The debate over Iceland’s adoption of the euro is raging on and has taken on new meaning given the krona’s difficult year so far. For some, adopting a new currency could help offset the effects of the global credit crunch and bolster Iceland’s economic system. For others it means giving up autonomy, an important value for the independent island nation.
Not only has the value of the Icelandic krona fallen against the euro since January 2008, but the Icelandic Central Bank predicts the economy will contract from now until 2010. But the currency ends May in a better position than it ended April.
“We are still likely to see a fairly sharp slowdown in the Icelandic economy in the coming quarters and the most likely scenario is for negative GDP growth in Iceland in 2008 and 2009,” says Lars Christensen, chief analyst at Danske Bank A/S.
Last week EUR 1.5 billion was extended to Iceland to help shore up the financial system as the result of a swap agreement with the central banks of Norway, Sweden and Denmark.
“In times of uncertainty and turmoil, the central banks have a responsibility to cooperate to attain their overall objectives,” said Swedish Riksbank Governor Stefan Ingves. “The swap agreement is aimed at supporting (Iceland) in its task of safeguarding macroeconomic and financial stability.”
The agreement isn’t quite enough to stabilise the economy on its own, but joining the EU might help on that front. Unfortunately, the EU’s practices when it comes to fishing mean that many citizens are opposed to membership, particularly as 40 percent of all Icelandic exports are seafood.
Regardless, more Icelanders are warming to the idea with an April poll indicating that 68 per cent of Icelanders are open to negotiating membership in the EU, compared to 55 per cent a month earlier.
One consequence of membership would be losing the right to set interest rates, but that may be a fair trade for gaining a stable currency. While interest rates in Iceland are currently 15.5 per cent, they are just four per cent in the eurozone.
“What we need in the long run is economic stability, which I doubt we can guarantee in the long run with our current currency,” said Foreign Minister Ingibjorg Solrun Gísladottir.
what are you guys saying about EU now? seeing Greece crumble, Ireland, maybe Portugal in the near future and Spain.
European Union … Soviet Union …
martin have you asked the norwegians if they want to have a monetary union with the icelanders…?? right now only EU seems to want them….that is why they will join soon.
iceland suffers because they stayed out of EU and the euro..norway is a different case,since they are oil rich nation….so the euro is not favourable for them,as they need to set their own rates…but they do lose some million of krona by staying out…for the moment they can afford it….in the future,if their oil production falls they might come to join the rest of us…hope it won’t be like the icelanders…in my opinion better join now,than suffering what iceland has suffered…
chris, dublin
Why doesn’t Iceland try to enter a currency union with Norway? That way it would have access to a credible lender of last resort facility through the Central Bank of Norway, and would not have to adopt all of the onerous EU fishing regulations. I realise Norway may not be willing to do it, but it seems to me that this should be the preferred route for Iceland.
Peter, the UK and Sweden ARE both important member states of the EU. They just opted not to be part of the Euro zone which is something different. ;)
Neither is it true that France and Germany determine everything that is happening in the European Union. Sweden, Italy, the UK, the Netherlands, Spain, Denmark – these are important and influential countries in the EU.
Norway is in an exceptional position with its natural resources. Iceland has neither those or a sufficient population to stand out in the world.
The problem with joining the Euro (as opposed just the EU) is that economic policy is determined by France and Germany. Interest rates have been set at too a low level for the smaller countries and produce uncontrolled booms and the inevitable busts.
The UK and Sweden have remain outside the EU and can tailor interest rates to their economic needs – this seems to be successful. If the UK did join the EU maybe it attenuate the risk for smaller countries by diluting France and Germany’s influence, who knows. The Euro is a big gamble for any country.
Cristoph. We (Norway) have had an election about the EU twice, last time in 1994. Both times the argument was that we would not be able to stand outside. I think future depends more on wice policy than that all problems can be solved by a more and more free marked.
Iceland and Norway and some other countries has the same agreements to EU. We also pay a lot of these agreements.
To me it is about politics. I belive in a mixed econemy, where the state is innvolved in securing peoples welfare. In Norway the main resources, oil, gas, energy, telecomunication, transportation and others is controlled by the state. The main policy is to secure peoples welfare. The private sektor is also very strong, dynamic and active. and the goverment is activly supporting innovation.
As a country Iceland has a lot of oportunities. Their resources are different from the European mainland. Which now is important is that Iceland can manage to development their own future, based on their resources – by humans and nature. A population of 320 000 is much more dynamic than a heavily populated country.
Yes, join the EU. The European Union is the future. Have a look what we have reached so far, also so many people never thought we could.
I say: welcome Iceland!
Christoph (EU / Germany)
come on iceland…you are already virtual members of EU, applying for membership will give you a chance to negotiate,and see what happens….it does not mean deffinate membership,(take norway’s example) but at least you will know where you stand.and I am sure EU will be glad to accomodate some of your issues and they will be glad to have you as members.do not listen some nationalist british advisers, EU is not united states of Europe, but a union of free european states. it is for your future and the future if Europe.you are in the schengen,EEA already,so why not go the full way,join the euro and cooperate with the rest of us..?
the choice is yours….good luck….
Christos,Dublin, Eire
If Iceland joins the EU, it would mean loss of sovereignity and independence to a future ‘supercountry’ known as the EU(‘United States of Europe’) in which each country is reduced to a province or state like that of the USA. Is this what Icelanders finally want?
[…] (story) […]