Depending on the resolution there and the progress of the EU accession negotiations, the problem could be resolved in connection with the accession process itself. At this point, it is unclear what form such outside assistance would take, but the more it takes the form of declarations concerning limits to exchange rate fluctuations backed by credibility and strong ability to intervene in the foreign exchange market, and the less it takes the form of offering loans, the better. On the other hand, it appears inevitable that, if Iceland joins the euro area, it would be necessary to convert all krónur at the same exchange rate, for the same reasons as with a currency board or unilateral adoption of another currency. Although the interaction between the capital controls and Iceland’s currency options is complex in many respects, this is not true to the same extent of prudential rules restricting the international activities of domestic financial institutions. For instance, it would be safe to relax such rules if Iceland were a member of the euro area and its financial institutions could carry out a large share of its cross-border business in its home currency. This would be even more true if the EU framework for cross-border banking were reformed so as to provide for EU supervision of banks operating throughout the region, a pan-European deposit insurance scheme, and intervention in distressed financial institutions by a joint EU body.
Therefore, the euro area is currently battling a fiscal crisis in some member countries, a competitiveness and current account crisis in the region as a whole, a deep banking crisis in some countries, and a fragile banking system in many others, which would be exacerbated if the sovereign debt crisis should end in default by any of the countries concerned. A currency crisis as such is not part of the problem, however, any more than it was in the US. As is discussed further in Chapters 16 and 25, a number of reforms have already been adopted in response to the shortcomings in the design of the euro area, but it is not certain that they will suffice to preserve the currency union in its current form. Forecasting near-term developments in the euro area crisis is beyond the scope of this report, however. The results of the reforms made to date have not yet been fully tested. If they prove inadequate, the crisis could be amplified and, in the worst-case scenario, could have severe repercussions for the future of the euro area in its current form. If they are successful, the reforms could strengthen the eurozone. The outcome has yet to be determined.