Indeed, by urging governments to aim at a fiscal position “close to balance or in surplus” in the medium term, the pact enables them to let fiscal deficits increase during recessions without exceeding the 3% reference value. In short, it allows them to create a fiscal buffer during normal economic periods that can be drawn on to counter economic divergences or asymmetric shocks. To summarise that overall issue, the “Optimal Currency Area” theory has frequently been called upon by economists who criticized EMU and expressed concerns about giving up the exchange-rate policy instrument as a response to asymmetric shocks - in particular to asymmetric shocks within a monetary union. I would like to point out, first, that one of the most remarkable effect of the European integration has been the increasing symmetry of shocks. Second, Professor Mundell himself, in support of EMU, made an interesting clarification at the beginning of 1998: in the event of a shift in demand from one member country to another, creating unemployment in the first and inflationary pressure in the second, flexible exchange rates would not be able to solve the problem. I quote: “If the argument for devaluation were valid, it could be applied to every state or sub-region in any country, with a proliferation of new currencies, so they could be devalued!”.
This is done for instance in our Financial Stability Report, which is published twice a year, and in speeches held by Executive Board members. We also try to influence market participants who are important to financial stability. Part of this work includes regular contacts with the banks, other government agencies and our central bank colleagues in other countries. Most of our work concerns preventing problems and ensuring that the payment system functions as smoothly as possible. We can do this in many different ways. Some concrete examples are the recent actions taken by the Riksbank and other government agencies. I shall return to what these actions entail shortly. We work to prevent financial crises from arising. But if they do nevertheless arise, it is also our task to manage them. We have to be prepared to take action although we hope that we will never need to do so. This preparedness includes, for instance, regularly holding crisis exercises, both internally and together with other Swedish authorities, and sometimes together with central banks and authorities in other countries. The work on financial stability is reminiscent of fire safety work. We have to provide information about the risks, but it is also our job to be prepared to put out the “fires”. And to be able to do this efficiently, we must have practised. In purely practical terms, we have the possibility to take a number of different measures if this should prove necessary.