6  BIS Review 65/2002  If Sweden joins ERM2, the responsibility for maintaining economic balance rests essentially with the Government and the Riksdag. In the event of a referendum next autumn resulting in a majority for Swedish entry into the EMU, followed by entry to ERM2, the fiscal policy that is already being established this autumn will be highly important. However this may, the Riksbank should do what it can to contribute to price stability being maintained also in ERM2. Under these circumstances there are grounds for continuing to make forecasts, publish Inflation Reports and set the repo rate in much the same way as at present. Neither do I see any reasons for altering the inflation target. But the room for manoeuvre in monetary policy would rapidly narrow as entry to full monetary union approaches. At the same time, exchange rate stability in ERM2 is important but the potential risks of conflicts between price and exchange-rate stability during this short period should not be exaggerated. It is natural that the central rate in ERM2 will be the conversion rate in the changeover to the monetary union and this reduces the scope for speculation. The objective of monetary policy in Sweden as well as the euro area is price stability. Moreover, the process for EMU entry by other countries was calm even though the circumstances in a number of cases were more difficult than they look like being in Sweden's case. BIS Review 65/2002  7
The banking system expanded very rapidly in just five years, from a combined balance sheet of less than 2 times GDP (at the end of 2003) to almost 10 times GDP (in mid-2008). Most of this expansion was cross-border, and a lot of it had very little to do with Iceland, as both financing and investment took place abroad. A number of domestic mistakes were made throughout the process, and I do not have time to go into them here, but the expansion of the banks was greatly facilitated by Iceland’s membership in the European Economic Area (EEA), as the EEA Agreement provides a legal and regulatory framework based on European Union Directives, including free movement of capital and provision of financial services. The underlying principles are those of home licencing for operations anywhere in the EEA and of a level playing field for competition, where size and location supposedly do not matter. This European “Passport” enabled the Icelandic banks to operate throughout the EEA, including through branches in other EEA countries. We now know that there are deep flaws in this framework and that these flaws are important elements in the current euro area crisis. A key issue here is the contradiction between, the European passport rights on the one hand and, on the other hand, national supervision, national deposit insurance and national crisis management and resolution regimes. This is what recent proposals of a banking union are supposed to deal with.