Slashing the rumours: Iceland is far from adopting the euro

‘A few weeks ago there were some discussions in Iceland concerning the possibility of adopting the euro without joining the EU itself. However, these discussions are now as good as dead after the EU confirmed what was previously known, that Iceland could not adopt the euro without joining the EU first. EU membership is not on the agenda for both parties in government in Iceland’, writes Hjörtur J. Guðmundsson.

I understand there are some rumours going on in Norway and some other countries that Iceland may be about to adopt the euro. Let me assure you that this is total nonsense. Actually, for me it’s like every other joke. It is similar to last year’s nonsense, when the europhiles in Iceland claimed over and over again before the Norwegian general elections last autumn that a new centre-left government in Norway would definately put EU membership on the agenda. They were even claiming this after it became clear that the new government would be even more opposed to EU membership than the previous one.

As in Norway we have a number of people in Iceland who desperatley want us to join the European Union, apparently just for the sake of joining. EU membership itself seems to be their ultimate goal, not necessarily the interests of Iceland, unless it so happens that they go hand in hand with membership. However, since in Iceland the interest in joining the EU has rather decreased than increased in recent years, those in favour have found themselves in a growing despair to get Iceland into the union. As a consequence they try to use every imaginable and unimaginable opportunity to raise the EU issue, with catastrophic results.

One of these people is our Prime Minister, Halldór Ásgrímsson. However, on this issue he hasn’t got the backing of either his centrist Progressive Party, or the government’s. But because of his europhile opinions he usually tries to speak as positive about the EU as he can within the policy framework of his party and the pact with his coalition partner in government, the conservative Independence Party. Both parties and the goverment have the policy that EU membership is not on the agenda. But every now and then Ásgrímsson goes too far in his wishful thinking, sometimes sparking wrong assumptions outside Iceland because of his position.

The Social Democratic Alliance is the only Icelandic political party in favour of EU membership. Their leaders have said, however, that membership is not a realistic option while the Independence Party is opposed to the idea due to its size. This party holds about 42% according to polls and has been by far the largest party in Iceland for more than half a century. Iceland, for example, would never have become member of the European Economic Area (EEA) a decade ago if not for the support of this party.

The chairman of the Independence Party and Foreign Minister, Geir H. Haarde, said in an official visit to Sweden in February that he believes Iceland will not join the EU in the forseeable future. His comments were in response to Ásgrímsson’s earlier prediction that Iceland will have joined the union by 2015. The basis for Ásgrímsson’s prediction was that by this time Sweden, Denmark and the UK would have adopted the euro and Norway would have joined the EU! Those were the only arguments he had for his prediction.

Haarde told journalists after a meeting with his Swedish counterpart, Laila Freivalds, that he disagreed with the Prime Minister: “I don’t share that point of view. Our policy is not to join in the foreseeable future. We are not even exploring membership.” In a speech at a conference at the University of Iceland, March 31, Haarde repeated what he had said on a number of occasions that no special Icelandic interests demanded membership of the EU. In the same speech he further explained in detail why it would not be in the interest of Iceland to adopt the euro.

A few weeks ago there were some discussions in Iceland concerning the possibility of adopting the euro without joining the EU itself. However, those discussions are now as good as dead after the EU confirmed what was previously known, that Iceland could not adopt the euro without joining the EU first. And both the Pro-EU movement in Iceland and Heimssýn, the no movement, agree on this. Even Prime Minister Ásgrímsson has said this is not possible and furthermore that claiming it only makes the EU debate more complex.

The reason why some people in Iceland are talking about adopting the euro is because of the current high value of the Icelandic króna and the considerable inflation in Iceland. However, this is according to most economic experts only a temporary situation and furthermore adopting the euro would only create more problems than it would solve as is very well outlined in Haarde’s speech on March 31.

So in short, Iceland is far from adopting the euro or joining the EU. It is far more likely that Norway will join the EU and Sweden, Denmark and the UK adopt the euro. However, none of this is of course likely to happen in the forseeable future.

Hjörtur J. Guðmundsson

*Further reading:

From a speech by Geir H. Haarde at the University of Iceland March 31, 2006:*

•When Iceland, back in the early 1990s, opted for the EEA as a long term basis for its relations with the Union, it was because EU membership presented serious problems. The single most important argument made against joining related to the Common Fisheries Policy. The disadvantages of membership were generally considered so obvious that the decision to stay outside the EU hardly caused any political controversy here at that time although membership in the EEA was a major bone of political contention back in 1992 and ‘93. So, by the way, was EFTA membership in 1970. Today the EEA is not a politically contested issue in this country. Membership in the EU is not and has never really been a serious issue in the political debate in Iceland. Some people seem to think, however, that it might be possible to put negotiations with the EU “to the test”, as it is frased, meaning that we should ask for membership negotiations just to see what the outcome might be. One assumption behind this way of thinking is that Iceland would be able to obtain permanent exemptions, in particular from the Common Fisheries Policy. This is simply not correct.

To begin with, the main principle in accession negotiations with the EU is that permanent exemptions are not granted from its policies. The basic rule of the Common Fisheries Policy is that major fisheries management decisions are made not by member countries but by EU institutions. Should Iceland join the EU, regulatory powers in the field of fisheries move irretrievably to Brussels. Even if the fisheries commissioner would be an Icelandic national he or she would be bound by the principles of the common policy.

This whole idea is obviously unacceptable to Iceland.

In membership negotiations with Iceland, the EU would most likely make demands for access to Icelandic waters for fishing vessels from Member States. The principle of freedom of establishment could easily lead to the so called “quota hopping” problem, which would give EU fishing companies access through the back door to Icelandic waters.

The problem is not merely that key decisions would be transferred to Brussels, nor that other EU countries’ fleets would enter our waters aided by the phenomenon of “quota hopping”. Just as important is the fact that the entire operating environment for fisheries within the EU is completely different from that in Iceland. In the EU, fisheries are largely regarded as a branch of regional development. Iceland, however, has no alternative but to operate its fisheries as a sustainable business sector.

A further consequence of membership would - due to a number of factors, including our standard of living and high national income - be that Icelanders would pay many billions of krónur more into the EU´s coffers than they would receive.

There are those who say that the Icelandic public would still gain as the price of food would go down should Iceland enter the EU. But we need not join for such purpose - and pay as a consequence huge amounts of money into EU funds - since we obviously have our own means, if we so choose, to reduce taxes, tariffs and other protective import restrictions on various agricultural products. That will in any case most probably happen through WTO arrangements.

It is also maintained that the admittedly high interest rates here would go down with membership of the EU and the Euro. There is, of course, no question that a small economy has to pay a certain price for keeping an independent currency. Interest rates have always been higher in Iceland than in most of the EU, for example. But Iceland has also experienced stronger economic growth than most EU countries, with very little unemployment.

If Iceland were a member of the eurozone, the interest rate here would almost inevitably be contrary to the requirements of our monetary policy. We have had strong economic growth for many years and we have needed to respond to inflationary pressures in the economy by raising interest rates. It is indeed unlikely, to say the least, that economic growth would be stymied in Germany, for instance, in order to keep the spectre of inflation at bay in Iceland.

Iceland´s exports of goods are not particularly diversified and are still dominated by fisheries products. This structural characteristic of our economy would make monetary union particularly risky. The exchange rate of the euro would obviously never be influenced by what might be happening in the Icelandic economy. It is, of course, too small for that.

We would face severe problems if, for example, our fisheries sector underwent a downswing at the same time as an economic upswing was taking place in the bigger countries in Europe. The euro would strengthen at the same time as the Icelandic economy was weakening and in need of a weaker, not stronger, currency. It is not difficult to imagine the consequences of such a scenario for us.

More problems would thus be created than solved. The challenge for us is to keep our own economic affairs in order rather than look for panaceas within the EU. If we succeed in that, economic stability will be ensured.

From a speech by Geir H. Haarde in Berlin March 29, 2006:

•With respect to the EU and EFTA, I know it is of some curiosity here in Germany, whether Iceland has plans to join the European Union. We follow developments within the EU very closely – after all the EU is by far our biggest trading partner, and some of our closest friends are members. We wish the EU well and want to see it succeed in its endeavours. Indeed, I would say that the EU is one of the major contributors to peace both in our region and world wide. However, there are no pressing reasons for Iceland to join the Union; indeed, there are certain matters, such as the EU’s common fisheries policy, which would make joining very problematic.

The very different nature of our economies would also present major obstacles. Economic fluctuations in Iceland do not follow the same cycle as those in the major economies of the euro zone. The rate of the euro and the interest rate policy of the European Central Bank reflect conditions in the major economies of the euro zone and not conditions as they are in Iceland. The Icelandic economy is frequently in a different phase to the major EU countries. Thus Iceland has completely different requirements in economic management than the larger countries of the euro zone, not least in matters of interest rates.