The most recent example in the UK banking sector was during the recession of the early 1990s when the major banks wrote off about 2.5%of their domestic loan book and tightened credit conditions, thus exacerbating the fall in property prices and in confidence. It has been estimated that the effect of the tightening of credit conditions was to reduce UK output in 1991 by almost 2% relative to what it would otherwise have been. 4 Of course, there was little monetary policy could do at that time to offset these effects because of Sterling’s ERM membership. But the current crisis does not follow that pattern. It has come at a time when the performance of the UK economy has been unusually good. Over the past fifteen years the economy has experienced the most stable macroeconomic conditions on record with steady growth, low inflation and a declining trend in unemployment. 5 For the most part the underlying balance sheet position of households and firms is robust and most indicators of financial fragility such as mortgage arrears, repossessions and corporate insolvencies are at low levels (Chart 5). So the question is whether we can reverse into macroeconomic trouble starting from a banking crisis with its origins in the US housing market. Of course a marked slowdown in the US will diminish directly part of our exports.
The excessive budget deficit procedure was initiated against Germany and France which exceeded the maximum budget deficit allowed according to the Growth and Stability Pact, 3% of the GDP - and the number of such member states will probably grow. At the same time, the situation initiated a discussion regarding sufficient flexibility of the Growth and Stability Pact, first and foremost in the context of a weaker economic situation. •  Estonia's budgetary policy is and has been strict and balance-oriented. This gives us a competitive advantage over others and does not place us in an inferior position, contrary to what has been erroneously claimed. The current debt burden of the Estonian government sector is about 5% of the GDP (the lowest in the EU accession countries); the budget deficit of the government sector rose above the maximum level allowed under the Maastricht criteria only in 1999. 6  BIS Review 26/2004  •  While assessing the relevance of the budgetary balance requirement from the viewpoint of Estonia's future competitive ability, one certainly has to bear in mind that merely meeting the budget criterion might not be a sufficient success guarantee. In the conditions of the common monetary policy, the budgetary policy will become the principal economic policy tool through which the government can independently influence economic development (e.g. stimulate its economy in the period of slow growth).