There are similarities between today’s financial turmoil and the Swedish bank crisis The current financial turmoil and the Swedish bank crisis actually have a number of common denominators. Harvard professor Kenneth Rogoff together with Carmen Reinhart of Maryland University has pointed to a number of similarities between the US mortgage turmoil and a number of earlier financial crises, including the Swedish bank crisis at the beginning of the 1990s. Some common denominators for the period prior to the outbreak of the crisis include a rapid increase in property and share prices, the fact that the current account deficit was large and growing and that economic growth had declined from an earlier high level. One important difference is that the exchange rate regime has not played a prominent role in the US case. Too low risk premiums and abstruse risks But it is also possible to find more specific parallels to the Swedish bank crisis. In both cases lending has increased rapidly at the same time as the banks have underestimated and therefore not taken sufficient payment for the credit risks. In Sweden this was linked to the banks – after decades of credit regulation – lacking a developed strategy for managing and pricing credit risk. When deregulation came in the mid-1980s they were quite simply unused to loan losses. But such tendencies could also be seen prior to the recent market turmoil. For a long time, risk premiums for credit risk-related securities were remarkably low. The uncertainty has led to an increase.
Thirdly, the Federal Republic is a major world competitor in sectors such as machine tools and industrial equipment. Its global competitiveness is a major asset for the euro area given how closely intertwined EMU countries are. Therefore, I would point out to all those who argue in a similar fashion that what looks as a disadvantage for the euro area as a whole from a specific angle is in reality an advantage when seen from the right perspective. Il Sole 24 Ore: But in a more general way Ms Lagarde did point out that the euro area is experiencing large economic imbalances. Is there a Europe-wide agenda to solve this problem? Trichet: The aim must be to elevate significantly growth potential in all countries through the structural reforms that are overdue in Europe. This will remain strategically important in the  2  BIS Review 45/2010  next decade. The 2020 Agenda will have to be implemented in a more effective way than the 2010 Lisbon Agenda, as President Van Rompuy has recommended. More generally let me say that given the nature of monetary union, some countries, because of a rapidly aging population for example, will have to run current account surpluses, while other countries with very significantly fewer pension liabilities will not be called to run such surpluses. Similarly, some countries, to regain competitiveness, will have to keep inflation below the EU average.