Iceland mulls EU membership

EUR 100The 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.

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