5/01/2006

Iceland Will Not Adopt the Euro

Rumours are circulating in some European countries that Iceland may be about to adopt the euro. The rumours have been picked up by some foreign media such as the Danish daily Berlingske Tidende as well as the Financial Times. These rumours are, however, totally unfounded.

Certainly, there has been some ongoing discussion in Iceland about whether adopting the euro could perhaps be better for the Icelandic economy than its own independent currency, the króna. And of course there are those who insist that membership of the European Union and the euro are the solutions to everything, without being able to put forward any tenable arguments. The latter, however, only constitute a minority group. Most economic experts have concluded that having the euro as Iceland’s official currency would most likely be far less beneficial for Iceland’s economy than keeping the króna.

Earlier this year, in the course of this debate, there was also a short-lived discussion in Iceland that perhaps it might be possible to adopt the euro without first joining the EU itself. However, those discussions have now subsided after the EU confirmed previous statements by a number of leading experts in this field that this is not possible. Quite remarkably, both the Pro-EU movement in Iceland and Heimssýn, the no movement, agree on that. Even Iceland’s Pro-EU Prime Minister, Halldór Ásgrímsson, has said that suggesting this is possible only makes the EU debate in Iceland more complex.

Out of the question
The official policy of the Icelandic center-right government, a coalition of the centrist Progressive Party (Framsóknarflokkurinn) and the conservative Independence Party (Sjálfstæðisflokkurinn), is that EU membership is out of the question and so is adopting the euro – even if it were possible to adopt it without EU membership. However, Iceland has a pro-EU Prime Minister who also chairs the Progressive Party. Although PM Ásgrímsson has neither the backing of his government nor of his own party he nevertheless tries to speak as positive about the EU as he can. As a result his comments every now and then spark incorrect presumptions outside Iceland.

The Socialdemocratic Alliance (Samfylkingin) is the sole Icelandic political party in favour of entering membership negotiations with the EU. However, its leaders have said that Icelandic EU membership is not a realistic option as long as the Independence Party remains opposed. The Independence Party has about 42% of the votes according to latest polls and has furthermore traditionally been by far the largest party in Iceland for more than half a century.

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 a response to Ásgrímsson’s earlier prediction that Iceland will have joined the bloc by 2015. Ásgrímsson’s sole argument for his prediction is his own assertion that by this time Sweden, Denmark and the UK will all have adopted the euro and Norway will have joined the EU!

During his visit to Sweden Haarde told journalists that he disagreed with the Prime Minister: “I do not 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 on March 31, Haarde repeated what he has said on a number of previous occasions: that no particular Icelandic interests require membership of the EU. On a number of occasions Haarde has also explained in detail why it would not be in Iceland’s interest to adopt the euro.

Different economic requirements
In short, the economies of Iceland and the EU are very different in nature. 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 and as a consequence Iceland has completely different requirements in economic management than the larger countries of the euro zone, not least when it comes to interest rates.

If Iceland was a member of the EU, and thus the euro zone, the interest rate in Iceland would almost inevitably be contrary to the requirements of our monetary policy. Iceland has experienced strong economic growth for many years and it has needed to respond to inflationary pressures in the economy by raising interest rates. It is indeed highly unlikely that economic growth for instance in Germany would be stymied in order to keep the spectre of inflation at bay in Iceland.

Far from Iceland adopting the euro or joining the EU, as some have obviously been speculating, it is more likely that Norway will join the EU and Sweden, Denmark and the UK will adopt the euro. None of this, however, is likely to happen in the forseeable future or ever at all.

(Previously published on the Brussels Journal aswell as on the EUobserver in a slightly different version)