Reforms are all the more important to help the economy adapt smoothly to external shocks such as those currently observed. In many countries, governments also need to press ahead with fiscal consolidation and fiscal reform. Budget deficits in the euro area as a whole are expected to improve this year, but this will mainly be the result of strong economic growth and one-off revenues from the sale of UMTS licences. Abstracting from these factors, there has been little further progress in the consolidation of public finances on average. Moreover, current budget plans for 2001 imply that the average fiscal stance will be slightly more expansionary next year. For the first time since 1993, the primary balance ratio as a percentage of GDP for the euro area is expected to deteriorate in 2001. This somewhat more expansionary stance demonstrates that the reform strategies have, in some cases, been unbalanced. Many countries have enacted reductions in personal and corporate income taxation and social security contributions, but have not set ambitious expenditure ceilings. While the tax reforms currently being implemented or planned in a number of euro area countries are a welcome stimulus to the supply side, they need to be accompanied by restraint in government spending. The longer-term sustainability of budget positions also needs to be ensured in several countries with regard to the consequences of planned fiscal reforms, such as those of pension systems, and the reduction of taxes. The policy adjustments necessary to create the financial leeway for these reforms should be prepared now.
The adopted solution was embedded in the so-called Emergency Act, which was passed by Parliament on 6 October 2008. The Emergency Act saved the domestic operations of the banking system by creating new banks, which involved carving domestic assets and liabilities out of the old, failing banks. The rest – and the much larger part – went into a resolution process. In order to reverse the ongoing run on domestic deposits, a declaration was made that all deposits in Iceland were safe, but this did not include deposits in foreign branches. Furthermore, all deposits in Icelandic-headquartered banks were given priority over other unsecured claims, including in foreign branches. As regards the blanket guarantee, the distinction made between domestic deposits and foreign currency deposits in the banks’ foreign branches added fuel to the fire of the so-called Icesave dispute about the settlement of deposit guarantees in the Dutch and British branches of one of the banks. But guaranteeing those deposits would never have been credible and might have bankrupted the Government had it been attempted. The deposits in question were in foreign currencies and amounted to 11½ billion euros – far in excess of Iceland’s available FX liquidity at that time, as the sovereign was completely closed off from foreign capital markets.