surplus country in the euro area, germany. the ecb has acted, on a temporary basis, as a substitute for decentralised markets within the euro area. 9 as a by - product of these developments, so - called target2 imbalances have emerged. you will recall that target2 is a recording, clearing and settlement system operated by the ecb. national central banks in the euro area – members of the eurosystem – can build up claims vis - a - vis target2 over time. target2 is only a mirror of the underlying economic and financial imbalances : with a properly functioning interbank market, no claim would appear in target2, and the underlying economic situation would be exactly the same. constraining the flow of funds through target2 would address a symptom of the crisis without tackling its causes. it would hamper the freedom of capital movements as well as the smooth operation of payment systems, which is a basic task of the eurosystem as mandated by its statute. the current situation is not a viable risk - sharing arrangement for the long run. today, risksharing between euro area countries occurs to a considerable extent through public institutions and only to a limited extent through markets. this has constituted an optimal response to a temporary malfunctioning of markets. however, financial integration remains key to the efficiency and competitiveness of the european economy. the eu is a marketbased economy and markets must play the primary role in allocating economic resources across emu countries, sending price signals and monitoring the associated risks under adequate supervision. risk - sharing in the euro area after the crisis let me discuss now what i see as the challenges ahead of us : how to restore and strengthen market - based risk - sharing mechanisms between euro area countries, and how to make euro area countries more resilient to adverse economic shocks in the future. see also merler, s. and pisani - ferry, j., “ sudden stops in the euro area ”, bruegel policy contribution, 2012 / 06. bis central bankers ’ speeches i would like to break this discussion down into four areas. first, the rest of the euro area – or the rest of the european union – should continue to support the adjustment process of euro area countries that had to address an unsustainable fiscal deficit or current account deficit – provided that there is adequate conditionality and monitoring. currently, the rest of the euro area is accompanying – via the efsf

important rationalisation has taken place in the icelandic financial system. until a few years ago, two of the main commercial banks were fully government owned and so were a host of so - called investment credit funds. the funds were unified in a single institution, which was subsequently privatised. the government has also reduced its stake in the commercial banks over the most recent years and intends to have them largely or fully privatised by the end of the current electoral term next year. the privatisation process creates opportunities for continued rationalisation in the financial system creating ample opportunities in the period ahead, including closer ties with foreign financial institutions. it is tempting to put recent economic developments in iceland into the context of developments in some of the other nordic countries about a decade ago. liberalisation of the icelandic financial markets was more or less completed in the mid 1990´s when the last restrictions on the movement of capital between iceland and other countries were removed. our liberalisation came a few years later than in the other nordic countries. you will recall that in some of the other nordic countries, liberalisation was followed by a boom period in the economy, partly or largely fuelled by a rapid growth of credit and in some cases large fiscal deficits. at the same time, these countries were pursuing a fixed exchange rate policy vis - a - vis the ecu. developments in the domestic economies were such that the fixed exchange rate policy was gradually undermined, the rapid credit growth of banks resulted in weakening loan portfolios when asset prices fell, the exchange rate fixety gave way to floating, the currencies depreciated and inflation rose. the current account of the balance of payments also deteriorated. developments in iceland from the latter half of 1990´s until the present time resemble in many ways the experience of some of the other nordic countries a decade earlier but differ also in important respects. soon after liberalisation, domestic demand picked up, fuelled by rapidly rising credit in the wake of intensified competition in the financial sector and a sharp increase in credit availability. at that time, iceland was pursuing a fixed exchange rate policy but not as rigidly fixed as the other nordic countries had done a decade earlier. the expansion in the economy at the end of last decade led to a very rapid rise in the current account deficit, climaxing in year 2000. through the effects of a tightening monetary policy, the exchange rate of the krona gradually appreciated. in the spring of the year 2000, expectations in the market shifted for a