, a stability - oriented economic policy with a focus on medium - term objectives together with structural reforms – not least in the labour market – have transformed the danish economy. today, unemployment is among the lowest in europe. we have sound fiscal balances and low public debt. large current account deficits have been replaced by large surpluses. this has transformed denmark from a debtor nation to a creditor nation with net foreign assets of about 70 per cent of gdp. page 3 of 7 in turn, we have created a highly robust economy. i think it is fair to say that the fixed exchange rate policy has had an educational effect on several generations of politicians. they all remember or have heard of the economic woes of the 70s and 80s. and no one wants to end up there again. * * * the system has withstood several tests over time – adding credibility to the system * * * keeping the exchange rate fixed is not always an easy task. it takes determination. vigilance. a forward - looking and responsive mindset. a willingness to learn and adapt. this is particularly true in periods with pressure on the krone. and we have seen our fair share of such periods. but we have shown that we are ready to do whatever it takes to keep the krone stable. as the economy has transformed over the years, so has the type of exchange market pressure that we encounter. and each time we have drawn new experiences. in the early 1990s, european foreign exchange markets came under strong pressure from speculators. our currencies were pegged to each other within the exchange rate mechanism, erm. but one after another, they came under attack. the danish krone was no exception. amid the turmoil, the united kingdom abandoned its fixed exchange rate policy. later sweden and norway followed suit. the situation developed into an attack on the entire erm system. responding to the crisis, it was decided to widen the bands within which the currencies were allowed to fluctuate to plus / minus 15 per cent. although denmark had argued in favour of retaining the erm as far as possible in its existing form, the danish krone depreciated significantly against the d - mark. the danish government under the leadership of prime minister poul nyrup rasmussen – who is here today – and danmarks nationalbank agreed to stand ground. it was emphasised that denmark had sound economic fundamentals and that the fixed exchange rate policy would be maintained despite

in both directions, thereby contributing to the difficulties we are now facing. danish house prices showed an almost constant upward trend from 1993 to 2007, particularly in 2005 and 2006. until 2005, growth in property prices during the most recent upswing was to a large extent attributable to low interest rates – especially at the short end of the curve – deferred - amortisation loans, higher disposable incomes, falling unemployment and the tax freeze. but the trend became self - fuelling. in the expectation that prices would continue to rise, new homes were purchased before the old ones were sold. property became an object of speculative investment. driven by expectations, combined with the economic upswing, prices of single - family and terraced houses soared by almost 25 per cent within one year from early 2005. the increase was even stronger in the copenhagen area. a hike of that magnitude cannot merely be explained by the underlying economic conditions. expectations also played a role. the rising property prices added fuel to the upswing. home equity increased, and consumers gained extra purchasing power. we witnessed a strong expansion in construction activities, with clear signs of overheating. and last, but not least, lending growth was particularly strong for banks with large - scale commitments to the property sector. it is characteristic that in the shadow of property - market developments activities took place that are now being investigated by the danish fraud squad. the rollback of these imbalances has amplified the impact of the international recession. declining property prices have not only affected the building and construction sector, but have also exacerbated the fall in consumption when compared with other countries. as regards the financial sector, it is worth noting that the ailing banks are primarily found among those that previously displayed the most aggressive lending policies in the property market. what does this tell us? in a market economy, crises can never be avoided. we must accept economic downturns from time to time. as a small, open economy we cannot guard ourselves against a sudden drop in external demand, reducing exports by almost 20 per cent in six months, as we have witnessed. but we can seek to conduct economic policy that does not in itself amplify economic fluctuations. we have not been good at that. during the upswing, our economic policy was procyclical, contributing to the upward trend. too little was done to curb it. you might say that we put the economy into a higher gear in a situation when it was