GDP declined three years in succession and employment fell by over 500 000. This also pushed inflation down to a low level. When it was decided that the krona would no longer be pegged against the ecu in November 1992, a monetary and foreign exchange policy was introduced with a floating exchange rate and an inflation target of 2 per cent. Fiscal policy was tightened. The budget consolidation process of the mid-1990s was quite drastic in international terms and also helped to subdue inflation, even though the krona had weakened by approximately 25 per cent directly after the introduction of the floating exchange rate. This was something that Sweden did not manage to do after the devaluations of the late 1970s and early 1980s. The Riksbank was eventually given an independent position with the aim of increasing the credibility of the inflation target, which the Riksbank also managed to do. Improvements in wage formation have contributed to positive development Another important reason why inflation in Sweden has been able to stay in step with inflation in Germany, and nowadays in the euro area, is that wage formation has improved. During the 1980s, it became increasingly evident that Swedish wage formation did not function in a manner compatible with economic balance. Collective bargaining often began only when the previous agreements had expired, which meant that negotiations were conducted under more strained circumstances without the obligation to refrain from industrial action.
The current process of deleveraging in the private sector remains incomplete, while pressures on fiscal sustainability in these economies also continue to weigh on confidence and growth. Significant challenges continue to be faced in the implementation of the structural adjustments which in turn is affecting the process of fiscal consolidation. This has further restrained the policy flexibility to support growth. The extraordinary and exceptional monetary measures taken by central banks in these economies have provided support to their economies, but they have also come at a cost to savers with growing risks of market distortions and financial imbalances the longer these measures are held in place. BIS central bankers’ speeches  1  In efforts to build stronger defences against a repeat of the events that precipitated the 2008 global financial crisis, the global regulatory reform agenda has placed significant focus on addressing elements of the regulatory and supervisory systems that allowed the build-up of excessive leverage. These elements include the unfettered innovation by financial institutions and the prevailing incentive system. Financial engineering had led bankers and investors to lose focus on their risk exposures when they failed to understand the increasingly complex products that purported to reduce the risks. The weak regulatory regime and supervision also failed to rein in such unbridled innovation. Misaligned incentives then fuelled excessive risk taking both at the institutional and individual levels.