DG ECFIN Lessons from financial integration and financial crises in Scandinavia Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, Dubrovnik, Croatia, organized by the Croatian National Bank Lars Jonung, DG ECFIN, Brussels Lessons from financial integration and financial crises in Scandinavia Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, Dubrovnik, Croatia, organized by the Croatian National Bank Lars Jonung, 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 and Sweden – the Nordic or Scandinavian countries – used to be regarded as a successful one during the post- World-War-II period. Then came the great financial crisis

DG ECFIN The Nordic boom phase about A stylized picture.

DG ECFIN The Nordic bust phase about A stylized picture.

DG ECFIN Ratio of bank loans to GDP

DG ECFIN Real estate prices 1990 = 100

DG ECFIN The case of Denmark – the great exception: Why no banking crisis? (still banking problems) Tight fiscal policy – credible exchange rate More financially integrated Earlier financial liberalization Well capitalized banks

DG ECFIN 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

DG ECFIN How to avoid a crisis … Lesson no 1: The power of financial markets (of the real rate of interest)

DG ECFIN How to avoid a crisis … Lesson no 2: The dangers of financial ignorance

DG ECFIN How to avoid a crisis … Lesson no 3: The dangers of backward-looking policy behaviour

DG ECFIN How to avoid a crisis … Lesson no 4: The dangers of procyclical monetary policy

DG ECFIN How to avoid a crisis … Lesson no 5: The dangers of procyclical fiscal policy

DG ECFIN How to avoid a crisis … Lesson no 6: The sequencing of financial reforms

DG ECFIN How to avoid a crisis … Lesson no 7: The inadequacy of micro-prudential financial supervision

DG ECFIN How to deal with a crisis … Lesson no 8: The importance of resolution policies

DG ECFIN How to deal with a crisis … Lesson no 9: The inadequacy of the lender-of-last- resort function of central banks

DG ECFIN How to deal with a crisis … Lesson no 10: The inadequacy of the advice from the IMF

DG ECFIN The long-run effects of financial integration … Lesson no 11: Financial liberalization changes the monetary and fiscal regime

DG ECFIN The long-run effects of financial integration … Lesson no 12: Financial liberalization has far- reaching effects – inside as well as outside the financial system

DG ECFIN 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

DG ECFIN 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?

DG ECFIN 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 in Scandinavia Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, Dubrovnik, Croatia, organized by the Croatian National Bank Lars Jonung, DG ECFIN, Brussels Lessons from financial integration and financial crises in Scandinavia Prepared for the 13th Dubrovnik Economic Conference, June 27 - June 30, 2007, Dubrovnik, Croatia, organized by the Croatian National Bank Lars Jonung, DG ECFIN, Brussels The views expressed are my own and should not be attributed to the European Commission