In this decade alone we have seen a currency crisis in Europe in 1992–1993 and the Mexican crisis in 1994–1995. A number of the countries affected were suffering from major economic imbalances, which triggered currency outflows and capital flight. These crises also revealed fundamental shortcomings in the functioning of the international financial system. BIS Review 20/1999  2  In principle, access to efficient international capital markets is an advantage for a country, not a disadvantage. Norway used international capital to finance the development of its oil sector and sizeable current account deficits in the 1970s and 1980s. Norwegian enterprises have access to credit that would be very expensive in periods if we were to rely solely on domestic financing. The central government invests the capital in the Petroleum Fund in foreign markets because this is expected to generate high returns. In the long term there is hardly any better alternative than to improve the functioning of capital markets. This is in the interest of Norway and other industrial countries, particularly countries that have a surplus of saving that must be invested abroad. This is also in the interest of many developing countries that sorely need international capital to develop their economies. One solution that is not effective is the reimposition of direct capital controls, given the vast increase in technological capabilities to evade them. The business sector is already international. Capital controls are disadvantageous to the business sector in the countries that introduce them.

With hindsight, we may ask why so much capital was lent to countries about which lenders knew very little. An additional problem is moral hazard: lenders may have assumed that the authorities or international organisations would bail them out if borrowers experienced payment problems. As a last resort, they may have expected the IMF to back the national authorities, which again are expected to support their banking systems. Lenders can thereby neglect to make a thorough evaluation of credit risk. The liberalisation of the capital market within a country requires national regulations and supervision. The liberalisation of capital movements across national borders requires coordination and regulations at an international level. Countries on the European continent have a regional approach to this. They have drawn up a set of laws and rules that govern a common European market, the single market. Norway also participates in this market by virtue of the EEA Agreement. From 1 January 1999, 11 EU countries introduced the single currency, thereby implementing one of the greatest monetary reforms of this century. Moreover, European monetary union effectively eliminates the opportunity to speculate between countries’ currencies, thereby enhancing the stability of the financial system in Europe. 3  BIS Review 20/1999  International rules for economic relations with other countries are important, particularly for small countries. Cooperation within the framework of the WTO and GATT agreement on trade in goods and services is an example. The OECD Capital Code, which provides a framework for member countries’ laws and regulations on capital movements, is another example.