the economy did not improve the situation. and when, in the spring of 2010, sovereign risk came to the fore, it turned into a major downside risk for recovery in bis central bankers ’ speeches europe. within a short period of time, fiscal problems in greece and other member states turned into an imminent danger to the stability of the financial system and the monetary union as a whole. thus, european institutions decided to implement far - reaching fiscal measures to support the countries in question. these measures were justifiable given the risks associated with inaction. nevertheless, they still placed a serious strain on the foundations of the monetary union. consequently, we now have to strengthen these foundations again and create an institutional framework that supports a stable monetary union. 4. the challenge of creating an adequate institutional framework as i have just pointed out, the crisis revealed two basic problems within the european monetary union : macroeconomic imbalances and excessive public deficits. both problems have their roots within the individual member states. consequently, it is first and foremost the responsibility of national governments to act by consolidating their budgets swiftly and ambitiously and by implementing comprehensive structural reforms. nevertheless, reforms also have to be undertaken at the level of the monetary union. as a first step, the institutional framework has to be enhanced to prevent the occurrence of harmful macroeconomic imbalances or excessive public deficits. this requires a twofold approach : first, strengthening the sgp to guarantee sustainable public finances, and, second, implementing macroeconomic surveillance to detect structural developments within member states that might be harmful for the rest of the monetary union. furthermore, as it will never be possible to prevent crises entirely, a third element should be a mechanism to solve potential crises in an orderly fashion – but without thwarting the stability - enhancing incentives set by the sgp and the surveillance mechanism. let us now take a quick look at how far we have come in turning this approach into reality. given its track record before the crisis, it can no longer be denied that there is an urgent need to strengthen the sgp : more emphasis should be given to the debt criterion, while earlier and more consistent sanctions have to be placed on any breach of the rules. the reform measures that have been agreed so far do indeed entail a number of improvements. however, the measures lack the ambition to fully redress past failings and to bring about a fundamental improvement. the major shortcoming of the envisaged reform is that relevant decisions on sanctions

s assesses the outlook for price inflation and sets interest rates. since 1997, labour costs have increased annually by between 5 and 7 per cent. in spite of this, consumer price inflation has been close to 2½ per cent over the past few years. the krone exchange rate has appreciated as a result of a wider interest rate differential between norway and other countries. combined with low growth abroad and increased trade with low - cost countries such as china, this led to a slower rise in import prices. in norway, voluntary export restraints on clothing have been removed and tariffs on clothing have been reduced considerably. in the eu and the us, a similar tendency has not been seen to the same extent. this may explain why prices for clothing have fallen in norway relative to the eu and the us. however, there is still a long way to go before restrictions on clothing imports to norway are entirely dismantled. for example, there is a duty today on imported children ’ s clothing and on shirts, suits, jackets and trousers for men and boys. as the world economy recovers, import price inflation will edge up. a rise in labour costs of more than 5 per cent will then only be consistent with the inflation target if the krone continues to appreciate. in the long run, wages must be compatible with the value added that is generated by workers, i. e. labour productivity. over time, the increase in real wages is therefore determined by developments in labour productivity. in norway, productivity growth has averaged 1½ - 2 per cent over the last 20 years. if this continues to be the case, an increase in nominal labour costs of around 4 - 4½ per cent in the long term will be consistent with the inflation target. there is an important interaction between monetary policy and fiscal policy. according to the guidelines for fiscal policy, petroleum revenues are to be phased in approximately in pace with the expected real return on the government petroleum fund. this guideline implies that fiscal policy will contribute to stimulating aggregate demand in the norwegian economy every year for many years ahead. the guideline also implies that the use of petroleum revenues will increase as long as the petroleum fund is expanding. variations in oil prices are accompanied by considerable fluctuations in government petroleum revenues from one year to the next. it is important to prevent these fluctuations from spilling over to the mainland economy. public expenditure and taxes that vary in relation to oil prices would result in an unstable economic environment. financial markets would be marked by uncertainty and turbulence, with an increase in