DG ECFIN

Lessons from financial integration and financial crises Lessons from financial integration and financial crises in Scandinaviain Scandinavia

Prepared for the 13th Dubrovnik Economic Conference, Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, June 27 - June 30, 2007,

Dubrovnik, Croatia, organized by the Croatian National Dubrovnik, Croatia, organized by the Croatian National BankBank

Lars Jonung, Lars Jonung, DG ECFIN, Brussels DG ECFIN, Brussels

The views expressed are my own and should not be attributed to the European Commission

DG ECFIN

Why look at the Nordics?

• Four laboratory experiments

• Pioneers in engineering financial crisis

• Open and transperant policy process

• Crisis in a welfare state

DG ECFIN

The macroeconomic record of Denmark, Finland, Norway The macroeconomic record of Denmark, Finland, Norway and Sweden – the Nordic or Scandinavian countries – used and Sweden – the Nordic or Scandinavian countries – used

to be regarded as a successful one during the post-to be regarded as a successful one during the post-

World-War-II period.World-War-II period.

Then came the great financial crisisThen came the great financial crisis

DG ECFIN The Nordic boom phase about 1985-90. A stylized picture.

DG ECFIN The Nordic bust phase about 1990-93.The Nordic bust phase about 1990-93. A stylized picture.A stylized picture.

DG ECFINRatio of bank loans to GDP

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Real estate prices1990 = 100

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The case of Denmark – the great exception:

Why no banking crisis? (still banking problems)

Tight fiscal policy – credible exchange rateMore financially integrated Earlier financial liberalizationWell capitalized banks

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Lessons from the Nordic experience of financial integration

1. Lessons on how to liberalize while avoiding a financial crisis

2. Lessons on how to deal with a crisis

3. Lessons on the long-run effects of financial integration

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How to avoid a crisis …

Lesson no 1:

The power of financial markets

(of the real rate of interest)

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How to avoid a crisis …

Lesson no 2:

The dangers of financial ignorance

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How to avoid a crisis …How to avoid a crisis …

Lesson no 3:

The dangers of backward-looking policy behaviour

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How to avoid a crisis …How to avoid a crisis …

Lesson no 4:

The dangers of procyclical monetary policy

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How to avoid a crisis …How to avoid a crisis …

Lesson no 5:

The dangers of procyclical fiscal policy

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How to avoid a crisis …How to avoid a crisis …

Lesson no 6:

The sequencing of financial reforms

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How to avoid a crisis …How to avoid a crisis …

Lesson no 7:

The inadequacy of micro-prudential financial supervision

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How to deal with a crisis …How to deal with a crisis …

Lesson no 8:

The importance of resolution policies

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How to deal with a crisis …How to deal with a crisis …

Lesson no 9:

The inadequacy of the lender-of-last- resort function of central banks

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How to deal with a crisis …How to deal with a crisis …

Lesson no 10:

The inadequacy of the advice from the IMF

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The long-run effects of financial integration …The long-run effects of financial integration …

Lesson no 11:

Financial liberalization changes the monetary and fiscal regime

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The long-run effects of financial integration …The long-run effects of financial integration …

Lesson no 12:

Financial liberalization has far-reaching effects – inside as well as outside the financial system

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The long-run effects of financial integration …The long-run effects of financial integration …

Lesson no 13:

Financial crisis may be costly in the short run and beneficial in the long run

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The long-run effects of financial integration …The long-run effects of financial integration …

Lesson no 14:

Financial liberalization does not necessarily lead to deep crisis

DG ECFIN

Lessons from other financial crises:

What is specific with Scandinavia?

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Any novel message?

The long-run effects of financial integration are not as dramatic as the short-run effects, but they have proved to have greater importance over time.

DG ECFIN

When is the next crisis?

“it could not happen here – again”

The future will show

DG ECFIN

Lessons from financial integration and financial crises Lessons from financial integration and financial crises in Scandinaviain Scandinavia

Prepared for the 13th Dubrovnik Economic Conference, Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, June 27 - June 30, 2007,

Dubrovnik, Croatia, organized by the Croatian National Dubrovnik, Croatia, organized by the Croatian National BankBank

Lars Jonung, Lars Jonung, DG ECFIN, Brussels DG ECFIN, Brussels

The views expressed are my own and should not be attributed to the European Commission