in the usa economic developments in the united states continued to deteriorate during the first half of the year. this was largely connected to problems in the financial markets. in the most recent monetary policy report published at the beginning of july we were expecting gdp growth in the united states to slow down to around 1. 5 per cent a year in 2008 and 2009. i agreed on the whole with the picture of international developments presented in the monetary policy report, but my assessment was that developments in the united states could be even weaker than we were assuming. there is a risk that we will have to lower the forecasts even more in coming reports, particularly the forecasts for 2009. gdp growth in the second quarter of 2008 was actually slightly stronger than we had expected. gdp increased by 0. 5 per cent compared with the first quarter. growth in the united states is now largely being upheld by exports alone, which are increasing at a good rate as a result of world growth and the dollar depreciation ( compared with the level 2 - 3 years ago ). domestic demand will on the whole not show any increase in 2008 and 2009. i do not believe that the recovery in domestic demand will get started before the financial system has stabilised and before the fall in us house prices has come to a halt. house prices have continued to fall during the summer. growth in europe will also slow down europe fared better than the united states at the beginning of the year. this is partly because the financial crisis originated in the united states and the financial market turbulence has not been as severe as there. another explanation is that the financial balance is better in europe ; public sector finances have improved in recent years and the current account is close to zero. we assumed in the monetary policy report that gdp growth in the euro area would slow down to 1. 7 per cent in 2008 and 1. 2 per cent in 2009, to reach almost 2 per cent in 2010. at the beginning of july we had seen little sign of the slower growth in the statistics on production and in the national accounts. on the contrary, there had been several positive surprises. however, there were tangible signs of a future slowdown in other types of data, such as corporate and household confidence indicators. the quick figures for the second quarter now indicate that gdp in the euro area declined by 0. 2 per cent compared with the first quarter, which was weaker than we had expected. global growth still strong gdp growth in the world as a whole has been

union candidates put their public finances in order prior to participation. the stability and growth pact has clarified what will apply once monetary union has begun. the pact can be said to consist of two parts : a surveillance mechanism for detecting at an early stage that a country is starting to have budgetary problems and is in danger of incurring an excessive deficit, and a mechanism for sanctions on errant countries. the first mechanism covers all the eu countries and requires them to present a fiscal policy programme. the sanctions mechanism, on the other hand, applies only to countries in the euro area. the purpose of the pact is to strengthen political mechanisms at union level so that budget discipline is permanently maintained. there has been underlying concern that otherwise a country might be strongly tempted to shift a part of the adjustment costs for consolidating government finances onto the other countries. the pact requires every member state to aim for a medium - term budgetary position close to balance or in surplus. if the 3 per cent limit is exceeded, the commission and the ecofin council are to follow a specified plan of action : examination, opinion, recommendation, publication and, as a last resort, sanctions. the pact has been constructed with a view to generating so much pressure on member states to put government finances in order that sanctions will never be necessary. a knotty problem when constructing the pact was how to make the requirements sufficiently strict without placing undue restrictions on national fiscal policies. this is all the more important when monetary policy is no longer available at national level, so that the task of adjustment falls more heavily in practice on fiscal policy. oecd estimates indicate that in a “ normal ” economic downturn, the cyclical budget balance in eu countries weakens by 1 - 1. 5 per cent of gdp. some budgetary discretion is therefore needed so that there is a margin for automatic stabilisers to act when activity is falling. the conclusion is that the trade - off seems reasonable but the pact does make it necessary to achieve a balanced budget or a surplus relatively soon. under these circumstances, the swedish government ’ s ambition to establish an annual budget surplus of 2 per cent over the business cycle is commendable. fiscal policy accordingly faces new challenges and it is not all that easy to tell just what may happen. when monetary policy ceases to be a national instrument, fiscal policy will have to play a greater part in stabilisation policy. at the same time, the scope for budget policy will be curtailed in