22nd Nov 2017


Iceland is far from adopting the euro

I have been told that some rumours are going on in some European countries that Iceland may be about to adopt the euro.

I must say that this comes as a complete surprise to me.

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Sure, there has been some discussion in Iceland about the euro and whether adopting it could perhaps be better for the Icelandic economy than our own independent currency, the króna.

However, most economic experts have concluded that it would not be better and having the euro as Iceland's official currency would most likely be less beneficial for our economy than keeping the króna.

Earlier this year we had a short-lived discussion in Iceland that perhaps it would be possible to adopt the euro without first joining the European Union itself.

But those discussions are now as good as dead after the EU confirmed that this

is not possible.

And quite remarkably, both the pro-EU movement in Iceland and Heimssýn, the no movement, agree on that.

Out of question

The official policy of the Icelandic centre-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 therefore so is adopting the euro.

The problem is that we have a pro-EU Prime Minister, Halldór Ásgrímsson, who chairs the Progressive Party.

Although he has neither the backing of his government nor his own party he nevertheless tries to speak as positively about EU membership as he can and, as a result, his comments every now and then spark wrong assumptions beyond Iceland.

The Socialdemocratic Alliance (Samfylkingin) is the sole Icelandic political party in favour of entering membership negotiations with the EU. But its leaders have said that Icelandic EU membership is not a realistic option while the Independence Party is opposed to the idea.

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 foreseeable future.

Different requirements in economic management

In short, the nature of the economies of Iceland and the EU are very different.

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.

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 we have 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 held back in order to keep the spectre of inflation at bay in Iceland.

So, in short, Iceland is far from adopting the euro or joining the EU as some people outside have obviously been speculating. It is far more likely that Norway will join the EU and Sweden, Denmark and the UK will adopt the euro, but none of this is likely to happen in the foreseeable future.

The author is director of Heimssýn, the no movement of Iceland

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