. unfit, in various aspects of its national economic and especially supervisory policies. all of this made it not well equipped to counteract the emerging imbalances at an early stage and to match the challenges facing the economy when the crisis took hold. ireland ’ s current account deficit was 5. 3 % in 2007 and accounted for 5. 6 % in 2008. and certainly overweight, in some sectors at least. ballooning credit and spending excesses had overheated the economy and misdirected resources. in 2007 ireland was an economy that had become dangerously dependent on construction and housing as a source of economic growth and tax revenue. overly optimistic expectations both in the private and the public sector played a major role. an over - sized and lightly - regulated financial system not only fed on these excesses but actively supported them. and government expenditures had been set on a clearly unsustainable course, based on the false assumption that very high tax receipts stemming from the booming housing sector and exceptional real growth where a lasting feature of the irish economy. for example, from 1998 to 2010 nominal public wages per government employee increased by more than 90 %, significantly outpacing public wage increases in most other euro area countries by 40 or more percentage points. only greece saw larger increases than ireland. 2. the adjustment process as anyone who has ever undergone the grinding process of recovering fitness will attest, the process can be long and painful. and so it has proved. domestic demand has shrunk. this was unavoidable as both public and private spending had increased to levels well above the sustainable productive capacity of the economy. unemployment has strongly increased. programme milestones i would identify three major milestones of the macroeconomic and fiscal adjustment programme : first, a return to growth, already in 2011. bis central bankers ’ speeches second, the progressive return to market funding well in advance of the end of the programme in 2013. third, reaching a fiscal deficit of 3 % in 2015. measured against these milestones, i must admit that i am truly impressed by the way ireland has handled its tough challenges, especially since the beginning of last year : the economy is well on the way to restoring competitiveness, reducing the fiscal deficit ( – 10. 6 in 2011 ; – 8. 6 goal for 2012 ), overhauling the institutional framework and restructuring the banking sector. it is the only programme country that has managed to close its trade deficit and to return to growth last year, even if at modest

low inflation and good growth go hand in hand when inflation converges internationally and long - term inflation expectations are permanently lowered to the level of the target for price stability, the core of the inflation process lies in the relationship between prevailing demand and the sustainable level of output. if resource utilisation is so high that it becomes strained, inflation will tend to rise. conversely, when resource utilisation is low, inflation tends to fall. to a large extent it is the interaction of demand and supply that determines whether inflation is rising, falling or constant in relation to the 2 per cent target. monetary policy is capable of exerting a direct effect - through the repo rate - on only one of these two sides of the economy, namely demand. the supply side is essentially influenced by structural factors that the riksbank cannot control directly. but permanently high inflation can indirectly impair the workings of the economy, leading to weaker growth. by the same token, today ’ s low inflation should help the supply side to function more efficiently. seen from this angle, it is easy to appreciate that a policy for safeguarding price stability should be able to go hand in hand with a development of demand that matches the supply side ’ s sustainable capacity. in the event of a demand shock, even in the short run the riksbank ’ s objective therefore coincides with that of general economic policy - a favourable real economic trend. in view of the discussion that arises from time to time about objectives for the riksbank, this should be borne in mind. consider these two examples : • suppose, first, that a shock causes demand to fall ; resource utilisation will then decline, with a risk of inflation dropping below the 2 per cent target. the monetary stance must then be adjusted so that the rate of inflation returns to the target. this involves lowering the repo rate so that demand recovers. [UNK] • suppose, instead, that a shock causes demand to rise faster than the supply side can cope with. inflation will then be liable to rise above the targeted rate. the monetary stance must therefore be tightened so that inflation falls back to the target, which involves subduing demand to output ’ s sustainable level. in the various situations, the impact of monetary policy can be contractive, expansive or neutral, depending on the degree of resource utilisation and the risk of inflation deviating from the target in either direction. the relevant rate of inflation here and the one that is affected by total demand