For Iceland the only realistic option is entry into the EU and adoption of the euro

If we Icelanders were to adopt another currency, the only realistic option would be to join the EU and adopt the euro. We enjoy great goodwill within the EU. The independent Icelandic krona has been a continuous tragedy and that is why the krona is not eligible outside the country. The punitive tariffs on ferroalloys were a great disappointment, but it is unlikely that the EU would ever take direct action to crack down on Icelanders and Norwegians. Gylfi Magnússon, professor of economics, is a guest of Ólafur Arnarson on the Eyjann podcast.

“We thought it was just nothing in the picture and then we got it in the face and there is always the risk that once one step has been taken, more will be taken. But of course we not only enjoy having this agreement, but also considerable goodwill. And of course we are always counted among the Norwegians and they also enjoy a lot of goodwill. So it is difficult to imagine that any actions will be taken that are directly intended to hurt Icelanders or Norwegians.”

“But we can get caught up in some elephant dance and get crushed under it like little animals who have no business with these elephants.”

Exactly. Then I would just like to look at another issue, which is our currency. It has now been shown that there is a huge cost, just a direct transaction cost, that comes with having a currency that is not valid outside the country. There are a lot of people who claim that it is the currency that is a major cause of the fact that interest rates are much higher in Iceland and that the Central Bank needs to move in bigger and more decisive steps when it is fighting inflation. What is your opinion on this?

Is it good to have the króna or should we look for some way out now? And in my opinion, the only realistic way, if we are going to adopt another currency, is to join the European Union and adopt the euro under the auspices of the European Central Bank. But I would like to hear your opinion.

“Yes, first of all, I think it is absolutely correct that the only realistic option other than just keeping the króna is to join the European Union and adopt the euro. But that has both advantages and disadvantages. Of course, one can argue about European Union membership from all kinds of perspectives. But if we just look at the currency, there are undeniably considerable advantages to having a large and stable currency. But there are also sometimes advantages to having a small and flexible currency. And the reason why interest rates are somewhat higher here and have historically been higher than in neighboring countries or the United States, is perhaps not necessarily that we have an independent currency, but that we have not played particularly well. And I am not criticizing the current Central Bank or government, but just looking back at Icelandic history.

It’s been almost a century since the Icelandic krona finally said goodbye to the Danish krona. And in that time we have been doing much worse than the Danes, if we use that as a yardstick, in keeping prices and exchange rates stable. And the difference is so great that now the Danish krona costs about 20 Icelandic krona and even though we have taken two zeros, we have lost ourselves to one two-thousandth of a Danish krona in these years. And that is actually the background to the fact that the krona is not eligible outside the country and that confidence in it is no more than that interest rates are and seem to need to be somewhat higher here and that a little more drastic interest rate decisions need to be made in order to beat the inflation spectre here. So this is what is the premise. It is of course possible to find some explanations, but it can perhaps be said that the explanation has generally just been a lack of discipline in Icelandic economic policy, both in fiscal and monetary matters, and also in decisions about wages and conditions in the labor market.

The króna reflects this history. It is another matter whether we, by adopting another currency, could solve these problems, because one of the risks of adopting a new currency, which requires a lot of discipline, is that if we were to continue with the lack of discipline that has characterized Icelandic economic policy in principle since 1918. So then it would be quite difficult to have a currency that requires a lot of discipline. So if we adopted the euro, we would have to have much tighter control over many things, not just monetary matters, which would now be a bit out of our hands, but also over public finances and wage decisions on the labor market and even something else. So it would call for quite a different kind of behavior than the nation has shown in recent decades.”

Iceland would be more than welcome to the European Union. I see little problems except fishing. Malta, Luxembourg and Cyprus are small populations as well.

The problem is your economy, importing goods to the island is expensive, while exporting is barely profitable. So you need to be creative to have some economy.

If Iceland wants to join the EU right now, they should become a member before I go to bed.

I really hope they do join, but it will also sadden me, because we’ll then be the only “real” democracy that’s left in the EEA. More than anything, I just want us in Norway to join too, to join our Nordic friends.

Then let Ukraine get in too

Honestly yeah, that would be great! I only hope they manage to figure out the problems with the fishing (haven’t gone into much detail but I remember that being an issue a few years ago) quickly and join us sooner. With the way things are going we Europeans really need to stick together.

Yes 🇪🇺

Its the same for Norway, but people living in rural areas are too inbred to understand