urban backstrom : the swedish economy speech by mr urban backstrom, governor of sveriges riksbank and chairman of the board of directors and president of the bank for international settlements, to the swedish shareholders association, in stockholm on 28 november 2000. * * * first a word of thanks for the invitation to talk to you this evening. my topic is the swedish economy and monetary policy. provided nothing unexpected occurs, in my opinion it will soon be time to raise the repo rate. it is, however, difficult to tell just when this will happen. the board is made up of six members, each with their own opinion of what is the most appropriate monetary stance and a say in the final decision. but this evening i would like to elaborate on why i personally believe it will soon be time to raise the repo rate. in order to put the present monetary policy situation in perspective, we need to look back some years into the past. during 1996, when confidence had been established in economic policy ’ s overall commitment to price stability and the consolidation of the public finances had begun, the riksbank was in a position to initiate a comparatively marked reduction of the repo rate. this had been preceded by a period with a tight monetary stance, when the repo rate had reached a high of almost 9 %. when the 2 % inflation target was introduced, few observers believed at first that trend inflation would ultimately land up around 2 %. we would do well to remember, however, that people ’ s perceptions of the future are often shaped not so much by words as by actions. so, after a series of purposeful decisions by the government, the riksdag ( sweden ’ s parliament ) and the riksbank, economic policy ’ s general commitment to macroeconomic stability began to inspire confidence. economic policy ’ s credibility gave the riksbank greater freedom to act the growing confidence accordingly meant in turn that, without jeopardising the objective of price stability, the riksbank was able to lower the repo rate relatively markedly, from almost 9 % to just over 4 %. interest rates for longer maturities also fell. this led, as we have all seen in recent years, not just to higher gdp growth but also to a more uniform development of demand in different sectors. when the cyclical upswing began towards the end of 1993, most of the growth came from the export sector. however, lower levels of interest rates benefited swedish households and firms by

, a mistake? the ideal sequencing would have been to first have a firewall in place, then do the recapitalisation of the banks, and only afterwards decide whether you need to have psi. this would have allowed managing stressed sovereign conditions in an orderly way. this was not done. neither the efsf was in place, nor were banks recapitalised, before people started suggesting psi. it was like letting a bank fail without having a proper mechanism for managing this failure, as it had happened with lehman. now, to be fair again, one has to address another side of this. the lack of fiscal discipline by certain countries was perceived by other countries as a breach of the trust that should underlie the euro. and so psi was a political answer given with a view to regaining the trust of these countries ’ citizens. coming to the fiscal pact, what is your answer to those who say there is excessive concentration on budgetary rigour at the expense of competitiveness and growth and that actually what is being created is a “ stagnation and austerity union ”? the answer is that they are right and wrong at the same time. they are right because there can ’ t be any sustainable economy without growth and competitiveness and job creation. they are wrong if they think that there is a trade - off between the two. there ’ s no trade - off between fiscal austerity, and growth and competitiveness. i would not dispute that fiscal consolidation leads to a contraction in the short run, but then you have to ask yourself : what can you do to mitigate this. improvement in budgetary positions should elicit some positive market response, lower spreads and lower cost of credit. but two further conditions have to be satisfied : implementation at national level of the structural reforms needed to enhance growth and jobs creation. and finally, it is necessary to have the right euro area design, implementing the fiscal compact, so that the confidence is fully restored. austerity by one single country and nothing else is not enough to regain confidence of the markets – as we are seeing today. consolidation must also go hand in hand with structural reforms. each country has its own path that they should undertake. for some, the situation would not be sustainable even if they were outside the euro and were to devalue their currency. that would give only a temporary respite – and higher inflation, of course. but that was part of the answer in the early 1990s in italy