High-cost Norway worried by struggling Europe

* Labour costs among world’s highest, wage restraint needed

* Finmin repeats oil spending cut needed, gives no timeline

STAVANGER, Norway, June 8 (Reuters) - Norway must restrict its spending of petro-dollars to ensure its high-cost economy does not become even more expensive at a time when its European neighbours face low growth and stagnant wages, top policy makers said Tuesday.

Central bank Governor Svein Gjedrem told a financial seminar in Norway’s “oil capital” Stavanger that the issue of costs had become more important during the global economic slump.

“Europe will be in big problems for many years and there is a lot more free capacity with our competitors,” Gjedrem said.

“We will feel the impact of a higher cost level for industry and businesses and the only tool we have to curb cost increases is to limit oil spending.”

Finance Minister Sigbjoern Johnsen concurred by saying: “What Svein is saying is that it is necessary to follow tight fiscal policies, and I agree.”

Norway has spent an unprecedented amount of oil cash in 2009 and this year to help its $400 billion-plus annual economy weather the impact of the global crisis.

The centre-left government has said that it plans to return to guidelines limiting petro-dollar spending when the economy improves, but has not set any firm dates for the exit strategy and has drawn criticism from the IMF for overly lax spending.

Rules envisage Norway spending only 4 percent of the value of its growing oil fund to finance an underlying budget deficit.

The rest of its revenues from oil and gas activities is invested in foreign stocks and bonds to avoid overheating the domestic economy.


But despite Norway’s attempts to insulate its economy from the inflationary effects of oil wealth, Norwegian labour costs have soared in past years and are among the highest in the world.

“Labour has never been as expensive as now. It has never been more profitable to move businesses abroad,” Gjedrem said. “Low growth in Europe will put industry jobs under pressure. Whole industry branches could be lost.”

Johnsen said Norway has to tighten its belt and reduce its appetite for wage hikes or face a painful adjustment when the oil fund stops growing -- as oil and gas resources are gradually depleted and pension payouts mount from about 2020 onwards.

“Europe will have low interest rates for a long time ahead. Wage growth in the euro area will also be low for a long time,” he said. “That means that we have to really use fiscal policy and wage policy.”

Johnsen said it was not clear how long Norway could compensate cost level hikes with increased productivity, something that it has managed to do for much of the last decade -- seen by economists as a golden era for the Norwegian economy.

“It is too early to draw conclusions, but in (a few) years, when the oil fund is no longer growing, costs must be reduced considerably,” Gjedrem added. “That could become painful ... the adjustment could become very demanding.” (Writing by Wojciech Moskwa; Editing by Jason Webb)