groups should be targeted and designed so as not to increase overall activity in the economy. this otherwise would further feed inflationary risks. measures should ideally also not be price - distorting to ensure that the price mechanism continues to work to reduce energy demand. in denmark, measures taken so far have mostly been in line with these recommendations. i see this as a testament to a sound economic policy setup. in fact, since i returned to denmark a few years ago after spending more than twenty years abroad, i have observed and been impressed by – and proud of – the extent to which sound economic advice plays a role in framing the policy debate in denmark. this tradition goes back perhaps 60 years to when the danish economic council was established. but the fixed exchange rate regime and its requirements of sound fiscal policy and sustainability arguably also play a role. this is a valuable feature of our regime. looking ahead the fixed exchange rate regime has advantages and drawbacks. i believe that the balance of these is such that the regime will continue to serve us well. most importantly, the fixed exchange rate policy provides a simple, credible and transparent nominal anchor for monetary policy, resting on the commitment and credibility built over 40 years of experience. it provides an important pillar in our stability - oriented framework for macroeconomic policy. it entails a clear separation of responsibilities between the monetary and the fiscal authorities. as i have already pointed out, the broad political support is an important part of the success of the regime, but also a feature that further reinforces the stability - oriented setup in its own right. * * * but there are also trade - offs * * * the choice of any currency regime, including our peg, also involves trade - offs. for one, the peg reduces destabilising currency swings against page 5 of 7 the euro. but it comes with the trade - off that it also eliminates currency movements that would have been warranted by macroeconomic fundamentals. it also removes the policy rate from the toolbox for targeting domestic financial conditions. this cost should not be overstated. in a small open economy closely integrated with global capital markets, financial conditions will always to some extent be driven by global factors. 2 but a clear trade - off we have experienced is episodes where pressure on the krone required a change of the policy rate in the opposite direction to what would have been desirable from the point of view of domestic economic conditions. for example, we increased the policy rate in 2008 going into the global financial

time, there has been a considerable decrease in prices for our imports, such as clothing, footwear and electronic equipment. from 2003 to 2008, this improvement in norway ’ s terms of trade alone boosted national income by more than 20 per cent, or a good 4 per cent per year. the picture of norway ’ s favourable situation has been reinforced by the very severe impact of the financial crisis on other western economies, while norway seems to have emerged with nothing more than a mild downturn. nevertheless, there are many challenges ahead. chart 1 relative labour costs deviation from the average for the period 1970 – 2009 per cent, 1990 – 20101 figures for 2010 are an average for the period 1 january – 19 august 2010. a rising curve indicates weaker competitiveness. sources : statistics norway, technical reporting committee on income settlements ( tbu ), oecd, ministry of finance and norges bank. norwegian labour has never been as costly as it is now. norwegian businesses may lose out in the competition for contracts given the current high level of spare capacity in other countries. there are frequent reports of businesses relocating activities to neighbouring countries, such as sweden. labour in sweden is perhaps as much as 30 per cent cheaper than in norway and the two countries are closely connected in terms of language and culture. the management of norway ’ s oil wealth poses another challenge. history has shown that countries that suddenly gain access to an abundance of resources have a tendency to deplete the values rapidly and then fall into decline. 9 since the introduction of the fiscal rule in 2001, oil revenue spending in norway has been increased by close to nok 110 billion. oil revenues now fund about 1 / 6 of government expenditure. without a fiscal rule, spending the paradox of plenty. oil booms and petro - states by terry lynn karl ( 1997 ) provides a good description of the problems facing oil - exporting countries. would probably have been higher. in the 1950s, 60s and 70s, the tax burden was steadily increased to finance higher government expenditure. the return on our oil wealth has now taken over as the source of funding for increased public consumption. chart 2 oil revenue spending1 in billions of nok, 2002 – 2010 structural non - oil deficit. source : ministry of finance. but looking ahead, funding norway ’ s welfare system will be demanding. increases in oil revenue spending cannot be sustained for much longer. oil production will decline. at the same time, we have been through a period in which the need for