, setting the pace for a prudent and sustainable use of petroleum revenues. As a general rule, the structural, non-oil budget deficit shall correspond to the expected real return on the Government Pension Fund – Global. This return is estimated at 4 per cent per year.

[Slide: Economic policy guidelines]

In short, the rule says that we should spend only the real return on the fund and leave the fund’s capital untouched. Thereby all generations should benefit more or less equally from the petroleum wealth.

To accompany the fiscal guideline, a standard flexible inflation targeting regime for monetary policy was introduced. Let me just point out that the guidelines also open for an active use of fiscal policy for the sake of stabilisation. Traditionally, we have high ambitions for stabilisation policy in Norway to avoid high unemployment and thereby reduce the risk of people being pushed more permanently out of the labour market.

Using the rule’s flexibility, we may spend more than the expected return on the fund in downturns in order to stimulate economic activity. In periods of strong economic expansion we should spend less.

[Graph: GDP growth, 1990 and onwards]

Currently, the Norwegian economy is running close to full capacity. The last three years, growth in mainland GDP – which excludes petroleum and shipping – was above 4 per cent. This means that we have to consider really carefully how much to spend in the next year’s budget.

[Graph: Employment/unemployment 1990 and onwards]

The good economic performance reflects in part the effects of increased globalisation. Import prices have fallen. Demand and prices for our exports have increased.

Over the last twelve months, employment has grown by more than 3 per cent, mainly in the private sector. This is the strongest growth in employment in 20 years. The unemployment rate has fallen to 3.1 per cent.

I am very happy to observe that more and more people are employed in Norway. Unemployment is a major waste of human resources. But we are facing some challenges as a result of this fortunate situation.

Several industries report that they have problems hiring qualified labour. So far, inflows of foreign workers have helped prevent bottlenecks in the Norwegian economy. Most of these workers come from Poland and Sweden. Germans are the third largest group of foreign workers. This has contributed to increasing the capacity of the economy and moderating wage growth. However, recent statistics indicate some rise in wage inflation. Underlying price inflation also seems to be picking up, although slowly and from a low level.

Looking ahead, the demanding challenge is to sustain the high activity level without overheating the economy.

[Graph: Manpower is the most important contributor to national wealth]

When discussing the Norwegian economy, oil and oil money often becomes the centre of attention. It is important to keep in mind that the petroleum rent is quite modest compared with the value added from labour.

This figure illustrates the point. The calculations date from 2004, but the main message is still valid. The figure shows that human capital amounts to almost 90 per cent of our national wealth.

The fact that the management of human capital is the by far dominant factor for our nation’s prosperity leads me to the Norwegian economic model.

Aside from the oil and gas, Norway fundamentally has a European economic and social model, with some specific Nordic features. Social partners play an important role, and we have a well developed welfare state based on universal entitlements. The income distribution is compressed.

In the Nordic countries the government provides more services than in many other European countries. To some extent this reflects high female participation in the labour market. Care services that were previously provided within the families are now provided by the public sector, mostly by female employees. The strong dependence on trade, which we have in common with other small European countries, is important. Openness to trade implies openness to economic shocks. The Norwegian and Nordic features of flexible product and labour markets are especially important for the ability to respond to these shocks.

In the 1950s and 60s, Norway experienced high growth, low unemployment and low inflation. But most European countries did well in this period. Germany for example experienced both lower unemployment and higher productivity growth than we did.

Like Austria, Switzerland and Sweden, we managed to keep unemployment at low levels during the 1970s. But inflation increased, partly because we poured oil money into the economy. As in most of Europe, the 1980s and the beginning of the 1990s were difficult. We experienced strong cyclical swings, and eventually a large increase in unemployment.

From the mid 1990s, however, the Norwegian economy has performed very well. Growth has generally been high, and unemployment has fallen to very low levels.

[Graph: Productivity growth]

Strong productivity growth has contributed to a higher income growth than in most OECD-countries. This is not confined to the petroleum sector. Also the traditional sectors experience higher productivity growth than most other countries.

According to conventional economic thinking, the Nordic countries should not perform well. It is claimed that a large tax financed government sector will disturb the economy. Compression of the wage structure is said to reduce incentives for education and hard work. So is a fairly generous safety net.

I believe that the Nordic countries have found a good balance between market economy and regulations. The role of the welfare state and cooperation with the social partners are important elements in this picture.

Let me mention some of the factors that may explain the performance of the Norwegian model:

• An efficient tax system reduces the over all distortions through taxes.
• Highly centralised wage bargaining is another factor. Sectors exposed to foreign competition set the bench mark for wage increases. Wage growth has, in fact, declined rapidly when this has been needed to counteract rising unemployment.
• A compressed wage structure secures profits in highly productive growth branches.
• A social safety net and active labour market policies are important as well. It reduces economic risks for the individual and the length of unemployment periods associated with job losses. It makes us less vulnerable to open trade and to changes in industrial structures. We aim at improving people’s employment opportunities, not sheltering particular types of jobs or industries.
• And finally, foreign trade openness and international and domestic competition is an explanation.

The good performance of our labour market is a key feature of the Norwegian model. Unemployment is low in international comparison and participation rates. The labour participation of elderly workers and women are among the highest in the OECD area.

[Graph: Employment/population ratios, men and women]

The Norwegian female employment has increased steadily since the beginning of the seventies. Today it is well above the level in Germany and most other European countries. Flexible arrangements to make family and work easier to combine have made this possible. Indeed, Norwegian fertility rates are in the upper range in the OECD area.

Many women are part-time workers. That may partly explain the highly flexible Norwegian labour market and labour supply.

[Graph: Female graduation]

Female students have outnumbered males in higher education for more than a decade. Last year female postgraduates for the first time outnumbered the men, accounting for 52 per cent.

Affordable and available kindergartens are vital to female education and labour participation. Today 78 per cent of children at pre-school age attend kindergarten. Still there is excess demand. Our plan is full coverage by the end of the year, meaning that everyone who applies will be offered a place.

Preserving and strengthening the Nordic social and economic model will be crucial in order to successfully meet economic challenges in the future.

[Graph: Ageing population]

This figure illustrates the demographic development in Norway.

The share of citizens past the official retirement age to those of working age will rise rapidly after 2010. Of course the prospect of better health and longer life is a good one. It is a product of our wealth and welfare. So are lower fertility rates. But these trends in combination pose a challenge to the welfare state and the sustainability of public finances.

The number of elderly will nearly double between 2005 and 2060.

Benefits per pensioner will rise and so will the number of pensioners. The health sector and the provision of care for the elderly will have to expand too. A strong focus on the labour supply is therefore needed.

We are currently working on a comprehensive reform of the public pension system to meet the future challenges. We will strengthen work incentives in the system and introduce a flexible retirement age from 62.

It is also worrying that almost 20 per cent of the working age population in Norway is on disability pension, sick leave, other health related benefits or early retirement schemes. And the numbers are rising. We must reverse this trend to be able to maintain our broad welfare system in the future.

A tri-party agreement has committed the social partners and the government to reach certain goals for reduction in sick leaves and for employing more disabled persons. Additional measures to reduce the numbers on sick leave were included in the 2007 budget.

However, ladies and gentlemen,

The most difficult – the most critical – sustainability issue is not a financial one. It is an environmental one with widespread economic consequences. As the Brundtland Commission told us twenty years ago; developments today should not be at the expense of future generations.

[Graph: Global warming]

Last Friday the IPCC launched a new report on global warming. It states that climate change has started. This figure shows the rise in global temperatures. The Panel is more certain than ever that the development is related to human activity. There will be severe consequences for economies and individuals worldwide. Now, there is an urgent need to take firm action to reduce emissions and avoid the worst impact.

Creation of an international emission trading system may be crucial to this end. A “cap and trade” system will keep emissions within limits, protecting the environment. At the same time international trading allows emission reductions to be made at least cost. The clue is to establish a single carbon price across countries and sectors.

Norway and other EFTA-states will link our national emission trading schemes to the EU. The European carbon market is an important first step. But to make progress, we need a global quota and trading system.

Technological innovations and developments are important too. Let me use an example from the oil production in the Sleipner area of the North Sea. Since 1996, CO2 is stripped from production and injected for underground storage - one million tonnes of CO2 per year. A similar solution will be applied at the Snøhvit field in the Barents Sea, when production starts later this year. Here, 700,000 tonnes of CO2 will be separated and stored every year. We want to transfer these solutions to power stations and other major industrial users of fossil fuels. The present government has stated that all new gas fired power plants shall have carbon capture technology.

In our Budget for 2007, we allocate around 100 million euros to research and development within technologies for CO2 capture and storage. My government and Statoil, the biggest Norwegian petroleum company, recently signed an important agreement.

We agreed to establish the world’s largest full-scale CO2 capture and storage project by 2014. This in conjunction with a projected gas fuelled heat and power plant at Mongstad on the western coast of Norway. Several technological solutions will be tested in parallel. It is our clear intention that this project will contribute to technological progress of general value.

My government wants to make more use of taxes to stimulate environmentally friendly behaviour. This includes not only energy- and CO2 taxes. As from this year, we introduce a new tax system for car registration, favouring cars with relatively low CO2 emissions. These cars are now less expensive to buy. As they consume less fuel, they are also less expensive to drive. The future lies in energy efficient and light- weight cars. It seems that German car makers are taking this challenge.

Norway follows with great interest the energy discussions within the EU. To secure energy supply and reduce climate change, we should all strive at enhancing energy efficiency within our economies. We need to stimulate the use of renewable energy in a cost-efficient manner. Likewise, we should promote innovative technologies like carbon capture and storage.

We envision close cooperation with Germany and other EU countries in these areas. It is encouraging that Germany has made combating climate change a centrepiece of its EU presidency.

To conclude,

Petroleum wealth constitutes only a small share of our total national wealth – much less than necessary to “pre-fund” public old age pensions.

The Norwegian economic model has performed very well over the last decade. A well developed security net has made workers more open for changes in industrial structures and thus increased the economy’s ability to adapt to changes. Together with an open economy, flexible labour markets and our specific production structure, this has helped us reap the benefits of globalisation.

The sustainability of our economic model depends on our ability to keep discipline in fiscal policy and to secure a large and educated work force. It is also crucial to keep on adapting to changing circumstances and new needs both in the private and the public sector. If the petroleum wealth is allowed to become a cushion against change, the wealth is easily spilt.

For the sustainability of our common globe, there is an urgent need for strong international action to mitigate climate change. It is a huge task. It is a daunting task. And it will cost. Thus, doing it in a cost-effective way and sharing the burdens equitably must be cornerstones of our actions.

Thank you for your attention.

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