øystein olsen : managing wealth – some thoughts on economic policy and the allocation of national savings speech by mr øystein olsen, governor of norges bank ( central bank of norway ), at a meeting hosted by the norwegian embassy, rome, 29 november 2012. * * * introduction european economies are currently going through hard times, with repercussions of the crisis still being felt throughout the world economy. for all of us, it is a humbling experience to observe how closely interconnected markets and economies have become across national borders. my intention here this evening is not to point at solutions to the challenges currently facing the euro area. what i can offer, however, is the perspective of a friendly neighbour and a substantial investor. in this modest capacity, i hope to sound a note of optimism from a region of europe that in its recent past went through a grave crisis, which was followed by a series of reforms and, eventually, the return of prosperity. the nordic experience with the cycle of crisis, reform and recovery might provide some perspective for those european countries now facing similar challenges. i will also make some remarks on the current situation in financial markets in general, and government bond markets in particular, from the viewpoint of a global investor. easy money is bad for you slide 1 : landes quote in his book the wealth and poverty of nations the historian david landes describes how the spanish empire went into a long period of decline when the flow of latin - american gold dried up in the mid - 17th century. according to landes, the moral of this story is that “ easy money is bad for you. it represents short - run gain that will be paid for in immediate distortions and later regrets. ” 1 as a country rich in natural resources, norway has shared and tried to learn from this experience. perhaps the quotation from landes also rings true for all those who borrowed cheaply during the boom before 2008, and who now have to face the consequences. windfall gains, like large and unsustainable capital flows from abroad, are double - edged. they provide short - term relief from hard choices, but may carry with them hardship in the longer term. slide 2 : output gap : a boom - bust economy after the discovery of oil in the north sea in 1969, government spending and social programs expanded rapidly in anticipation of future petroleum revenues. we sought to build a bridge across the post oil - shock recession in europe. but it was a bridge to nowhere.

##goff, aasim m. husain, ashoka mody, robin brooks and nienke oomes ( 2003 ) : “ evolution and performance of exchange rate regimes ”, imf working paper 03 / 243 ; eduardo levy - yeyati and frederico sturzenegger ( 2003 ) : “ to float or to fix : evidence of the impact of exchange rate regimes on growth ”, american economic review, september 2003, pp. 1173 - 1193 ; jeannine bailliu, robert lafrance and jean - francois perrault ( 2003 ) : “ does exchange rate policy matter for growth? ”, international finance 6 : 3, 2003, pp. 381 - 414. in 2003, wage growth was considerably lower than in the previous five years. this provided a sounder basis for substantial reductions in norwegian interest rates, resulting in a narrowing of the interest rate differential between norway and other countries. the reduction has contributed to a weakening of the krone since december 2002. thus, the real exchange rate has also weakened and business sector competitiveness has improved. however, the business sector is still feeling the effects of the loss in competitiveness that resulted from high wage increases. the internationally exposed sector has been scaled back. those companies that are still operating may be in a better position to bear the high wage level. nevertheless, costs may hamper activity and employment growth. for a long time, a stable exchange rate and the level of cost inflation among our trading partners provided an anchor for wage determination in norway. to maintain competitive strength, wage growth in norway had to be on a par with wage growth among our trading partners when productivity growth in norway was on a par with our trading partners. with the current monetary policy regime, the inflation target is the nominal anchor. according to updated national accounts figures, an inflation target of 2½ per cent and trend productivity growth of around 2 per cent imply annual nominal wage growth of about 4½ per cent. wage growth that is lower than 4. 5 per cent contributes to increased employment. the swedish trade union confederation ’ s recommendations to its members are based on the inflation target : “ it is therefore in the interests of all wage earners to control total wage increases to avoid exceeding the level that is consistent with the inflation target defined by sveriges riksdag ( swedish parliament ). ” challenges facing the norwegian business sector history has taught us that individual companies and individual industries in wealthy countries may be threatened by