nils bernstein : developments in the world economy, the danish economy and in its mortgage credit system speech by mr nils bernstein, governor of the national bank of denmark, at the annual meeting of the danish mortgage banks, copenhagen, 26 september 2012. * * * growth in the world economy was weaker than expected in the 1st half of 2012 and declined further over the summer. it now looks as if global growth this year and next year will be lower than expected in the spring. not only the european economies have slowed down, but also major emerging economies such as brazil, china and india – which have until now been surprisingly resilient to the crisis. this development is reflected in world trade, which has flattened out since the turn of the year. according to the press, the wto assesses annual growth in world trade at only 2 – 3 per cent at the moment. this is a clear indication that things are not going too well. the problems in southern europe still constitute the greatest uncertainty factor. the debt crisis has been weighing down the world economy since early 2010. many initiatives have been taken – by the member states in question, by the euro area as such and by the imf. but it has proved to be difficult to come up with effective solutions. the good years of the last decade were only to a limited extent used to build up buffers. so when the crisis erupted, many countries had little resilience, and the need for consolidation soon became evident. uncertainty about us fiscal policy is another risk factor. at a time with weak domestic demand and low confidence in the private sector, many countries are compelled to pursue tight fiscal policies due to large government deficits and debts. these countries are to a large extent paying for the sins of the past. on the other hand, it should also be emphasised that consolidation is underway, especially in many european economies, and medium - term strategies to ensure fiscal sustainability are in place. combined with the most recent initiatives from the european central bank, this should help to bring down interest rates, and hence funding costs, to a manageable level in debt - ridden eu member states such as spain and italy. among the member states subject to imf programmes, ireland has made the most progress towards economic recovery and is now, once again, able to borrow in the international financial markets at affordable interest rates. neither the usa nor japan has adopted a medium - term fiscal plan – that is, a plan for reducing the growing debt in the long term.

keeps turning, structural reforms in principle never end. the most appropriate speed and sequence of reforms e. g. depend on whether the output gap is positive or negative. this makes it difficult to draw a clear distinction between structural and fiscal policy. in international terms, including countries that apply best practice inflation targeting, denmark has seen very moderate volatility in inflation as well as output in recent years. we attribute this, in large measure, to the use of stabilisation policy as described above. in the 1970s and early 1980s, a very activist fiscal policy was pursued, as opposed to the current situation. our government debt rose steeply and the exchange - rate policy was anything but consistent. in those years, danish volatility was high by international standards. danish experience thus speaks against fiscal as well as monetary fine - tuning of the economy. efforts to stabilise the economy often end up rocking the boat. our experience, in the main, corroborates the focus on structural economic factors theoretically established by kydland and prescott. i want to make one final point : it is appropriate that drivers practise and qualify for a driver ’ s licence before getting behind the wheel. similarly, it is appropriate that a country documents that it is ready for emu prior to entry. part of this documentation is erm ii membership