Mr. Bäckström speaks on the topic “EMU - a further step in financial integration” Address by the Governor of the Bank of Sweden, Mr. Urban Bäckström, at the Danish-Swedish Business Council in Copenhagen on 29/9/98. Stage Three of EMU will soon be here. Something that many people felt was impossible just a few years ago is now taking place. The EMU project is probably the greatest change that has even happened in the domain of exchange rate policy. The economies of eleven countries are being linked together by a single currency. Both the population and the economy of the euro area will be on a par with the United States. Today, the euro area’s share of the industrial countries’ output is about 30 per cent and the United States has 35 per cent. The introduction of the euro will affect conditions for the financial system throughout Europe. But the advent of a single currency should not be discussed as an isolated phenomenon in the financial sphere. The move to Stage Three is simply accentuating a process that is already in train. In the 1980s and ’90s we have seen the beginnings of a financial revolution on a global scale. This in turn has been a combined consequence of financial deregulation, a general globalisation of trade and production, major developments in technology and new demographic trends.
Third, substantial progress has been made on the large adjustment of financial positions in the household and financial institution sectors necessary after the substantial leveraging of households and financial institutions that occurred in the run-up to the financial crisis. Confidence is increasing that conditions are now in place to support sustained abovepotential growth, when it occurs.   Aided by the second installment of Large-Scale Asset Purchases (LSAPs), financial conditions have improved. After equity prices, interest rates and inflation expectations fell with the apparent slowing of the economic recovery in the summer, they began to move up again shortly after Chairman Bernanke’s speech laying out potential responses to the slowdown in late August in Jackson Hole, Wyoming (Charts 17–20).   The personal saving rate has risen to a level that is consistent with the historical relationship between that rate and household net worth relative to disposable income, reflecting the very large drop in household net worth from the combined impact of financial crisis and severe housing downturn (Charts 21–22).   The household financial obligation ratio has declined to the level that prevailed in the mid 1990s, reflecting a combination of debt repayment, debt charge-offs and lower interest rates (Chart 23). Households in all credit-quality quintiles are continuing to reduce their overall debt (Chart 24).   Banks tightened lending standards during the financial crisis and recession. Bank lending standards, while tight in level terms, have begun to ease (Chart 25).