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Iceland – The 29th member state?

Article by Dick Leonard

November 13, 2008

Question: What is the capital of Iceland? Answer: Around four dollars and 50 cents. This cruel jibe epitomises the plight of the North Atlantic country following the ruination of its banks and the collapse of its currency.

On 24 October, the Icelandic government succeeded in negotiating a $6 billion IMF rescue plan, backed by Norway, Sweden, Denmark and Russia, but its approval by the IMF board has been delayed three times, and the country is far from being out of the woods yet.

Its leaders are feeling distinctly sore about the European Union, and – in particular – Britain, which they largely blame for making their troubles far worse than they would otherwise have been.

Gordon Brown may have become a hero within the EU for his decisiveness in proposing action to recapitalise the banks and restore liquidity to money markets, but in Iceland he has become something of a hate figure. His action in using anti-terrorist laws to freeze the British assets of a failing Icelandic bank caused immense offence, and undoubtedly helped to put the skids under efforts to keep the bank afloat.

Icelandic Foreign Minister Ingibjorg Solrun Gisladottir told the International herald Tribune that she “was absolutely appalled at opening the British treasury department’s home page… and finding Iceland featured on a list of terrorist entities that included Al Qaeda, Sudan an North Korea”.

More broadly, Iceland, which is a member of the European Economic Area, and participates in many EU programmes, including the Schengen agreement, was disappointed that the Union did not mobilize itself quickly to come to the stricken country’s aid, forcing it to turn instead to countries such as Russia and Japan, with which it has no formal links.

Somewhat belatedly, Icelandic Prime Minster Geir Haarde wrote to French President Nicolas Sarkozy in mid-October, asking for an EU loan. This has not yet yielded any result, though the Commission subsequently called for authority to double the Union’s crisis fund to €25 billion, which could possibly be utilised for this purpose.

Despite the widespread disappointment with the EU, many Icelanders appear to have concluded that their best bet for the future would be to join the Union as soon as possible. A typical reaction was that of Fisheries Minister Einar Gudfinnsson, who said: “Everyone knows that I am against EU membership, but today we should think about these questions in a new light”.

An opinion poll published in Frettabladid, Iceland’s leading newspaper, on 18 October, showed 70 per cent wanting a referendum on EU membership, with 49 per cent saying they would vote in favour, and 27 per cent against.

The present government, a coalition between the (conservative) Independence Party and the Social Democrats has, up till now, been split on the issue, with the Social Democrats in favour and their right-wing colleagues against.

Enlargement Commissioner Olli Rehn lost no time in laying out a metaphorical red carpet. In an interview with Agence France Press, on 20 October, he said that Iceland could quickly complete European Union membership negotiations, should it want to do so.

“Iceland is clearly a democratic country”, he said, “which has already negotiated perhaps two-thirds of the criteria needed to join the Union…this means that were Iceland to pose its candidature, we could quickly complete the negotiations”.

In practice, it is likely to be more complicated and more protracted than Rehn suggested. One of the biggest attractions of EU membership for Iceland would be to join the Euro, after the virtual destruction of its currency. This, however, requires a preliminary period of two years during which the Icelandic krona would need to be within the narrow band of the Exchange Rate Mechanism.

It would not be easy for Iceland to negotiate an exemption from this requirement, which is embedded in the Maastricht treaty, nor would the admission of any new member state, however generally acceptable, be straightforward in advance of the ratification of the Lisbon treaty.

As far as Iceland itself is concerned, however, the difficulties would be far less than an earlier period when the fishing industry totally dominated its economy. The rapid industrial development over the past two decades means that it now represents much less than 50 per cent of Iceland’s exports, and fitting it into the Common Fisheries Policy should not now prove an insurmountable obstacle.

So, it will not happen overnight, and Iceland is unlikely to leapfrog over Croatia, whose membership negotiations should be completed within the next year. It will not, therefore, become the 28th member of the Union, but it might well be the 29th.

Dick Leonard is the author of ‘The Economist Guide to the European Union.’

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