Economist: Iceland hunts the euro

Economist
Iceland hunts the euro
Jan 22nd 2009


Why a crisis-hit Iceland may apply to join the European Union as soon as March

FOR a small country, Iceland has room for lots of contradictions. Some can be seen in the harbour of Reykjavik, the trim capital. On one side of the Aegisgardur pier lie whale-watching boats that take foreign tourists to commune with whales, dolphins and puffins. But just across the pier are four large ships, with mysterious gantries and winches above their decks: whalers, their harpoon guns in storage as the government ponders allowing a commercial hunt. Iceland’s stance on whaling is...

Economist
Iceland hunts the euro
Jan 22nd 2009


Why a crisis-hit Iceland may apply to join the European Union as soon as March

FOR a small country, Iceland has room for lots of contradictions. Some can be seen in the harbour of Reykjavik, the trim capital. On one side of the Aegisgardur pier lie whale-watching boats that take foreign tourists to commune with whales, dolphins and puffins. But just across the pier are four large ships, with mysterious gantries and winches above their decks: whalers, their harpoon guns in storage as the government ponders allowing a commercial hunt. Iceland’s stance on whaling is ambiguous: it opted out of an international moratorium, but the most recent big hunt was in 2006. Some fishing bosses support catching whales: there are plenty of them, they say, and they eat fish. Activists say whales are intelligent, scoffs Kristjan Loftsson, boss of the whaling fleet. His family has been hunting fin whales in the same spot since 1948, “and they still come there to eat”. If whales went farther offshore, they would not be caught, he adds, as their large carcasses might rot on the journey back.

Ambivalence about whales mirrors larger tensions. Iceland—three times as big as Belgium, but with only 300,000 inhabitants—has full access to the European Union’s single market through the European Economic Area (EEA). Its citizens can live and work across the EU, and it is assiduous about implementing directives from Brussels. But most of its leaders have always been hostile to full EU membership: they prize their sovereignty (Iceland became independent from Denmark only in 1944) and fear foreign control of their fish.

EEA membership has been good for Iceland, which pays relatively little into EU funds, and runs its own farm and fish policies (it also escapes EU laws banning whaling). Yet the EU debate has been revived by the collapse of Iceland’s economy after its debt-fuelled boom. Above all, the Icelandic krona is barely traded now: banks cannot borrow abroad, and capital controls block investment flows. A large majority of Icelandic voters want a new currency. Given trading patterns, the euro makes most sense.

What happens next revolves around a congress next week of the ruling Independence Party, a broad centre-right coalition hostile to EU membership. The prime minister, Geir Haarde, remains a Eurosceptic. But he also knows that the Icelandic krona is “finished”, says an observer. Hardliners have called for unilateral adoption of the euro (or maybe the dollar, Swiss franc or Norwegian krone). But Mr Haarde has been told by EU bosses that unilateral action without the boring necessity of joining the EU first would wreck relations with Brussels. And an open letter, signed by 32 Icelandic economists, gave warning that it would not even provide Iceland with what it needs: international credibility as a normal developed state. Mr Haarde agrees, say officials.

Which leaves him pondering EU membership after all—and trying to preserve party unity. Mr Haarde is “not a decisive man”, and will try to keep his options open at the congress. Talk of a referendum on opening EU talks briefly tempted him. He may now prefer a committee to review options (with strong caveats over fish) and discussions with his coalition partners, the pro-EU Social Democrats. The Social Democrats say they will quit the coalition if an EU membership application is not lodged by March. But they have as much to fear from a snap election as Mr Haarde (a tide of protests suggest the big winner might be the Left-Green Movement, which denounces the EU as too capitalist). In short, the government may end up stalling for time.

Unfortunately, Iceland does not have time. The European commissioner for enlargement, Olli Rehn, is a strong ally. A Finn, Mr Rehn says that Iceland “would complement the EU, both philosophically and economically”. Its strict fish-management policies have been praised by the fisheries commissioner, Joe Borg (who is from Malta, a small island that has no selfish interests in cod). But there will be a new European Commission in the autumn. To catch both Mr Borg and Mr Rehn in their current jobs, an application must go in by April at the latest. The commission could rush through a formal positive opinion in six months (Iceland already applies two-thirds of EU laws). Iceland could then become a formal candidate in late 2009, when Sweden (another ally) holds the rotating EU presidency, and a full EU member by 2011. Membership of the single currency would take a bit longer, but pro-EU politicians say the simple act of applying and working towards euro convergence would reassure the markets.

Dangerous shoals ahead

As time passes, Iceland’s chances may shrink. Sweden will be followed in the presidency by Spain, a country with a prodigious appetite for others’ fish. Then comes federalist Belgium, which may feel Europe has enough sceptical Atlantic islands already.

Icelanders fear the EU wants to grab some of their fish through the common fisheries policy. Such fears are “exaggerated, but not wholly unjustified”, admits one Eurocrat. If Iceland wants the euro, it may have to “move a bit” on fish. (Greenland and the Faroes, nearby Danish dependencies, control their own fish, but neither is an EU member.) Exemption from the fisheries policy is a non-starter, not least because future applicants might seek the same. But Iceland may win transitional arrangements, perhaps along the lines of national subsidies permitted for far-northern Finnish and Swedish farms.

Will such a fudge do it? Icelanders are fond of national myths of splendid isolation, says Arni Pall, a Social Democratic member of parliament. But they are also deeply pragmatic. Just consider whale hunting, he suggests. Icelanders grew up thinking of whaling as normal, but whaling offends public opinion abroad and harms lucrative fish exports, so it is now stalled.

Iceland will be bullied, in subtle and unpleasant ways, if it applies to join the EU from its present position of weakness. Yet it may never have a better chance of a good deal. That sounds like a contradiction, but Iceland is good at managing those.