(Chart 3: Current account for selected countries) A lack of fiscal discipline is not the only factor behind the relatively high interest burden facing Greece, Portugal, Spain and Italy. Public deficits rose in tandem with a fall in private saving. Countries lived beyond their means and accumulated current account deficits and substantial debt while their debt-servicing capacity weakened. The result is a deterioration in their creditworthiness. (Chart 4: Current account and fertility rate) The combination of large deficits and growing demographic problems is particularly challenging, as is the case for southern European countries where fertility rates are well below the replacement rate and lower than the average for advanced countries. The demographic challenge will be even greater ahead. In some of the countries the number of pensioners will be close to the number of economically active. The basis for economic growth is thus weakened. The burden of rising debt and pension payments will be heavier. Financial markets are already now demanding a high interest rate on loans to troubled countries. It takes a long time to reverse demographic trends. The ideals associated with fertility from the mythologies of Aphrodite and Venus might provide some impetus – not only in Mediterranean countries, but in most OECD countries. Financial incentives would probably be more effective, however. Norway, with favourable support schemes for families with children, has a relatively high birth rate. In other European countries, there is a risk that these hard times will exacerbate the demographic challenge.
Furthermore, external conditions are not likely to help push up inflation in Norway in the period ahead. Many countries are facing the prospect of stagnation or decline, and the rise in prices for imported goods is low. Our objective is inflation of close to 2.5 percent over time. Inflation will be brought up gradually, but not so rapidly as to generate imbalances in the economy. Under the current outlook, it will likely take several years before inflation is back on target. New measures to promote financial stability There is an inscription on Åmodt Bridge here in Oslo– “100 mand kan jeg bære, men svigter under taktfast marsch” [A hundred men I can bear, unless in step they march]. Bridge designers have long known that when a large number march across a bridge in step, selfreinforcing oscillations can arise, causing the bridgeheads to collapse. Likewise, financial market participants can trigger self-reinforcing economic fluctuations. During upturns, banks tend to vie with one another to lend. House prices and other property prices rise, fuelling credit growth. Risks and vulnerabilities in the financial system increase. In downturns, credit lines are tightened, and households and enterprises face stricter credit standards. When financial market participants march in step, fluctuations in the economy are amplified – potentially forming bubbles that burst. The events of autumn 2008 were a reminder of this. As long as the music is playing, individual banks will be tempted to get up and dance.