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.

Saying that the Icelandic

Saying that the Icelandic currency took a dive is also a bit overblown I must say. What happened was more a correction as it is often called and it had been expected for a long time here in Iceland although it happened a little bit faster than people here thought. As for the interest rates, like it says in my article and you quoted: "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."


Financial crisis is a little overblown, but the currency took a dive and interest rates shot up considerably, didn't they?

Not the first time

Of course this is not the first time some rumours start circulating in Europe that Iceland may be about to join the EU (or in this case adopt the euro in one way or another). After the French and the Dutch rejected the proposed EU constitution the Financial Times suggested that Iceland was considering to join the EU, but with no surprise that was just an unfounded rumour aswell.

Peter Fleming

This is simply not true, my friend, as many economy analysts have known from the beginning and many others are now realizing. Just the other day it was reported that the HSBC bank in London issued a detailed report on Iceland only last Tuesday saying that all speculations about possible financial crisis in Iceland are exaggerated and unfounded. The bank also says in its report that it reccommends investment in the Icelandic currency and that the bank has itself already done so for five million dollars.

As for the current account deficit it is mainly due to foreign investments by Icelandic companies which will in the long run pay off.

Inflationary pressures?

"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."

Raising interest rates because of inflationary pressures?

Iceland is facing a financial crisis! The current account deficit of 16% seemed to be unsustainable after all.