there are questions about whether national preferences are sufficiently aligned to permit it. for that reason, we have to think carefully about whether it is essential for the euro area. in particular, we have to consider how having a genuine banking union might change the debate. as you know, stabilisation in europe takes place through national budgets and, in normal circumstances, they are sufficient to smooth the cycle. a recent study demonstrates that 47 % of an unemployment shock is absorbed by the automatic stabilisers in the eu, compared with only 34 % in the us. 4 they were insufficient in some countries during the crisis only because they faced an exceptional circumstance : a very large shock from the financial sector. with a genuine banking union, however, the risk of this happening again should be lower. first, we expect the ssm to increase the quality of supervision and the assessment of systemic risk. second, if a financial shock were still to appear, national budgets should be better insulated. the costs of banking sector repair would be shared with the private sector through the single resolution mechanism and a more integrated european financial market. all this suggests that stabilisation at the national level could be more effective in future. or put differently, the more successful we are in building a genuine banking union, the less we would need a central budget for stabilisation purposes. however, this does not mean i see no role for fiscal union in the stabilisation area. first, we would need the public backstop, namely for the resolution fund, which would be fiscally neutral over the medium - term. in my view the esm could play this role. second, we would need an insurance mechanism against tail events that may still arise and endanger euro area financial stability. here we already have the esm to act as lender of last resort to sovereigns. allocation turning from stabilisation to allocation, i see a role for a fiscal union that performs an allocative function – ensuring resources are used efficiently. in the literature, this typically refers to the provision of public goods, and in this context one possibility is to use common funds to incentivise growth - enhancing reforms. however, i will not discuss this in detail today, even if i think that this is a good idea, especially for the euro area, including an own revenue source. a recent study demonstrates that automatic stabilisers absorb 38 % of a proportional income shock in the eu, compared with 32 % in the us. in

comprehensive assessment of risk in the financial system as a whole was much less developed. the old adage – that the whole is greater than the sum of its parts – was forgotten. second, the institutional framework was flawed, in that it did not promote such a comprehensive assessment of risk. it was unclear who was responsible for responding to systemic risk, and there were too few tools for addressing it, such as variable capital requirements and other restrictions to combat lending and asset bubbles and set limits on risk appetite. third, liquidity risk was underestimated, not least risk related to liquidity management between currencies and financial institutions ’ re - financing in foreign currency. fourth, actual equity in the financial system proved too little to offset the indebtedness and other risk that had accumulated. fifth, the regulatory framework for cross - border banking operations was deeply flawed, not least in the european economic area. sixth, there is significant risk associated with building a relatively large banking system with cross - border operations based on a small country and small currency. these problems remain more or less unaddressed here in iceland, and as a result, there is little in the regulatory environment to prevent the problems iceland had before the crisis from developing once again, although it is unlikely that this will happen in the next few years, as our financial systems are still recovering and risk awareness is keen. now is the time to solve these problems because, if we wait until operations have resumed their full pace, it might be too late, and the will and incentive to take action will be lacking. the central bank is determined to set policy on these matters during the current year, and to contribute to joint policy - making with the government. this process involves, on the one hand, macroprudential rules – that is, rules that reduce systemic risk and obstruct the development of credit and asset bubbles, and on the other, it involves institutional elements, not least possible forms of closer collaboration or merger between the central bank and the financial supervisory authority. and monetary policy will be reviewed as well. there is a practical reason for such a review : we need to formulate the monetary policy that will take over from the imf programme because the current arrangement will not suit once the capital controls have been lifted and iceland has re - established its financial links with other countries. but there are also lessons to be learned from monetary policy implementation during the upswing and in the run - up to the financial crisis. the inflation target