Risks in the euro area – focus on Greece and Spain The concern on the financial markets stemmed of course from the public finance situation and problems in the banking sector in the euro area. Concerns increased during the spring, mainly due to developments in Greece and Spain. The situation following the parliamentary election in Greece in May fuelled speculations of an EMU exit. After a new election in mid-June, the political parties that support the savings programme managed to form a new government. However, it was still uncertain whether the new government would be able to implement adequate measures. At the same time, Spain continued to have problems with its public finances and yields on their government bonds rose. The problems in the Spanish banking sector also became more acute. In June, the Eurogroup promised to provide loans of up to EUR 100 billion to enable the Spanish banks to increase their capital adequacy, and the Spanish government formally applied for  BIS central bankers’ speeches  1  assistance. Increased concern over the situation in Spain also meant that Italy and the country’s large sovereign debt attracted greater attention. At the end of June, just before our monetary policy meeting, the European Council decided on a number of measures to stabilise the situation in the euro area in the short term. The focus was on how the EFSF funding programme and later the ESM can be used.
In July, CPI inflation increased by 0.7 per cent compared with July last year, and CPIF inflation increased by 0.8 per cent. This was completely in line with our forecasts and with market expectations. Information on developments in the real economy during the third quarter is so far limited to the business and consumer tendency surveys for July and to the purchasing managers’ index for July. The National Institute of Economic  BIS central bankers’ speeches  5  Research’s economic tendency survey fell in July and is at a level indicating that growth in the economy is weaker than normal. The confidence indicator for households did rise compared with June, and then to a level just above the historical average. Another bright spot was that the indicator for the manufacturing industry rose. This is in line with the indications from thepurchasing managers’ index for the manufacturing industry, which also rose in July. However, one must exercise caution in drawing conclusions on the basis of changes in individual months. Appreciation of the krona during the summer Another significant factor this summer has been the large appreciation of the krona in relation to the euro. This, together with the fact that the krona has increased in value against other currencies, too, means that it has appreciated in trade-weighted terms this summer. Our forecast in July was that the krona would strengthen, given the relatively good economic developments in Sweden and given our robust public finances.