relationship between wage increases and competitiveness is different under a fixed and floating exchange rate. with a fixed exchange rate, competitiveness is determined first and foremost by how big wage increments in sweden are compared with other countries. if wage costs increase too rapidly, costs crises arise that can result in higher unemployment or that force the country into devaluations with a view to restoring competitiveness, as was the case in sweden during the 1980s. the problem with the repeated devaluations was that they eroded the fixed exchange rate ’ s credibility. wage - earners and employers expected to be bailed out when competitiveness was weakened by the excessively fast wage rises. under a floating exchange rate, however, relatively higher increases in nominal wages do not have as much significance for competitiveness, if the exchange rate adjusts. we can have higher price and cost growth than our trading partners without seeing our competitiveness deteriorate, if the krona functions as a shock absorber. so, companies do not bear the direct burden of excessive wage increases, since the exchange rate adjusts over time so that profits are maintained in the sectors exposed to competition. also, a floating exchange rate often dampens cyclical fluctuations. in 2001, the swedish it sector – including ericsson and telia – was hit by a deep decline. but the decline was partly compensated for by the weaker krona exchange rate, so that profits were sustained in the paper and pulp industry, the iron and steel industry, and in other parts of the manufacturing sector. under a floating exchange rate, the inflation target is the nominal anchor for price and wage formation, rather than the rate of wage increases abroad. wage - earners and employers know that the riksbank has to immediately intervene with interest rate adjustments if inflation deviates clearly from target. so, excessively high wage increments can lead to tighter monetary policy. for an individual company or industry, developments in wage costs in other countries nonetheless have great significance, since the exchange rate in these cases can be taken as given. a swedish company that raises wages sharply risks being driven out of business. as globalisation continues, new markets are being opened in which wage costs differ from the level in sweden. companies get increased opportunities to outsource their activities to countries with lower wage costs. the question is if wage growth in sweden is competitive in relation to other countries? the large surplus on the current account, sek 48. 1 billion during the second quarter this

on. the way the whole economy functions has of necessity changed since the post - war period and it is unlikely that the current economic policy regime with a floating exchange rate and inflation target can deliver both 2 per cent inflation and an unemployment rate equivalent to the levels we had then. during the post - war period we had a unique expansion in public sector employment and very high demand pressures, something that was not sustainable in the long run and that is not possible with free movement of capital, an inflation target and an independent riksbank.