Iceland and Europe. Euro dreams

Date: 04/03/06

The prime minister starts a debate about joining the European Union

IT IS remote and tiny, with just 300,000 people. Yet Iceland's recent performance is impressive by any standards. One of Europe's richest countries boasts one of its fastest-growing economies. Top marginal rates of income and corporate tax have been cut to unNordic levels of around 36% and 18%, respectively. Unemployment is in effect near zero. And the economy has diversified far beyond fish to such areas as banking and telecoms. Icelandic investors have also forayed abroad: the prime minister, Halldor Asgrimsson, says that they now employ over 100,000 people in other countries, 70% of them in Britain.

Yet over the past two weeks severe financial tremors have jolted Iceland. A rating-agency downgrade, prompted by worries over rising inflation and a whopping current-account deficit of as much as 15% of GDP, triggered a sharp sell-off of the Icelandic krona, which briefly hit a new low against the dollar. Interest rates had already doubled in the past two years, to over 10%. There are widespread fears of a crash in Reykjavik's dizzy house prices.

In an interview during his recent visit to London, the first paid by an Icelandic prime minister since the 1970s cod war, Mr Asgrimsson seemed unruffled. He took over in late 2004 from the long-serving David Oddsson, who is now the central-bank governor. The shift was not just from Mr Oddsson's Independence Party to Mr Asgrimsson's Progressive Party; it was also from Mr Oddsson's staunch Euroscepticism towards Mr Asgrimsson's cautious openness towards the European Union.

Last month, Mr Asgrimsson created a stir by predicting that Iceland would be a member of the EU by 2015. He points out that Iceland is in almost every other international club around, including the European Economic Area, which means that it already has to abide by most Brussels directives. He adds that developments in Britain, Sweden and Denmark will count for much: if these three were to join the euro, for example, 70% of Iceland's imports and exports would be in euros.

Even so, the path towards putative EU membership remains highly uncertain. Icelandic business is mostly in favour, but the foreign minister, Geir Haarde, who now leads the Independence Party, is against--and, with an election next year, he is far higher in the polls than Mr Asgrimsson. Fish will always be a problem: as a former fisheries minister himself, Mr Asgrimsson asserts that Iceland has managed its stocks much better than the EU has done, and it is not about to give up control. That might be hard for the EU to swallow.

Public opinion is also fickle, though for most of the past three years opinion polls have shown a narrow majority in favour of joining. Mr Asgrimsson insists that Iceland will not make the same mistake as Norway, which has held and lost two referendums on membership. What he hopes for is a proper long-term debate about the EU, which would lead to membership only if there were strong public support and a cross-party consensus.

The biggest argument for joining, put by both Mr Asgrimsson and many Icelandic businessmen, is not a sudden love for Brussels but a simple desire for currency stability. If Iceland could join only the euro, but not the EU, all might be happy--and it would create one more version of the multi-tier, multi-speed Europe that is anyway emerging.

The Icelandic Prime Minister, Halldor Asgrimsson, starts a debate about Iceland joining the European Union