Stefan Ingves: Monetary policy entails a balancing act Speech by Mr Stefan Ingves, Governor of the Sveriges Riksbank and Chairman of the Basel Committee on Banking Supervision, to the Norrland County Administrative Board, Luleå, 4 December 2012. *  *  *  Today I would like to take up some aspects of the difficult balancing act that monetary policy has to perform and that in many respects reflect the lessons we have learned from the financial and debt crisis. The global economy has suffered a number of turbulent years. More than four years have now passed since the outbreak of the global financial crisis. Unfortunately, the recovery following this crisis came to a halt when the financial crisis developed into a debt crisis in Europe. The Swedish economy has coped rather well with the crisis so far. We have of course been affected by the unease abroad and by the economic downturn, but to a much lesser extent than many other countries. This is due to factors such as stable public finances and good competitiveness. Another reason why Sweden has coped so well is that we have not suffered a crash on the housing market. However, household indebtedness is very high, which makes the households more vulnerable to a fall in housing prices and other risks. The course of events in several countries during the financial and debt crisis shows that we must take risks of this type seriously.
As the problems have worsened the recovery that began after the financial crisis in 2008 has ground to a halt, and our assessment in the Monetary Policy Report published in October is that GDP will actually fall in the euro area in 2012. …which is having a major impact on the Swedish economy Sweden is what we usually call a small, open economy. We are highly affected by developments abroad. This high dependence on economic activity abroad has led to considerable fluctuations in production in recent years. The fall in GDP in 2009 was the largest since World War II, but growth in 2010 was the highest for 40 years. The recent weak development of economic activity in the euro area has once again dampened growth prospects in Sweden. An important explanation of why the Swedish economy is affected so much by what happens abroad is that we are highly dependent on the demand for the goods and services that we export to other countries. The euro area is our largest export market and problems in the euro area therefore have a major impact on the demand for Swedish exports. One way for Swedish export companies to reduce this impact is to turn to new markets instead, but this is a very slow process (see Figure 7). The euro area will continue to be easily the largest export market for Sweden for the foreseeable future. Uncertainty abroad affects households and companies in Sweden.