Lars Heikensten: Stability and Growth Pact needs reinforcement Speech by Mr Lars Heikensten, Governor of the Sveriges Riksbank, at a conference organised by the European Commission, Brussels, 15 December 2004. *  *  *  Thank you, Mr Chairman. I very much appreciate this opportunity to comment on the work of the Commission. Perhaps the invitation is particularly pleasing for me as, unlike the other members on the panel, I do not come from a country that has introduced the euro. I should also immediately say that I very much enjoyed reading the background report and the communication on the Stability and Growth Pact produced by the Commission. Let me begin by characterizing the experiences from the Monetary Union so far. There is no doubt that the regulations on fiscal policy laid down in Maastricht had clearly positive effects up until the euro was launched. They are still having the same impact on those countries that remain outside the single currency and have the ambition of joining in the future. Far-reaching measures were taken, and are also being taken today, to enable entry into the Monetary Union. Noting the progress, some people have even claimed that earlier less well-functioning national economic-political cultures have been replaced by a more stability-oriented common European culture. But since the start of Monetary Union, this momentum has been lost. Several countries have returned to their old behaviour even though there are good examples of the contrary.
The subsequent market movements as investors withdrew funds from EME investments were an abrupt shock for EMEs generally, especially after the long earlier period of abundant liquidity and ample inflows. From one perspective, the unconventional nature of recent U.S. monetary policy adds little that is fundamentally new to the challenges now facing EMEs. These policies simply represent a way of easing, driven by our coming up against the zero lower bound. Central bankers have managed differences across countries in cyclical positions and policy stances many times in the past. But, from another perspective, we have less experience operating with unconventional monetary policy and this creates more potential uncertainties. This puts a premium on continued dialogue among central bankers, between central bankers and the market, and keen listening skills on our part. In my view, the fact that our large scale asset purchase programs affect the size of term risk premia globally is important. This set of monetary policies affects financial asset prices in a different way compared to changes in short-term interest rates, and we should be humble about what we claim about understanding the importance of this distinction. For the period ahead, it seems likely that markets will remain focused on vulnerabilities they might have ignored a year ago. The greater premium on strong fundamentals, policy coherence and predictability will likely remain. There will be no one right answer in managing the trade-offs that come with the changed environment, and adjustment will sometimes be difficult. Moreover, we will undoubtedly experience further bumps in the road.