When there is confidence that the inflation target will be attained, high wage growth creates expectations of a tight monetary policy and relatively high interest rates. High returns make it attractive to take krone positions. Increased demand for our currency boosts the international value of the Norwegian krone. If wage growth slows , and we can be confident that it will remain low for the next few years, the interest rate differential against other countries can be narrowed. This will normally lead to the krone depreciating. Over the last thirty years, manufacturing has been scaled back in waves, and particularly sharply in the period 1977 to 1987. In the years leading up to the periods of contraction, profitability weakened in the manufacturing sector. It can take time before such a deterioration translates into lower output and  BIS Review 49/2002  11  employment. But when the turnaround hits, it tends to hit fast and hard. It now appears that a new period of downscaling is under way. Several factors point to this: first, a trend analysis indicates that manufacturing employment will be reduced in the period ahead, partly because petroleum investment is expected to decline and productivity growth in manufacturing to be somewhat higher than in other industries. Second, manufacturing costs have increased sharply since 1998 as a consequence of high wage growth. Up to the summer of 2000, this cost increase was to some extent offset by a weaker krone. The appreciation of the krone has revealed and exacerbated the deterioration in cost competitiveness.
And third, progress in building the Capital Markets Union is essential to increase the resilience of the EMU to macro-financial shocks, better spread the costs of asymmetric or idiosyncratic shocks, reduce the risks of financial fragmentation, and provide a more favourable environment for private investment. At present, the relatively small size of equity markets and the substantial national bias in asset portfolios limit risk sharing in the area. In addition, a deeper Capital Markets Union can improve the channelling of abundant aggregate savings into investment in infrastructure, energy and innovation, areas where private investment is crucial. In this regard, a key element for a truly deeper and more integrated EU capital market would be a sufficient volume of pan-European safe assets. An EU safe asset would become a common benchmark for investors, allowing security prices across the EMU to better reflect the risk of their fundamentals. It would also facilitate the development and integration of the area's financial markets, and movements in search of credit quality would no longer produce cross-border flows to countries considered safer. It would also boost the confidence of international investors in the European project, helping to strengthen the international role of the euro. All this is particularly relevant in a context of geopolitical tensions and asymmetric shocks. 6  The consequences for monetary policy Let me now turn to the third part of my talk: are all these recent global developments relevant for the conduct of monetary policy?