But exit strategies from this support need to be developed and consistently implemented to contain moral hazard, to forestall a rise in long-term real interest rates and crowding out effects, and to insure sustainability of public finances. If this challenge is not met, the current crisis is bound to be exacerbated by a sovereign debt crisis. •  In the area of regulation a broad set of measures is under way and considerable progress has been made. But as signs of stabilisation in the financial system and the  BIS Review 102/2009  3  economy are emerging, reform appetite is waning and there is a risk of missing the opportunity of a paradigm shift in the financial system. •  Especially as the crisis intensified, central banks took immediate and unprecedented action by lowering rates to historically low levels and providing ample liquidity. •  Keeping interest rates too low for too long may well lay the basis for new imbalances and instability. Central banks need to prepare for credible strategies to phase out their support and stand ready to prepare financial markets when they come to unwind their credit support measures. •  In academic circles the financial crisis has revived the debate whether central banks, in the conduct of monetary policy, should pay more attention to financial variables, and specifically, whether inflation targeting strategies do not focus too narrowly on economic developments alone. Relative to this the ECB’s monetary policy strategy has proved to be robust.
Thus, the impact of the pandemic on domestic demand was less pronounced. Despite relatively successful public health measures, the large share of tourism services in Iceland’s GDP made the economy quite vulnerable to the economic consequences of global restrictions on travel and tourism services. In 2019 tourism and tourism-related services amounted to about 8% of Iceland’s GDP, a proportion second only to that of Portugal and Spain in the OECD. Reflecting the weight of tourism in exports, Iceland’s exports contracted by 31%, more than in any other OECD country, and service exports shrank by 54% in the wake of restrictive measures taken by all major trading partners. Other tourism-dependent countries such as Greece, Spain and Portugal also suffered severe export shocks. The weight of tourism and the effects of COVID on exports  In 2020, economic activity in Iceland contracted by 7.2%, compared to 4.9% on average in main trading partner countries. The difference may appear smaller than expected given the size of the shock to exports. As a small open economy, Iceland imports a large share of consumer durables, investment goods and tourism services. Therefore, a considerably larger share of shocks to aggregate demand tends to be absorbed by the external sector than in larger, more self-contained advanced economies.