Eva Srejber: The power of transparency for macroeconomic discipline Speech by Ms Eva Srejber, First Deputy Governor of the Sveriges Riksbank, at the 10th International Financial Economic Forum, Vienna, 11 November 2004. * * * The crisis encountered by the Stability and Growth Pact has put the new enlarged Europe at a crossroads: either we get our act together and produce better checks and balances in our institutions or we are going to move down a path of looser fiscal policy and tighter monetary policy. Both fiscal and monetary policy need the other to be predictable: a government needs the predictability of a transparent and consistent monetary policy to know how to conduct fiscal policy, and of course no monetary policy will be sustainable if poor fiscal policies lead to a rapid accumulation of debt. This is what Sweden witnessed in the 1980s and the 1990s. In the 1980s we had an unsustainable mix of fixed exchange rates and lax fiscal policy, which led to high inflation and eventually to a crisis that landed us with an even higher mountain of debt. When the regime collapsed in 1992 we introduced a target for inflation of two per cent, which today is hailed as a success. However, the real breakthrough for the new regime was in the mid 1990s when a forceful implementation of fiscal consolidation, supported by a broad political majority in parliament, made the whole macroeconomic set-up credible.
In fact, a recent study by the ECB shows that the closer a country comes to an excessive deficit, the more likely it is that the forecast the government presents officially will later turn out to be wrong. There is a strong bias towards unrealistic optimism once a country’s deficit approaches 3 per cent of GDP. Let me say something in this respect about the new member states. It is all too apparent that the collapse of Germany’s leading role in fiscal discipline has also set a bad example for some of the larger new member states. Given that public finances have deteriorated so much in Poland, Hungary and the Czech Republic during the first years of this century it is fortunate both for themselves and for the euro zone that these countries have postponed joining ERM II and the attempt to rapidly adopt the euro. Had they tried and locked their currencies within ERM II they may well have stayed in that position for a long time, becoming in the meantime targets for speculation - as their poor public finances would have lent little credibility to their overall economic policy. This was Sweden’s experience with the combination of a currency peg and deteriorating public finances in 1991-1992. But now there is another danger.