Demand slump following the onset of the financial crisis (2008–2011) The key event following the onset of the financial crisis was the collapse of the Lehman Brothers investment bank in September 2008. The subsequent weeks and months saw a sudden, substantial slump in demand for goods and services. Between 2008 and 2009, global imports and exports fell by some 25% in nominal terms, the sharpest decline since records began in 1948. The euro area, and the neighbouring countries examined here, slipped into recession (cf. chart 2). GDP in the euro area plunged by around 5% in 2008 and 2009, at the height of the crisis. The drop in the neighbouring countries ranged from 3.4% in Switzerland to 7.2% in Denmark, whose economy had experienced a phase of overheating in pre-crisis years. Inflation rates fell sharply due to lower demand and falling oil prices (cf. chart 3).1 Inflation in the euro area declined to −0.6% in the course of 2009. The lowest inflation recorded during this period was −1% in Switzerland. In the Czech Republic, too, inflation was negative for a short period in 2009. In Denmark and Sweden, it remained in positive territory. Central banks reacted to the global slump in demand with drastic interest rate cuts – the conventional monetary policy instrument (cf. chart 4).2 In addition, markets were provided with large amounts of liquidity. In the Czech Republic, Denmark and the euro area, there was still leeway for further steps even after these interest rate cuts.

Their focus should be comprehensive, meaning further adaptation of legislation, improvement of infrastructure, full privatization of public assets, improvement of the business climate, deepening and broadening of the financial market, comprehensive reform in pensions, as well as a number of other actions which I can not mention here because of objective reasons. I think that the inflow of foreign direct investments remains our major target. Without them the region would remain small, fragmented, with a low development, social and economic potential, with sporadic exports, with premature markets and high costs, or in other words, with a low productivity. Personally, I am of the opinion that each foreign investment means faster convergence to Europe. Third, the financial market should develop to create other alternatives for savings, financing and risk management of economic entities, as well as for improving the conditions of these activities. Besides the banking sector, the share of non-bank financial institutions should also be rapidly developed, to enable a greater involvement and access to financial services for entities that can not benefit enough from banking services. Furthermore, I think that it is important to pay more attention to development of capital markets, particularly those issuing and trading debt securities and equities by private entities. Fourth, the regulatory framework and supervisory practices should be completed with some important elements in terms of prudential measures and emergency financial situation management. The prudential measures framework should cautiously treat capital and liquidity requests from banks, especially in the case of foreign currency.