The second story was the rise and fall of three cross-border banks operating on the basis of EU legislation (the European “passport”). This story was much more unique, as it was part of the first banking crisis in Europe since the EU single market was formed in the early 1990s. This framework, along with the prevailing conditions in international financial markets that provided for ample and cheap credit, facilitated the cross-border expansion of the newly privatised Icelandic banks. In less than five years, from the end of 2003 to mid-2008, the combined balance sheet of these banks went from under two times GDP to almost ten times GDP, topping other small European countries with international financial centres, as can be seen on Figure 1:  BIS central bankers’ speeches  1  Towards the end, around two-thirds of the combined balance sheet of the three cross-border banks was denominated in foreign currency. On the liabilities side, the share of FXdenominated debt was actually higher, as can be seen on the right side of the slide, with almost half of the financing in the form of FX deposits and other short-term FX financing. The FX part of the balance sheet therefore had a significant maturity mismatch. However, there was a very limited safety net of the type we have in a national setting, in the form of liquidity provision and lender of last resort (LOLR) to back it up.
The euro area-wide unemployment rate has fallen to 8.7%, compared with levels close to 13% at the height of the crisis, although there are substantial cross-country differences, ranging from an unemployment rate below 4% in Germany to 20% in Greece and 16.5% in Spain. Moreover, a balanced pattern of economic growth can be seen. Adding more recently to the momentum of private consumption, the sole engine of growth of the start of the recovery, has been the dynamism of business investment. Low financing costs, the sound performance of final demand and high capacity utilisation are enabling investment to pick up to pre-crisis levels. However, factors persist that might restrict medium-term investment projects, including most notably low potential growth expectations, the adjustment of balance sheets and the correction of high corporate debt levels still under way, and the problems that are creating political uncertainty. Euro area exports, boosted by more buoyant global trade, are also contributing to the momentum of activity. And this despite the notable appreciation of the euro since last spring. Undoubtedly, a significant factor underpinning the recovery has been the maintenance of an expansionary monetary policy, which has allowed financing conditions to be relaxed, contributing to the upholding of both private consumption and the recovery in investment. Specifically, estimates by the Banco de España suggest that the series of monetary policy measures adopted since mid-2014 might account for close to half of the nominal GDP growth in the euro area from 2015 to 2017.