ECONOMIC PERSPECTIVES Annual address by Governor Øystein Olsen to the Supervisory Council of Norges Bank  THURSDAY 17 FEBRUARY 2022  Economic perspectives 2022  NORGES BANK ECONOMIC PERSPECTIVES 17 FEBRUARY 2022  INTRODUCTION Today, nearly to the day, a hundred years have passed since the first annual address was delivered. The governor at that time, Nicolai Rygg, painted a gloomy picture. The speculative boom in Norway during the First World War had created a bubble that burst. A wave of losses ensued. The economy was marred by stagnation and bankruptcies. The problems in the business sector spread to the banks.1 If banks had failed, the problems facing businesses would have intensified. It was therefore crucial to make sure the banking system weathered the crisis. There was no disagreement about that. The main issue under heated debate was who should bear the losses and who should guarantee new capital. Not many weeks after the first annual address, Norges Bank had to step in to rescue one of the big banks. When the next big bank encountered problems, Norges Bank was again called upon to intervene. But Nicolai Rygg now put his foot down. The loans provided should be guaranteed by the State and not by Norges Bank. Not only did Nicolai Rygg have to deal with a banking crisis, but also an erosion in the value of the Norwegian krone due to periods of excessive money supply.
In that regard, the recent announcement by the European Central Bank of its determination to conduct unlimited intervention in the sovereign secondary markets, provided effective conditionality is fulfilled, constitutes a significant step towards the normalisation of market conditions in the euro area. Yet, the return to a smoothly operating monetary union cannot be completely achieved by simply relying on ad-hoc reactions by policy-makers. Institutional arrangements must be reviewed in order to restore adequate incentives for domestic authorities to prevent the reemergence of destabilising imbalances and to ensure that any residual risks arising in specific jurisdictions that could affect the area as a whole would be addressed by integrated mechanisms operating at the euro area level. The recent changes introduced in the European Union to strengthen the requirements and the mechanism for the surveillance of domestic fiscal policies and structural reforms, together with the creation of the EFSF and the ESM – which we now know will be soon be launched – are good examples of the required institutional reforms. BIS central bankers’ speeches  1  At the same time, a specific source of risks for the smooth functioning of monetary union that needs to be addressed directly is the financial instability experienced in specific jurisdictions.