forces and competition from abroad and a monetary regime bent on securing a low rate of inflation was chosen. iceland is, as mentioned, not a member of the european union and membership is not on the agenda of the present government. iceland operates its own small currency on the margins of the us dollar and the euro. these facts place firm requirements on economic policy while at the same time offering iceland to reap important benefits from globalisation. this is indeed born out by developments over the last few years that were years of rapid growth of gdp and years which tested the ability of economic policy makers to steer the economy in an environment of liberalised markets and capital movements. more generally, the lesson to be drawn from our experience is that countries only stand to gain from full participation in the global economy. aside from subjecting the domestic economy to competition from abroad, it disciplines economic policymaking. the market is a strict master and serves painful punishment for mistakes or ill - thought initiatives.

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