the recession at the end of the 1980s was followed by a period of low wage growth and gains in competitiveness. this may help to explain why the decline in manufacturing employment came to a halt in the 1990s. however, wage costs increased again in the late 1990s. the relative wage level in manufacturing industry compared with trading partners is now back at the level in the 1970s. two forces were behind economic developments from the beginning of the 1970s. first, the deterioration in competitiveness was caused by the expansion of the norwegian welfare state and a transfer of real resources from the exposed sector to the sheltered sector. second, inflation expectations took root as a result of low administered interest rates and competitive devaluations. nominal interest rates were kept low although price inflation and the value of tax - deductible interest expenses rose. frequent devaluations in the period from 1976 were ultimately ineffective with regard to preventing a relative decline in manufacturing industry. on the contrary, the devaluations proved to be self - reinforcing. chart 7 over a period of 15 years from 1973 to 1988 consumer prices in norway rose twice as much as in germany. in the same period, the value of the krone was virtually halved against the mark. while we paid around 2 kroner for one mark in 1973, 15 years later we had to pay close to 4 kroner. since then the krone has remained relatively stable against the deutsche mark. today the exchange rate is around 4 kroner and 10 øre. the last devaluation came in 1986 after the fall in oil prices. thereafter, the krone exchange rate was fixed. the norwegian economy had to go through a severe economic turnaround. confidence in the krone had to be restored in order to avoid persistent inflation. this required very high interest rates. the norwegian economy entered the worst recession experienced since the interwar period. unemployment rose from about 2 % in 1987 to almost 6 % in the winter of 1992 / 1993. many companies went broke and households were faced with debt problems. the financial sector was hit by crisis. the fixed exchange rate regime led to a gradual decline in price inflation, but not to deflation as was the case in the 1920s. an improved wage - setting process, in conjunction with an active fiscal policy, contributed to curbing the real economic costs. hence, the experience of 1986 and the beginning of the 1990s probably provides a realistic picture of the minimal costs associated with stamping out high inflation.

a real and well - known risk of fiscally overburdened states possibly infecting their own banking system and triggering a solvency crisis at banks. and this sovereign - bank nexus, in turn, affects the ex - ante likelihood of a european deposit insurance scheme becoming involved. in order to improve the current situation, a crucial element has to do with current incentives contained in banking regulation. at present, sovereign bonds from member states of the euro 3 / 5 bis central bankers'speeches area have a zero risk weight under the capital requirements regime. essentially, this means that the economic risk attached to sovereign debt ( which is larger than zero ) is not reflected in capital requirements. nor is there any upper limit for exposures to specific sovereigns. this preferential treatment is a factor that actually contributes to the sovereign - bank nexus and therefore needs to be altered. please bear in mind that given the risks that are currently not resolved in several areas, a third pillar is not only unjustified because of the heterogeneous levels of risk at national banks. it would also reduce incentives to address those national issues if a mutualised insurance scheme were in place. so as you can see, the reasons for postponing edis are founded not on an ideology - based rejection, but very much on stability considerations. 4 the road to stability : are we locked in a stalemate? this brings me to a second mindset i frequently encounter when discussing the future of the banking union. it concerns the idea of a trade - off between crisis mitigation and crisis prevention measures. essentially, some interpret the ongoing risks for the euro area as a sign that we are approaching a stalemate situation, where self - recovery potentials in the financial system will be exhausted – as will options for action. in this situation, the reasoning goes, would it not be better to compromise on short - term oriented “ flexible ” measures – however counterproductive in the medium and long term? and would this not be an argument for an immediate completion of the banking union? the great value of systemic analyses is beyond doubt. but at the same time, i wonder whether a simple trade - off between short - term and long - term goals might not be the result of over - hasty generalisations. let me set these thoughts in the context of our main topic of european deposit insurance. my guess is that here, too, hasty calls for new policy agendas are partly the result of a too - narrow