We must, moreover, act with the urgency demanded by our responsibilities as active members of the common European project in defence of stability and the success of this project. The report I present today is specifically geared to contribute to this task. From spring last year, the economic indicators offered signs that the world economy was emerging from the most critical phase of the gravest real and financial crisis since the Great Depression. Progress since along the path to recovery has been much more evident in the emerging economies, for which the latest projections indicate growth rates above 6% for 2010. By contrast, the developed countries’ economies are recovering at a considerably less dynamic rate, of around 2%. This turnaround confirms that the rapid and energetic economic policy action to support financial systems, to stimulate demand and to sustain confidence was pivotal in halting a spiral of recession and financial instability which, had it continued, would have undoubtedly had disastrous consequences for the world economy. Halting this recessionary spiral was crucial for placing the world economy once again on a path of sustained output and employment growth. But if the incipient recovery – still subject to considerable uncertainty and risks – is to take root, further measures on various fronts will be needed. The bulk of the measures adopted to check the accelerated economic and financial downturn were exceptional. Accordingly, they have to be withdrawn.
And we’ve been on our own ever since. Iceland has a number of unique characteristics that complicate economic policy. The economy is extremely small. Its export sectors are homogeneous and prone to cyclical fluctuations. Most of its financial markets are relatively shallow and illiquid, which complicates price formation. Not only is our currency small, it is also bordered on both sides by two of the largest currency areas in the world – which cannot but make independent monetary policy conduct more difficult. And there are other factors as well. Icelanders demonstrate a decided herd mentality in their consumption decisions, which causes wide fluctuations in private consumption. With its small population, Iceland has a limited number of workers to do all that is needed – operate the healthcare, education, and administrative systems – and conduct monetary policy as well. Anyone discussing Iceland’s monetary policy concerns is bound to acknowledge these problems. On the other hand, it is clear that the greatest problems facing domestic monetary policy do not stem from the structural flaws inherent in Iceland’s history and geographical characteristics – flaws that are unlikely to change. The biggest problems are institutional, political, and – perhaps most of all – societal: They centre on fiscal policy decisions, collective bargaining agreements, and overall societal consensus. These we can change.