- lived downturns and longer upturns, appears to be holding true. economic policy has contributed to stability a number of different factors may have contributed to upturns in economic activity becoming longer, and the downturns shorter, while variations in production have declined. various studies bring up different explanations, so i would like to point out that this is more a question of speculation than fact. one explanation could be that economic policy has contributed to increased stability. fiscal policy in a large number of countries has been changed towards a balanced budget and avoiding an unsustainable build - up of debt, while monetary policy has been given a clearer focus on maintaining price stability. a greater emphasis on combating inflation and on institutional changes to make central banks more independent, has gone hand in hand with stabilisation policy appearing to have been more successful in counteracting fluctuations in economic activity in many countries. changes in production methods, including an altered pattern for adapting stocks and new technology, may have enabled the demand and supply for both goods and capital to be matched more quickly than before, which contributes to the milder downturns and longer upswings. a further factor that could have contributed is that the percentage of services in gdp has increased and the production of services has shorter lead times. expansive economic policy - good years for the swedish economy a low inflation rate and tidy public finances have provided room for manoeuvre when facing a downturn in economic activity. a changeover towards a more expansionary economic policy in a large number of industrial nations has laid the foundation for the recovery this year. in the usa there was a substantial change in monetary policy at the beginning of 2001. on top of this came considerable fiscal policy stimulation. monetary policy in europe and sweden has also been expansionary. however, many large countries in europe are still struggling with large budget deficits, which have limited their fiscal policy scope for action. last year sweden had one of the largest surpluses on public savings in the eu. this has enabled an expansionary fiscal policy. this year households ’ disposable incomes are expected to increase by almost 5 per cent, almost 80 per cent of which comes from increased transfers and lower taxes and charges. such a large increase in income has only happened on a few occasions over the past decades. despite the slowdown in economic activity, employment increased strongly and unemployment continued to fall. however, the labour market is split into two parts, with falling employment in manufacturing and an

environment is such a good idea, why aren ’ t governments doing this all the time? well, first of all, macroeconomic stabilization is not the only objective of fiscal policy. there are lots of other legitimate economic and political objectives, like for example redistributing income. and there are important constraints as well. i will come to speak about debt sustainability in a moment, when we look at the euro area. but there are also, what economists famously call, the implementation and transmission lags. this simply means it takes time, for example, to design and implement a good subsidy policy for the purchase of electric cars. and then it takes time before people actually buy more electric cars. these time lags often prevent fiscal policy from providing the necessary stimulus at the time it is needed, and not when the recovery is already well underway. and even if fiscal policy were not subject to any lags, governments would still face the issue of coming up with the right fiscal package. are we going to cut labor income taxes or are we going to invest in the digital highway? or a little bit of both? it isn ’ t easy. as a finance minister, witteveen was no doubt very aware of that. so when i say that persistently low interest rates strengthen the case for more countercyclical fiscal policy, i ’ m not saying this should be the new compass for the ship of state to sail by. other considerations are as important as ever. what i would like to argue is that the macroeconomic stabilization function of fiscal policy has become more important, and should therefore attract more prominence when weighing the various objectives of fiscal policy. fiscal - monetary coordination in the euro area now that we have covered the theory, let ’ s see what actually happened in the euro area. the consensus view before the global financial crisis of 2008 prescribed a clear division of tasks between monetary and fiscal policy. according to this view, an independent central bank should be tasked with stabilizing prices, which would normally have a countercyclical element to it. fiscal policy should focus on achieving public debt sustainability. this division of tasks was meant to ensure that fiscal problems were not resolved by having the central bank ‘ inflate away ’ public debt. also, discretionary fiscal stabilization policy was generally seen as very difficult to implement, for the reasons i just mentioned. fiscal authorities were therefore advised to take on a more passive role and let the automatic stabilizers do their job. this pre -