Ending on a positive note, I would like to point out that one should dare to be optimistic. If economic and political developments turn out better than anticipated, a regulatory framework such as the SGP should be flexible enough to accommodate such events. The Swedish financial crisis of the 1990s brought a fivefold increase in the unemployment rate and three years of negative growth, the worst performance in a century. In the midst of the crisis, anyone painting the picture of the situation we have today would most certainly have been laughed at. Although such profound institutional and macroeconomic changes that later came about seemed implausible at the time, one should not rule them out in advance. Stabilisation policy from a country’s point of view If we instead turn to viewing each country individually, the tendency is still less towards interventionism and that policy-makers should only respond in the event of large economic shocks. After joining a monetary union, fiscal policy is the only remaining tool for national stabilisation policy. Here, it should be remembered that the smaller the member country is, the less important it is for the overall economic developments of the monetary union. Thus there is a greater risk of the common monetary policy not suiting the smaller member country. Whether using the example of Sweden relative to the euro area or Uganda to the EAC, the general conclusion is that the role of fiscal policy is even more important in such a case.
Perhaps a society has to undergo a learning process on a broad front so that earlier mistakes yield new insights. Economic policy decision-makers like myself are, of course, no exception here. But as financial turbulence does not inevitably lead to a serious crisis in the real economy, we need to ask why it is that in certain cases output and employment do suffer severe setbacks and the attendant deflation. Much will have been gained if we can learn to tell whether or not an extensive share price fall, for example, besides being troublesome enough for many people, is likely to result in a situation with general deflation, rapidly falling output and rising unemployment. An answer to that question was suggested in the summer of 1999 by the Federal Reserve chairman, Alan Greenspan: While bubbles that burst are scarcely benign, the consequences need not be catastrophic for the economy. The bursting of the Japanese bubble a decade ago did not lead immediately to sharp contractions in output or a significant rise in unemployment. Arguably, it was the subsequent failure to address the damage to the financial system in a timely manner that caused Japan’s current economic problems. Likewise, while the stock market crash of 1929 was destabilising, most analysts attribute the Great Depression to the ensuing failures of Policy. Most things indicate that when banks run into trouble on account of financial turbulence, the supply of credit may dry up and the payment system cease to function.