I believe that two major mistakes were made: –  First, countries – including France and Germany – weakened the Pact by failing to comply with the provisions of its preventive arm (they were not in balance over the cycle but permanently close to the 3% deficit ceiling), or those of the corrective arm (they never abided by the sanctions). –  Second, the euro area did not equip itself at the outset with an instrument for monitoring competitiveness. The basic premise is important and simple: when joining a monetary area whose goal is to achieve a rate of inflation of just below 2%, changes in its unit production costs must be in line with this central bank objective. In all the countries that did not abide by this calculation and this discipline, year after year, there was a loss of competitiveness. The crux of the matter is that, as soon as countries were approved for euro area membership, they considered that they were protected simply because they belonged to a single currency area: as their fiscal or competitiveness gaps were no longer penalised by the markets that indiscriminately lent to all euro area Member States at the same rate. When doubts started to emerge, the markets reacted rapidly, violently and often excessively, although it must be said that real underlying problems existed. How the euro area sovereign debt crisis has been dealt with to date What have we done to tackle the urgent issues stemming from the crisis and to deal with the underlying problems?
The Riksbank’s forecasts are therefore based on the prices of forward contracts for oil, that is, the price of delivering oil in the future. This means that at the monetary policy meeting in July we were assuming a price for crude oil of USD 130-140 per barrel during the forecast period. Since April the oil price has fluctuated substantially. First it rose to USD 147 a barrel and since then it has fallen. At the beginning of this week the oil price was USD 113 a barrel. 2  BIS Review 100/2008  Food prices have also risen substantially in the world market, particularly over the past year. Rising incomes, urbanisation and changes in diet lead to an increase in the demand for food. As oil becomes more expensive it becomes profitable to use maize and other grains to produce biodiesel and biofuels. Furthermore, the production costs for foods are rising. Other factors such as supply shocks and speculation in future price changes also affect developments. Our assumption in June was that food prices would not continue to increase, but would stabilise at a high level. Since the beginning of July food prices have fallen. High international inflation and rising inflation expectations The upswing in commodity prices in recent years has in turn led to an increase in inflation around the world. In the United States it has risen to 5.6 per cent and in the euro area it rose to 4.0 per cent in July 2008. It has risen much more in several emerging economies.