in gdp growth of 1. 0 per cent, compared with the first quarter, which was much more than the 0. 3 per cent we were expecting, and much stronger than during the first quarter. the average level of gdp growth in the euro area was high thanks to very high growth in germany. moreover, the purchasing managers ’ index for the manufacturing industry in the euro area rose to 56. 7 per cent in july. the economic recovery is also continuing in our nordic neighbouring countries. inflation in the euro area was 1. 7 per cent in july, measured in terms of the eu - harmonised consumer price index, the hicp, which may be considered a relatively high inflation rate given the low resource utilisation in the eu. but if one disregards energy and unprocessed foods, inflation was only 1. 0 per cent in july, which is largely the same inflation rate as earlier in the year. ( figure : inflation in the euro area ). continued recovery in the world economy to summarise the international economic situation one can say that the new information published during the summer largely supports the picture painted by the riksbank of a continuing recovery in the world economy. but there are some signs of weakness in the united states and asia, while europe looks slightly stronger than expected. large deterioration in public finances in many countries there were concerns at the monetary policy meeting in june over the possible consequences of the public finance problems in several countries. during the spring these problems had led to increased risk premiums in the financial markets and caused difficulties for many banks. in a worst case scenario, this could lead to a much weaker development abroad, which would also affect sweden. i said at the monetary policy meeting that in this case we must be prepared to reconsider the direction for our monetary policy. given this, i shall now specifically discuss public finance problems and developments in the financial markets. deficits in public finances and national debts have increased rapidly in many countries during the economic crisis. ( figure : public finances in the oecd area ). developments have been dramatic for some countries, and especially so for greece. the poorer public finances have pushed up government bond rates and are making it difficult or almost impossible to fund the large deficits. many other countries are also experiencing serious problems. to improve their public finances these countries are now implementing strict budget tightening, which is necessary to attain a stable long - term development in public finances. but at the same time, the budget constraints will

. instead, in the large advanced economies at least, the bursting of the bubble coincided with a contraction of private demand and a deep recession. the negative effect of the crisis on economic activity actually reduced inflationary pressures. the main problem has since then been how to prevent the deleveraging process from bis central bankers ’ speeches starting a deflationary spiral. in such conditions, monetary policy which eases the strain on the banking sector has at the same time supported price stability. now, almost five years later, do we have a trade - off between price stability and financial stability? by conducting a monetary policy of extremely low interest rates, combined with exceptional measures such as bond purchases, are we stoking asset price bubbles and encouraging too risky lending practices by banks? very low interest rates may encourage risk taking by the investors. this is actually one of the objectives. our economies need more productive investments. the low interest rate environment will also affect bank lending. this is also desirable, and it is hoped that business lending to job - creating smes will be stimulated. however, we hear worries that the incentives could be too strong. this is based on the fear that banks will finance investments which are too risky, or the stimulus could be unduly concentrated on, say, the real estate sector. of course, successful monetary policy requires a stable financial system. if stability is not there, the transmission of monetary policy can hardly work smoothly. this is one of the lessons of the financial crisis. * * here we see how the problem of possible financial dominance is manifested in today ’ s economic environment. now it is not the question can the banking system endure a hard, disinflationary monetary policy. we must pose the question in another way : how can we make sure that the banking system is able to operate prudently under a monetary policy that seeks to maintain price stability “ from below ”, with an accommodative, even expansionary stance? there was a famous discussion on how monetary policy should relate to credit booms and asset prices in the jackson hole conference of 2007. at that time, the prevalent thinking in central banking circles was what it is better for monetary policy only to “ clean ” ( up after the bursting of the possible bubbles ) than to “ lean ” ( against the wind ). the strategy of the ecb includes the so - called second pillar of monetary analysis, which focuses on signals from money supply and credit creation. this means we are committed to