inflation targeting. there can be little doubt that both real and financial global integration have brought enormous economic benefits. still, it has been increasingly questioned of late. we partly understand why. we know that there are significant gains from real integration but that there are winners and losers. the losers can be compensated in principle, but in practice this does not always happen. inequality has increased within many countries and economic integration is blamed, although research shows that technological change plays a significantly bigger role. at least in part, the case of financial integration is different. finance is an integral part of economic progress, and there are significant benefits from global financial integration. but more is not always better when it comes to finance, as we learned the hard way during the latest financial crisis. furthermore, large and volatile capital flows can undermine the financial stability of countries. it is not clear who the winners are in that case nor what the compensation mechanism would be. spillover effects from monetary policy of global rate setting countries to small, open and financially integrated economies ( sofies ) increase as global financial integration intensifies. in particular, if the global rate setter experiences an economic slack at a time when a sofie is booming, the sofie might find it difficult to pursue warranted macroeconomic policies without risks to financial stability and / or significant detrimental effects on export sectors. this could be the case if there are perceived limitations to the use of fiscal policy ; for instance, if there is already a sizable headline surplus. in this situation, macroprudential and even capital flow management measures could help. in iceland ’ s case and some others, this raises the issue of compatibility with existing international and regional treaty obligations regarding free movement of capital. the jury is still out on these issues. it is one thing to try to make global financial integration safer and to mitigate unwanted spillover effects – which might involve some retrenchment, as it did in this country and many others after the crisis – but it is another matter entirely to bring about a large - scale reversal of the global financial integration of recent decades. most likely, such a reversal would seriously undermine real economic integration and the benefits associated with it. we are going to discuss these issues and others that pertain to the current state and future prospects of global economic integration. after jaime ’ s keynote speech, we will have two sessions with substantive presentations and discussions on different aspects of the topic. this afternoon, we aim to take stock of recent trends in global and regional economic and

services would be enhanced, thereby reducing the cost of capital. simulations using the stylised dynamic stochastic general equilibrium model in chapter 7 indicate that domestic real interest rates would decline, the domestic capital stock would grow, and gdp per capita would rise permanently if a small country such as iceland were to join a larger currency area ( see also chapters 2 and 21 for a discussion of other countries ’ experience ). • upon joining the euro area, consumers would have access to a large market in which they could use their home currency. this would facilitate price comparison and boost competition. it would also be easier for domestic firms to gain a foothold in larger markets and benefit more from economics of scale in their operations and production. bis central bankers ’ speeches • with euro area membership, the risk associated with cross - border banking operations would be reduced, as banking would take place in the home currency to a larger degree and the ecb would be responsible for providing liquidity. as a result, it would be possible to ease the restrictions on cross - border banking that would otherwise be necessitated by foreign exchange risk and maturity mismatches in the banks ’ foreign - denominated assets and liabilities. • eu and euro area member countries are subject to requirements concerning public finances and other aspects of economic policy, which aim to improve policy discipline. in addition, member countries participate in a variety of consultative fora on economic policy and financial stability, which should also promote improved policy in these areas. another benefit of euro area membership is access to rescue funds and a common safety net intended to address shocks in individual countries and reduce contagion among them. but euro area membership also entails risks for iceland. it would no longer be possible to apply independent monetary policy and a flexible exchange rate in response to shocks and to expedite adjustments to changes in national income. under certain circumstances, this has been quite useful for the icelandic economy. on the whole, however, domestic monetary policy has not proven particularly effective in achieving set goals, and more often than not a flexible exchange rate has proven a source of shocks rather than a shock absorber. consequently, relinquishing domestic monetary policy may not prove to be a great sacrifice unless monetary policy can be improved and excess exchange rate volatility can be mitigated. this possibility is explored later in this chapter. another risk is the crisis currently facing the euro area and the design failures that are a partial cause of it. because of this, it would be risky