​Uncertainty and difficult financing conditions weakened household and business confidence during last summer and early autumn, and in Europe there was a marked contraction in the economy. ‘Balance sheet adjustment, high unemployment and tight financing conditions in the crisis countries will continue to weigh on economic growth,’ Governor Erkki Liikanen stressed at the press briefing for the latest edition of the Bank of Finland journal Euro & talous. Notwithstanding the weak growth, the financial markets have calmed down. The Eurosystem’s readiness to undertake outright monetary transactions has been an important factor.

Euro area inflation has dropped below 2%, with the rise in energy and food prices moderating and the weak trend in the economy continuing. ‘Over the policy-relevant horizon, inflationary pressures should remain contained and inflation expectations remain firmly anchored in line with the ECB’s objectives. This will allow the monetary policy stance to remain accommodative,’ stressed Governor Liikanen.

The Governing Council of the ECB has responded to the uncertainty generated by the debt crisis and the expected slowdown in inflation with an accommodative monetary policy and various non-standard monetary policy measures. These have made it possible to avoid a credit crunch and to remove unfounded fears of the reversibility of the euro.

The Bank of Finland forecasts that world growth will remain very slow in 2013, at just over 3%. In Europe, unemployment will remain high and real GDP will not reach its pre-crisis level until 2015, with the reduction in private and public sector debt weighing on growth in the crisis countries. The forecast sets out from the assumption that the agreed fiscal and structural measures in the crisis countries will be carried through successfully and confidence will continue to improve. Recovery will gain strength only gradually as the fall in housing prices in the crisis countries ends, the health of the banking sector is restored and the level of private debt is reduced. Downside risks remain and relate to deterioration in the still fragile sentiment on financial markets.

The seeds of the financial crisis were sown by the rapid growth in household and corporate indebtedness, which fuelled a rise in property prices to unsustainable levels in many countries. The post-crisis recession caused a collapse in government tax revenues and a steep rise in the government debt ratio. ‘Orderly deleveraging is unavoidable, but it will be slow. This will hamper economic growth both now and in the years ahead,’ Governor Liikanen continued.

Accommodative monetary policy will support economic recovery and give time for a controlled reduction in debt. ‘The crisis will not be resolved by monetary policy means alone. Structural reforms and measures to address the imbalances in the economy are indispensable,’ asserted Governor Liikanen.

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In addition to the article on monetary policy and the global economy, Euro & talous 1/2013 also features the following articles:
Jarmo Kontulainen, Juha Kilponen and Antti Suvanto: Rahoituskriisi avasi keskustelun rahapolitiikan tavoitteista (‘The financial crisis sparked debate on the goals of monetary policy’)
Mika Kortelainen: Kansainvälisen raha- ja finanssitalouden malli (‘A model of the international monetary and financial economy’)
Laura Solanko and Lauri Vilmi: Globaalit energiamarkkinat murroksessa (‘Global energy markets at a turning point’)