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16th Aug 2022

Unilateral adoption of euro possible option for Iceland, says economist

  • Discussion of Iceland unilaterally adopting the euro without joining the EU has increased lately (Photo: Wikipedia)

Unilateral "euroisation" of Iceland's economy is possible without a loss of independence, but the country must choose between the krona and the euro soon, a prominent economist told the Icelandic Chamber of Commerce yesterday (13 February).

"Because of the exceptionally high degree of exchange rate pass-through into domestic prices and equally exceptional financial openness of Iceland, unilateral euroisation would not be sacrificing much effective monetary policy independence," Richard Portes, the president of the Centre for Economic Policy Research in London, told a meeting of the business group, according to the Financial Times.

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Mr Portes, who produced a report on the island nation's economy for the chamber last year, was invited following increasing discussion driven by some banks and other companies to comment on Iceland adopting the euro unilaterally without first joining the European Union.

He also said that a gradual euroisation of the country's economy was "highly problematic and probably unstable."

The country's central bank refused to give permission in mid-January to Iceland's biggest company, the Kaupthing to adopt the euro as its main currency.

Other commentators have come out in favour of the unilateral adoption of the euro as a panacea for the country's ongoing currency volatility problems.

The prime minister, Geir Haarde, speaking at the same meeting, disagreed strongly with the economist's analysis, saying Iceland only has two choices in terms of monetary issues: either keep the krona, or join the EU and then adopt the euro. Unilateral adoption is not an option.

"Such a step would not be credible and it would bring a number of disadvantages and additional expenditure," Mr Haarde said.

"Membership of the EU is not on the agenda of the present government and therefore not adopting the euro either," he insisted.

A European Central Bank board member also attended the meeting, and said after Mr Portes' comments that the ECB was opposed to any non-eurozone country adopting the euro unilaterally, reports the Financial Times.

Steingrímur Sigfusson, the chairperson of the eurosceptic opposition Left-Green Movement, told EUobserver that the whole debate is being pushed by a few firms and that a majority of the chamber of commerce is actually opposed to membership of the EU.

"The discussion is overheated due to the situation in the Icelandic economy and the global economy," he said. "Two thirds of the members of the chamber of commerce said in a recent poll we shouldn't apply for EU membership."

"If we adopted the euro, it would mean we would have to give up our monetary policy control. Furthermore, it would be the same as declaring to the world we don't have the self-confidence to control our own economy," he added.

"It's giving up. Instead of fluctuations in the currency, we would have fluctuations in employment instead."

Unilateral adoption of the euro by a non-EU state is not without precedence. Montenegro adopted the euro in 2002 while it was still part of a union with Serbia. Kosovo is also using the currency although the Serbian dinar is used in areas mainly populated by the Serbian minority. However, the EU discourages the practice.

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