Indeed, I find it hard to understand how an earnest rating agency might assess sovereign risk without even referring to that country’s level of public debt and international reserves. As a professor, I can safely assume that the “subject is not treated”, hence the conclusion is unsubstantiated. As concerns these assessments, I must say however that things are not in the least that simple. Of course, we could assert that at present our economy is in a better position than those of other countries in the region rated within the “investment grade” range. But those countries have at least adopted austerity measures at domestic level. How do things stand in our country? After two consecutive years of wage increases in a range from 20 percent to 25 percent per year – i.e. more than twice the labour productivity gains – the wage rises envisaged for 2009 ranged between 50 percent and 60 percent, whereas the agreements with the trade unions, whenever struck, do not provide for hikes lower than 35 percent. Such an approach reveals a dangerous decoupling between aspirations and reality. In the current international context and given the already dangerously high level of external deficit, we must not aim at further increases in domestic consumption above labour productivity gains, since there are no more financing sources for something like that. And unless we understand this state of affairs ourselves, rating agencies are going to warn us.
A high leverage ratio makes the financial system, and in effect the whole economy, more sensitive to fluctuating asset prices. The present downturn in Norway was not triggered by moving asset prices, but rather by the international downturn. Still, the effect of the international downturn on our economy is probably stronger than it would have been with a better regulatory framework. A consensus is emerging internationally that new tools are needed in order to make the financial system more robust with respect to macroeconomic fluctuations. Moreover, the financial system should help dampen rather than amplify or even cause fluctuations. The new tools – macro-prudential policies – are needed regardless of the monetary policy regime in place in any given country. For Norway, as a small EU outsider, it is hard to see any better option than inflation targeting. Indeed, it has been a strength in the current downturn to have a credible inflation targeting regime in place. We have tried to have a long-term perspective on attaining the target. This was especially important when the economy was hit by a supply shock, and we needed to trade off reaching the inflation target and closing the output gap. Inflation was below target until last year. Now, hit by a demand shock and looking ahead, we know that a trade-off is absent – the economy needs stimulus. But in the face of an unusually high degree of uncertainty, and given an unusually large shock, I believe that it is sensible to continue to be patient.