now have positive effects that are directly evident in the form of low inflation and thereby lower interest rates and higher economic growth. moreover, with the division of responsibilities that now applies in stabilisation policy, fiscal policy is freer to focus on long - term issues and structural matters. the riksbank ’ s way of working i should now like to comment briefly on how the riksbank works and on the implementation of our so - called rule of action. these matters have featured in the general debate in the past year, presumably just because inflation and our inflation forecasts have continued to provide relatively weak arguments for raising the repo rate even though activity is strong. in simple terms, the riksbank can be said to formulate monetary policy on the basis of inflation ’ s forecast rate, in the first place one to two years ahead. if inflation is expected to be above the 2 % target during this time horizon, the interest rate is normally raised and vice versa. this rule was formulated with a view to making policy more intelligible, to ourselves as well as to others. we also believed a rule of this kind would serve as a structure for decision - making and help to enhance confidence in monetary policy. in my opinion, the rule has served these purposes. it has contributed, not least, to a more structured discussion of monetary policy issues and thereby to a deeper understanding of the choices we have to make. have we observed our rule? judging from this chart, i would say we have ( chart 2 ). the chart shows the repo rate in practice together with the path indicated by the riksbank ’ s inflation assessments. you will see that we have followed our forecasts fairly closely and thus adhered to our rule of action. deviations have occurred, mainly in the early years with the inflation target ; i believe they were largely connected with concern about the exchange rate. the repo rate in practice and the rule of action 10, 5 9, 5 8, 5 percent 7, 5 6, 5 5, 5 4, 5 3, 5 2, 5 time source : jansson and vredin, the riksbank while i accordingly consider that a rule of this kind is of considerable value, i must underscore that we never intended to implement it mechanically. what matters is that we secure our objective in the longer run, really for ever. we chose to focus on the period from twelve to twenty - four months ahead for a number of reasons.

on the one hand, financial markets failed to provide enough ex - ante market discipline : european and global investors were eager to finance countries with higher expected short term returns, dismissing underlying vulnerabilities. investors tend to ride the waves of sentiment, reacting only – but dramatically – when weaknesses become evident. in this way, they act procyclically, inducing large swings in capital flows. our latin american colleagues are acquainted with these experiences, because they have suffered this type of “ sudden stops ” several times over the last decades. on the other hand, economic policies did not respond adequately to the underlying dangers. in a context of apparent economic and financial stability, and with the european project sailing in full swing, complacency was difficult to avoid, and there was little incentive to address – or even assess – underlying problems. this applies both to the european and the domestic spheres. the surveillance framework operating at the european level was mostly focused on the fulfilment of the fiscal targets embodied in the stability and growth pact. however, this framework revealed itself insufficient and ultimately ineffective, both because it relied on nominal deficit thresholds – which masked fiscal vulnerabilities under the umbrella of a large cyclical increase in revenues - and because it was loosely applied. in several euro area countries, spain among them, the structural policies that could have set the basis for a more lasting and sustainable growth path were timid in a period when the economy was supported by a favourable environment. this is not, by the way, a european peculiarity : as we all know, structural policies tend to be implemented out of necessity, that is, not in the good, but in the difficult times. however, the narrative of the financial crisis in spain somewhat differs from other developed countries. our financial system was not exposed to the complex structured assets which were at the root of the financial crisis in 2007 - 2008. but, while we did not hold this kind of toxic assets, we have suffered the toxification of the housing sector assets as the crisis deepened. the freezing of the global financing markets that started in mid - 2007 also disrupted our financing patterns ( heavily dependent, as i have said, on external funds directed towards the housing sector ). the situation only got worse when the sovereign crisis – that started in greece in late 2009 – progressively spread to other euro area countries with vulnerable fundamentals. as we have seen in our discussions today, the trigger of the crisis in the euro area shows, to a