samchain/econo-pairs-v1 huggingface dataset:
The euro area In an international setting, as described, of a moderately expanding world economy and heightened geopolitical tension, the pace of growth in the euro area in 2002 was markedly weak. At 0.8%, it was far lower than had been expected at the end of the previous year. This performance has highlighted  2  BIS Review 31/2003  the considerable exposure of the euro area to global shocks and the burden the structural deficiencies still beleaguering the area entail for it. However, although economic buoyancy has diminished across the board, there have been considerable differences in the growth of the different Member States. In particular, among the four major countries in the area, only Spain has remained moderately dynamic in this unfavourable setting, while the biggest economy, Germany, has deteriorated markedly. Thus, while high and growing synchrony has been observed over the past decade, this still remains below what should be the case for a fully integrated economic area. Persisting divergences underscore the need to refine the single market and reaffirm the role to be played by national policies when it comes to ensuring the proper functioning of each of the member economies. It is also significant that the scant growth in the euro area in 2002 was mostly based on the contribution of the external sector. As a result, the shocks buffeting the European economy had a particular influence on internal demand, which was considerably slack throughout the year.

National economic policies will thus have to be geared to strengthening these elements by promoting macroeconomic stability, business profitability and the competitiveness of the productive system. As earlier indicated, budgetary policy has contributed to domestic stability by means of fiscal consolidation and the control of the budget deficit. If in the future, against a background in which European monetary conditions will remain relatively generous for the requirements of the Spanish economy, demand pressures were to persist and contribute to sustaining an inflation differential unwarranted by the process of real convergence, it might be advisable to move towards a budgetary surplus position. That would additionally help tackle the problems of the long-term sustainability of the pensions system. Maintaining competitiveness, which is one of the main long-term challenges, will require continuing wage moderation and higher productivity gains. To do this, certain changes must be made to the collective bargaining system so that settlements are more closely related to the specific situation of firms. It is also necessary to increase the incentives for the stable hiring of employees, reducing the segmentation and duality brought about by the still-high numbers of temporary employees as a proportion of the total labour force, despite the fact this proportion has fallen in recent years. In this  BIS Review 31/2003  5  respect, the reform of hiring arrangements in the past has been in the right direction, as it has reduced the differences in terms of costs between temporary and permanent employment contracts.
However, there was nothing to prevent the banks themselves, alone or jointly, establishing subsidiaries to handle the bad loans. None chose to do so. BIS Review 58/2003  3  Nor did the Norwegian authorities issue a blanket guarantee for the banks’ liabilities. Such a guarantee can create moral hazard problems and actually lead to more bank problems in the future4. In addition, it was not considered proper for the government to take on an open-ended and not budgeted liability. Nevertheless, when the crisis emerged, it was made clear both by the Minister of Finance and by Norges Bank that measures necessary to bolster confidence in our financial system would be taken. No assurances were given that individual banks would be rescued. In this respect, it was probably a blessing that there was no government ownership in commercial banks before the crisis. In the end however, only two small banks were shut down and depositors paid back through the banks’ guarantee funds. By late 1993 - one year after Norway left the peg to the ECU and started to lower the interest rate - the crisis was effectively over and banks had started to earn normal profits. Banks in general came out of the crisis much leaner and more efficient than before. The discounted value of the gross fiscal costs of the resolution of the Norwegian crisis resolution is estimated at 2.9 per cent of GDP as of year end 1993.

Thus, not every stage in the development of the crisis will be recapitulated, or every step and detail in its resolution. Nor have I tried to reflect every nuance in the public debate, in the reports from parliamentary commissions and in research papers on the subject3. The views I put forward are my own and have been deliberately sharpened to promote discussion. The most important characteristics of the resolution of the Norwegian crisis can be summarized as follows: •  The banks’ own collective guarantee funds handled the problems in the banking sector before the crisis became systemic. •  No blanket guarantee for the banks’ debts was provided by the government. •  No regulatory forebearance. •  No liquidity support to banks whose solvency was in doubt. •  A clear and transparent division of responsibility between the political authorities, the supervisory authority and the central bank was established early on. •  Government support was contingent on strict requirements being met, e.g. existing shareholders accepting a write-down to cover losses to the extent possible. •  No micro-management of the banks. •  Measures taken to prevent supported banks exploiting the situation vis-à-vis non-supported banks. •  No asset management companies or “bad banks”. I shall comment on each of these issues, but before doing this let me briefly mention the background for the crisis:  1  Source: Sandal (2004). 2  Source: Kane and Klingebiel (2002) and Norges Bank.
Sources: Statistics Sweden and the Riksbank  One would need to raise the repo rate substantially, perhaps by several percentage points, to have a tangible effect on the risks linked to indebtedness. But the effect would then also be much higher unemployment and a much lower inflation. Such a monetary policy stance does not appear appropriate, and would in any circumstance not be compatible with an inflation target. The estimated effect of the repo rate on the debt ratio is very uncertain, so it is not impossible that the actual effect is much greater. At the same time, it is also possible that the actual effect is zero, or even that it would go in the opposite direction so that the debt ratio rises when the interest rate is raised.13 This could be possible, as the interest rate not only affects indebtedness, it also affects disposable incomes through its impact on economic activity and inflation. A higher interest rate is expected to have a negative effect on both indebtedness and disposable incomes. The ratio between them can therefore in principle rise or fall, even if it appears to be the latter in practice. Although I consider that indebtedness in the Swedish household sector comprises a risk to macroeconomic developments in Sweden, I am extremely doubtful about managing this risk by means of a monetary policy that leans against the wind. The cost appears to be high: inflation is pushed down in a situation where it is already low and unemployment becomes unnecessarily high.

During this period the krona strengthened by around 10 per cent and we were forced to revise our exchange rate forecasts in a stronger direction on several occasions. One possible explanation is that the forecast did not fully reflect the large interest rate differential that monetary policy entailed. One consequence of the strong development of the krona is that Swedish import prices have fallen in absolute terms and fallen more than other countries’ import prices (see Figure 2a). This puts downward pressure on inflation. Another consequence is that the international competitiveness of domestically-produced goods and services deteriorates. This could be reflected in lower sales volumes and, to the extent the firms instead prefer to guard their market shares, lower price mark-ups. A strong krona, combined with weak demand from abroad, has meant that the situation for the export industry has been particularly hard pressed, which has probably led to low wage increases in the manufacturing sector. As this sector is traditionally a wage leader, the low wages may have spread to the rest of the Swedish economy and in this way have contributed to the low inflationary pressures. Figure 2a. Figure 2b.
Access to financial services has been given separate priority status because it is vital for Russia. Special attention will be paid to the uniform development of access to services in different territories, cities and towns and reducing disparity. I would also like note it is unacceptable that some people lack access to financial services owing to disability. Unfortunately, such examples still occur. To conclude, I would like to summarise the overall focus of the measures that we plan to take in various areas in the coming years. How will our work differ from that in previous years? I started my speech by saying the Russian economy is entering a new cycle and the Central Bank’s approaches to work should rise to meet these new conditions. Our work will be consistent, we will continue to resolve the problems we have already identified, where progress has been made. However, we also need to think about a new stage in the Bank of Russia’s operation. In recent years, we worked on solving a number of entrenched problems and were partially successful in eliminating the consequences of external shocks. For example, we removed weak and unscrupulous players from the financial market, completed building the necessary elements of the national infrastructure of the financial market, and transitioned to inflation targeting. Now that the economy and the financial system have become stable, we have more opportunities to focus on development issues. We will prioritise competition issues, new technologies, financial accessibility, developing long-term money instruments and the capital market.

See May 2020 Monetary Policy Report and ‘Millennium of Macroeconomic data’ See 2015 report on the impact of climate change to the insurance sector and 2018 report on the impact to the banking sector 3 Record-breaking temperatures of 38°C were reported in Verkhoyansk, Siberia, Russia on 20 June 2020 1 2  2  All speeches are available online at www.bankofengland.co.uk/news/speeches  2  While these risks manifest as the credit, market and operational risks we know well, they have distinctive characteristics and therefore require a different approach if we are to manage them well. First, they are far-reaching in breadth and scope. They will affect every consumer, every corporate, in all sectors and across all geographies. Their impact will likely be correlated, non-linear, irreversible, and subject to tipping points. They will therefore occur on a much greater scale than the other risks we are used to managing. Second, these risks are simultaneously uncertain and yet totally foreseeable. It is difficult to say now what exact combination of physical and transition risks we will experience. But what is absolutely certain is that some combination of these risks will materialise - either we continue on our current emissions pathway and face physical risks or we change our emissions pathway and face transition risks. And we cannot let that uncertainty lead to inertia and inaction.
For all those reasons I don’t think the agencies are as influential as they used to be. The agencies themselves have always claimed that they are just one of the resources available in the market. They have always insisted quite rightly that they are not the final arbitrators of investment decisions. EUROWEEK: What about the French banking system? Are you comfortable that the French banks are adequately prepared for Basel III? Noyer: I have always considered each of the five major groups within the French banking system to be basically resilient. The universal banking model is playing an important role in that respect because it creates a large base of diversified revenues which means that when one business line of the banks has been hit by a shock they can rely on the variety of their other revenues and preserve their earning capacity. But this being said, with the benefit of hindsight, it’s clear that like many others the French banks weren’t sufficiently resilient to withstand major external shocks and tail risks during the crisis. So the French banking sector had to increase its capital base and reduce its leverage. I have to say that in my view the French banks have done so quite successfully and rapidly. Between the end of 2011 and June 2012 they increased their capital base by € through retained profits or fresh fundraising in the market or from their shareholders.

It is true, as I indicated earlier, that in recent years most European bank income statements have reflected sluggish growth. This is largely a result of cyclical factors such as persistent macroeconomic weakness (despite the recent improvement), subdued credit demand amidst deleveraging by households and firms alike and low interest rates which exert considerable pressure on financial margins. Nevertheless, there would also appear to be structural factors that could keep banks’ returns on capital permanently below their pre-crisis levels. In particular, it is reasonable to assume that stricter prudential regulations will moderate banks’ profits, if for no other reason than the higher regulatory cost they impose on high-risk exposures which are usually also those that generate higher expected returns. More generally, as I mentioned earlier, one of the aims of the new legislation is to increase the participation of banks’ shareholders and creditors in the absorption of losses in the event of bank failure. This means reducing to a minimum the idea of an implicit state guarantee for banks’ liabilities, which will naturally have an impact on the industry’s financing costs and, therefore, on bank profitability. In addition, it should also be noted that medium-term trends in advanced economies – characterised by the need for deleveraging, moderate productivity growth and population ageing – exert downward pressure on potential growth and prompt excessive structural saving which will tend to keep interest rates low. As a result, we may see marked changes in the banking business.
BIS central bankers’ speeches  7  making, which should have much stronger powers, and would also mean stricter constraints on national budget policies. This kind of reforms would require a comprehensive change to the EU Treaty but, above all, an adequate mechanism to ensure their democratic legitimacy. Let me outline the ideal cornerstones of such a governance reform. First, to ensure fiscal discipline, all planned deficits of more than 3% of GDP and those in excess of a country’s medium term objective would need to be approved by all euro area governments. Second, past fiscal slippages would be automatically corrected in upcoming budgets without any room for discretion via the introduction of constitutional rules similar to the German “debt brake”. Third, all Member States would also agree to implement fines and sanctions in a quasi-automatic mode. Finally, with the introduction in 2013 of a permanent crisis resolution mechanisms, the European Stability Mechanism (ESM), those countries slipping in the progress with their macroeconomic adjustment programmes would temporarily loose financial autonomy. The institutional arrangements at both national and supranational level would also have to be strengthened. At the national level, independent budget offices would ensure reliable forecasts – a prerequisite for sound planning and implementation of budgets. At the euro area level this needs to be complemented by an independent entity with a clear mandate and a strong institutional framework to assess the implementation of fiscal rules.

The social costs are in the end equal to the aggregate cost represented by the higher interest rates that the governments of all the other countries have to pay for their debt because of the fiscal irresponsibility of the original country. The difference between private and social costs implies a market inefficiency calling for some form of intervention whose objective is to internalise these kinds of externalities. In other words, the countries that pursue activities which risk causing contagion need to be constrained in pursuing such activities or “pay a price” which is proportional to the expected costs to the other countries which are affected by the contagion. This provides them with incentives to reduce the activities that could trigger contagion. Given that the possibility of contagion is well known from the literature and economic history, we should mind about both the preventive and corrective policies. In the case of sovereign contagion preventive policy options would include, fiscal rules and governance mechanisms that avoid excessive deficits or high stocks of public debt. Ex post policy options aimed at addressing the fall-out from sovereign contagion would include liquidity provision by central banks to financial markets, the recapitalisation of fragile banks and the swift implementation of growth enhancing structural policies and fiscal adjustment measures to regain market confidence in national economies and governments and offset the adverse effects of contagion. It goes without saying that – as a rule – prevention is by far preferable to addressing the problems that arise from contagion ex post.
The great attraction of an inflation target is that it is a framework that does not have to be changed each time we learn about aspects of the economy such as the velocity of money or the underlying rate of productivity growth, as was the case in the past with frameworks based on targets for money aggregates or nominal GDP growth. It is a framework designed for a world of learning. The empirical evidence suggests that inflation targeting has helped to confer tangible benefits. One test of whether inflation expectations are well-anchored is the volatility of long-term interest rates. Chart 5 shows the standard deviation of ten-year forward interest rates in the United Kingdom since 1992 and compares it with the figure for the United States. In both countries, volatility rose in the early 1990s. But whereas volatility has been broadly stable in the United States since the mid-1990s, it has fallen steadily in the United Kingdom. In a comparative study of OECD countries, Levin et al (2004) found that inflation expectations were better anchored in inflation targeting countries in the sense that movements in actual inflation were less likely to cause inflation expectations to change. The clarity and simplicity of an inflation target mean that a natural heuristic for the private sector is “expected inflation equals the inflation target”. Inflation targeting is a framework for making and communicating decisions. It is not a new theory of the transmission mechanism of monetary policy. It does not reflect a new understanding of the laws of economics.

“Potential Benefits of Poland’s EMU Accession”, Focus on Transition No. 1. 2. Brzoza-Brzezina, M. 2005. “Lending Booms in the New EU Member States: Will Euro Adoption Matter?”, ECB Working Paper No 543, European Central Bank, Frankfurt. 3. Brzoza-Brzezina, M. 2006. “The Information Content of the Neutral Rate of Interest: The Case of Poland”, Economics of Transition 14(2), s. 391-412. 4. Buiter, W.H., Nielsen, E. (2007), “Mundell on His Head: Asymmetric shocks are good for you, thanks to Economic and Monetary Union in Europe”, paper presented at The Brussels Economic Forum 2007, Global Adjustments and EMU, 31 May 2007-1 June 2007 5. Csajbók, A., Csermely, A. (ed.) 2002. “Adopting the euro in Hungary: expected benefits, costs and timing”, MNB Occasional Paper 24, National Bank of Hungary 6. DeGrauwe, P. 2003. “The Enlarged Eurozone: Can it Survive?”, Jelle Zijlstra Lecture, NIAS. 7. Demirgüç-Kunt, A., Detragiache, E. 1998. “The Determinants of Banking Crises in Developing and Developed Countries”, IMF Staff Papers, Vol. 45, No. 1, Washington, D.C. 8. ECB (2006), “Indicators of Financial Integration in the Euro Area”, ECB, September 2006 9. Eickmeier, S., Breitung, J. 2005. “How synchronized are central and east European economies with the euro area? Evidence from a structural factor model”, Discussion Paper 20/2005, Deutsche Bundesbank 10. Estrada, A., López-Salido, D. 2001. “Understanding Spanish Dual Inflation”, Documento de Trabajo n.º 0205 Banco de España  4  BIS Review 67/2007  11.
Earlier, the krone was devalued in response to high wage growth, which contributed to veiling the effect of relatively high wage growth on manufacturing industry’s competitiveness. With an inflation target, monetary policy has become forward-looking. The high pay increases awarded in last year’s wage settlements therefore engendered expectations of higher interest rates. This led to an appreciation of the krone. Manufacturing industry is thus faced with a double burden: high wage growth and a strong krone. Over the last 30 years, manufacturing has been scaled back in waves, particularly in the years between 1977 and 1987. In the years leading up to the periods of contraction, profitability in the manufacturing sector deteriorated. It can take time for such a deterioration to translate into lower output and employment. But when the turnaround does occur, it tends to be swift and pronounced. It now appears that a new period of downscaling is under way. Several factors point to this. First, a trend analysis suggests that manufacturing employment will decline in the years ahead. This is partly related to an expected decline in petroleum investment and somewhat higher productivity growth in manufacturing than in other industries. Second, manufacturing costs have increased sharply since 1988 as a consequence of high wage growth. The appreciation of the krone since the summer of 2000 has amplified the deterioration in cost competitiveness. Third, as a result of the fiscal guideline, the internationally exposed sector is exposed to additional pressure.

The reality during this period was that everyone was tempted to grab as much as they could while the going was good, because they knew it would not last. But we have learned from that experience. We’ve learned that in anything other than the short term there really is no trade-off between growth and inflation. What we are trying to do now through monetary policy is to keep overall demand in the economy growing continuously broadly in line with the supply-side capacity of the economy – as a whole – to meet that demand. Both the previous Government and the present one set a low inflation target as the immediate objective of monetary policy, not as an end in itself, but in effect as a barometer of our success in keeping demand in line with supply. So the real aim of monetary policy these days is to achieve stability across the economy as a whole in this much wider sense. Now, there is not a lot, frankly, that we can do, directly through monetary policy, to affect the supply side – the underlying rate of growth that can be sustained without causing inflation to rise. That depends ultimately on the ingenuity, the productivity, and the flexibility, of the economy, though it can, of course, be influenced by the whole raft of Government policies, ranging from education and health, through taxation and social security, to the balance between regulation in all its forms, including regulation of the labour market, and productive efficiency.