##d five times between 1976 and 1982, partly as a result of recurring cost crises. the large devaluation in 1982 was an offensive devaluation aimed at stimulating growth in the competitive sector. it assumed a tight fiscal policy to restrain domestic demand. during the 1980s both the credit and foreign exchange markets were deregulated, partly as a result of international developments. this was done gradually, but the credit market was formally deregulated in 1985 and the final parts of the foreign exchange regulations were abolished in 1989. demand was high during the second half of the 1980s and the economy became overheated, resulting in high inflation, large wage increases and very large increases in property and share prices. sweden ’ s competitiveness was undermined and finally the riksbank could no longer withstand the speculation against the krona. in november 1992 the krona was allowed to float and it depreciated around 30 per cent in just a few months. the 1990s crisis was not merely a consequence of stabilisation policy failures. the situation was aggravated at the beginning of the 1990s by the tax reform – which stimulated increased saving – and an international slowdown in economic activity. it was difficult to predict the large fall in share prices and property prices. the decline in demand was substantial in any case and production and employment fell considerably. unemployment reached the highest level of the post - war period. the budget deficit and government debt ( as a percentage of gdp ) also increased to all - time highs as a result of the crisis. sweden and finland were the european countries that suffered the most from the crisis, but other countries also experienced serious problems ( see figure 4 ). for most countries, this proved to be dearly - bough experience. monetary policy was reformed to inflation - targeting policy, the exchange rate was allowed to float and a deficit target and an expenditure ceiling were introduced as norms for fiscal policy. we have had this new policy in sweden for around 10 years now, and many other countries have chosen a similar policy. the labour market situation most people would probably agree that the period from the mid - 1990s, when inflation targeting was introduced, has been a relatively successful time in macroeconomic terms. inflation fell fairly quickly from levels close to 10 per cent to around the inflation target of 2 per cent. inflation has remained at a low level since then, albeit slightly too low in recent years ( see figure 1 ). annual gdp growth has on average been twice as high over the past ten years as during

’ s nominal exchange rate is determined by the real exchange rate together with differences in inflation with the rest of the world. a currency ’ s real exchange rate can be described as the price of goods and services in that country relative to the rest of the world. if a difference in inflation grows, a corresponding depreciation of the currency is needed to keep the real exchange rate stable. the current exchange rate is also influenced by expectations of future rates. the credibility of economic policy ’ s commitment to long - term price stability is thus important for exchange rate tendencies. the value of a currency is also susceptible to influences of a more temporary nature. cyclical factors may play a part. when the economy is in an upward phase, a country may need a tighter monetary policy, which normally leads to an appreciation of its currency. deviations from the exchange rate ’ s more fundamental level may also be occasioned by matters to do with credibility. in addition, the exchange rate may be affected by transitory shifts in the currency market ’ s demand and supply. such shifts may arise from portfolio adjustments. in certain periods these mechanisms may tend to accentuate exchange rate movements even though economic fundamentals point in a different direction. one example of this is the large movements in the us dollar. against this background i shall now look at some factors that will probably be important for the development of the euro. i shall take the fundamentals first and then point out some factors that could be of transitory significance for the euro. fundamental factors provided economic policies in the euro area focus credibly on price stability accompanied by a corresponding low - inflation policy in the rest of the world - it is probable that the euro ’ s nominal exchange rates with other countries will display a high degree of stability. however, cyclical disparities between currency blocs and some uncertainty about monetary policy signalling are factors that could generate certain fluctuations. emu is constructed so that monetary policy will be formulated collectively by the ecb ’ s executive council and the national central banks in the light of the overall picture of inflation in the euro area, while fiscal policies are formulated at the national level. monetary policy the european central bank ( ecb ), which will be accountable for emu ’ s single monetary policy as of next january, was established on july 1st. the monetary policy objective is price stability. the objective has not yet been defined more specifically but statements suggest that there will probably be an intermediate money supply target and that price stability will be represented