krone back to its initial range over time. this illustrates the challenges of stabilising the exchange rate of a small, open, oil and commoditiesbased economy against that of larger, more diversified economies. though a much larger economy, the uk has also over time experienced problems with exchange rate targets, most recently the events that led sterling to leave the erm in 1992 and orient monetary policy towards an inflation target. the introduction of the euro from 1 january 1999 did not in itself require changes in norwegian monetary policy. the euro could replace the ecu as the operational indicator of the external value of the krone. however, last spring norges bank also reviewed the merits of a change in anchor currencies. norges bank found the potential benefits of changing the exchange rate target to a trade - weighted basket to be relatively marginal and fairly uncertain, and recommended that the government refrain from modifying the exchange rate regulation. in the revised national budget for 1998, the government affirmed this view and decided that the exchange rate regulation would continue to apply without any changes, with the euro replacing the ecu as the indicator of the krone ’ s value against european currencies. thus, the consequences of the introduction of the euro for the orientation of norwegian monetary policy might not appear particularly great at the outset. the launching of emu nevertheless entails changes in the environment for our monetary policy, for the following reasons among others : first, the european central bank formulates its monetary policy with the aim of maintaining low inflation for the euro area as a whole. euroland will be a more closed economy than the individual member countries used to be, and thus exchange - rate changes less important. this can result in larger exchange rate fluctuations between the major countries than in the past. if so, keeping the krone stable against the euro might become more challenging. second, the launch of the euro will reinforce global financial integration and contribute to higher capital mobility, and the establishment of an efficient payment and settlement system in euros reduces the cost of moving capital. increased mobility of capital, both in and out of countries, including norway, could follow. as i indicated earlier, we, like others, have experienced increasing difficulty in maintaining a stable exchange rate in a world of large, unrestricted capital flows. the relative calm within the euro area during the recent turmoil linked to the financial crises in asia and russia and later brazil could be indicative of future differences between europe ’ s “ ins ” and “ outs ”. finland,

will be of little consequence. two other areas that will be directly affected are international payment transactions and liquidity management. international payment transactions do not represent a substantial source of income for norwegian banks. however, it will be important for banks to be able to provide competitive payment services in euros to avoid losing customers. foreign lenders today account for close to 30 per cent of all loans to norwegian enterprises, a share that has been stable for the past five years. thus far, foreign branches in norway have primarily focused on the largest enterprises and financial market segments that demand more advanced services. as the euro gradually gains a foothold in the norwegian business sector, the norwegian market may prove to be of greater interest to foreign banks. nor can we disregard the possibility that mergers and acquisitions in the norwegian business sector – which may partly be perceived as a response to consolidation in the business sector in the euro area – will lead to a situation whereby a larger number of norwegian enterprises move into the “ division ” where foreign competition is strongest. norwegian enterprises with close ties to the euro area will also demand a wide range of euro services from their banks. for this reason, foreign banks will probably compete more intensely with norwegian banks in the future. technological advances, including the development of new channels of distribution, will reinforce this tendency. substantial overcapacity in the financial sector in european countries, particularly in traditional banking, has spurred the need for enhancing efficiency and consolidation. over the last couple of years we have seen a considerable increase in the number of mergers and acquisitions in europe, with mergers taking place both within and across national borders. the introduction of a single european currency has probably been an important catalyst in this process. mergers and acquisitions create entities with ambitions, financial strength and, not least, a range of services well designed to compete on international markets. this points to increasing competition across national borders. several large nordic bank conglomerates define the nordic area as their home market, and have established, or plan to establish, branches in most nordic countries. the largest swedish and danish banks have been the most active so far. a few of them, in contrast to other international banks established in norway, have started to show an interest in the market for households and small and medium - sized enterprises. the strengthening of the position of nordic banks in their home market may partly be perceived as a defensive strategy to keep out large global banks. the launching of a single currency in europe may have been an important driving force. the euro is likely, at