there is no simple economic formula stating how these pros and cons should be weighted together so as to yield a clear answer. in addition, it is quite uncertain how these factors will develop in the future. but it should also be noted that this report contains numerous findings indicating that the selection of a currency and exchange rate policy may be less important for economic welfare and stability than might be expected in view of the public discussion on the issue. an example of this is how different countries have fared during the financial crisis ( see chapters 16 and 17 ) and how likely asset price bubbles are to develop inside and outside a currency union ( see chapter 11 ). based on the limited experience to date, it appears that fiscal policy, financial system structure and regulatory framework, and the incentives and opportunities of private agents to borrow are much more important. one of the reasons it is difficult at this point to draw a clear conclusion about which path iceland should take is the uncertainty about near - term developments in the two most likely scenarios : an improved framework for the krona and removal of the capital controls, or eu membership and eventual adoption of the euro. it therefore appears sensible to continue to analyse and develop these two options for a while yet, both by preparing a stronger framework for the krona and by pursuing iceland ’ s application for eu membership. if the euro area crisis is resolved in the near future and the currency union framework is strengthened, and if iceland decides to join the eu and the euro area, reforms to the current monetary framework will also prove helpful during the run - up to adoption of the euro. in a best - case scenario, euro area membership will take several years at the very least. iceland must make a decisive effort to lift the capital controls. it is therefore critical to develop the monetary and exchange rate policies that would be used afterwards. these policies must be adequate until iceland adopts the euro if it so chooses, although some changes could take place along the way, such as with participation in erm - ii. but the monetary framework must also be suitable for the long term. to the extent possible, it must be a viable alternative to euro area membership so that icelanders can assess the pros and cons of the options available to them. the central bank of iceland has recently invested considerable work in these projects, including preparing the publications mentioned in this chapter, and further bis central bankers ’ speeches work is planned. the bank has also invested a great deal of work in projects related to

, to most other regions and countries as well ( see chapter 10 ). iceland ’ s export sector differs in structure from that in most other industrialised countries ( see chapter 4 ). on the other hand, the economy is quite open to trade and the euro area is by far iceland ’ s largest trading partner ( see chapters 4, 8, and 20 ). in addition, the domestic labour market is quite flexible, although downward flexibility of nominal wages has not been tested much and available data suggest that it has been relatively limited to date ( see chapter 14 ). the oca theory has many shortcomings and does not take account of a number of potential benefits of participation in a large currency area such as the eurozone. historical experience also suggests that currency unions can be successful even if the participating countries do not fulfil the oca criteria at the outset ( see chapter 5 ). in this context, the following points are worth noting : • research indicates that currency union membership will stimulate trade with the currency union without reducing trade with other countries. in part, this is because domestic firms will be enabled to participate more readily in external trade because of the absence of exchange rate risk. according to an estimate of this trade boost effect if iceland were a member of the euro area ( see chapter 8 ), goods trade relative to gdp could increase by 4 – 11 percentage points and, as a result, gdp per capita could rise permanently by 1½ – 11 %. • research shows as well that the increased trade between member countries with a common currency could cause the business cycle in those countries to become more symmetric over time, so that oca criteria are met to a gradually increasing degree. • the use of money is subject to considerable economics of scale ; for instance, in connection with currency issuance, the cost of providing monetary services ( such as monetary policy and payment intermediation ), and cross - border foreign exchange transactions. other things being equal, participation in a larger currency area would lead to a more efficient and less expensive monetary system. • in addition, small countries in a currency union can save foreign exchange reserves to a greater degree than is possible with an independent currency. • the domestic foreign exchange market is small, undeveloped, and relatively expensive to trade in ( see chapter 12 ). euro area membership would provide access to a large, deep financial market without exchange rate risk. this would facilitate risk diversification domestically. in addition, the pool of financial products would increase and competition in financial