is high in relation to domestic production. a current - account deficit may be due to factors that are not necessarily negative. however, it can also be due to domestic imbalances, for example to economic policy being too expansionary. another reason may be that competitiveness is weak, which dampens exports. in such cases, it pays for the country to try to reduce its current - account deficit by restraining domestic expenditure or increasing production. many of the euro countries that are having problems have had both current - account deficits and deficits in their public finances. probably the most effective way of reducing the deficit in such cases is to improve competitiveness and reduce domestic expenditure at the same time. postponing consolidation in such a situation would only entail domestic demand continuing to be higher than it should be. figure 4 shows the current - account balance in a number of euro countries last year. bis central bankers ’ speeches figure 4. current - account balances per cent of gdp, 2011 - 2 - 2 - 4 - 4 - 6 - 6 - 8 - 8 - 10 - 10 source : european commission like the riksbank, most forecasters expect a tighter fiscal policy to dampen growth in europe in the period immediately ahead. it is difficult to assess the precise effects as these will depend on how and when the measures are implemented. but the measures will of course have an impact, particularly when several countries reduce their public spending and / or raise their taxes at the same time. this will happen, furthermore, in a situation in which there is little scope for monetary policy to further stimulate demand. but what ’ s the alternative? as the risks associated with a high level of debt are so high, it should be in the countries ’ interests to shoulder a greater responsibility for improving their own situation. this brings me to the second aspect i would like to discuss today, that is how the problems of highly - indebted countries are handled. sustainable solutions require responsibility it is now obvious that some european countries need support from the imf and the eu and it is good that this possibility exists. however, focusing too much on various support measures undermines the incentives for the countries themselves to find sustainable solutions to their problems. i suspect that at least one reason for the comparatively weak results achieved so far with regard to budget consolidation and reforms at the national level is that altogether too much energy has been expended on support facilities and too little on what is needed to improve the preconditions for

and international organisations are now discussing the interaction between monetary policy and financial stability. the basis of the discussion is the lessons learned from the financial crisis. experience has shown how costly a financial crisis can be. low and stable inflation was not sufficient to prevent imbalances in the financial system. it is now generally agreed that monetary policy must take into consideration the risk of a build - up of financial imbalances. as the financial crisis clearly demonstrated, the financial system cannot be left to its own devices. the regulatory framework for financial institutions has therefore been changed. new regulations are being introduced in an increasing number of countries and new tools are being deployed. new institutions are being established to ensure coordination across countries, markets and instruments. a clearer macro dimension has been integrated into banking regulation, based on the recognition that the financial system as a whole can be vulnerable even if individual institutions seem to be solid. systemic risk entails a risk that the entire financial system could become unstable or, at worst, collapse, with substantial negative consequences for the real economy. the aim of the new regulations is to guard against systemic risk. bis central bankers ’ speeches as the new regulatory regime has been introduced, another dimension has been added to the discussion. the question being asked is whether the new instruments relieve monetary policy of taking financial stability into account. experience of the new regulatory regime is still limited, and we have little knowledge about the effectiveness of the new tools. at the same time, a number of central banks are facing a demanding challenge with regard to the practical implementation of policy : how can the economy be brought back on track without laying the basis for new imbalances? my presentation today will focus on financial imbalances and systemic risk. i would like to offer you some insight into some of the issues and analyses in the interface between monetary policy and financial stability that we are now working on at norges bank. macroprudential regulation and financial imbalances macroprudential regulation of banks must be based on an understanding of how systemic risk arises. this understanding has been brought a step further since the financial crisis. there is a growing academic literature on the basis for macroprudential regulation. one of the main themes is how systemic risk can arise in the interaction between the financial sector and the real economy. research is at an early stage, and so far no specific framework stands out. some conclusions seem, however, to be robust across the various approaches. many studies single out rapid credit growth in particular as a