Iceland determined to join euro once it meets criteria

ICELAND is determined to join the euro as soon as it meets the bloc’s criteria for the currency switch, foreign minister Ossur Skarphedinsson said.

The island, where krona losses helped generate a trade surplus that carried the economy out of its 2008 banking meltdown, will target the switch once it gains European Union membership, Skarphedinsson said.

Iceland is underlining its commitment to the euro as European finance ministers meet in Brussels for the latest round of talks to tackle the currency bloc’s debt crisis. Euro-sceptic parties in some of the region’s AAA-rated nations, including France and Finland, have won support as voters balk at the prospect of funding more bailouts that many investors say may fail to prevent defaults.

“The top shots in the EU are busy trying to work out these problems,” Skarphedinsson said. “I have full faith that they will be able to do so.”

Iceland started EU accession talks last year and would need to wait about six or seven years before euro adoption could be achieved, Skarphedinsson said.

Accession remains attractive even as the region’s debt crisis deepens because the turmoil is “a temporary situation”, he said. “I’m not too worried — by then they will have sorted this out.”

Iceland’s financial collapse more than two years ago saw the krona tumble 80% against the euro after the island’s biggest banks were unable to secure short-term funding. The government took control of the lenders, splitting the foreign and domestic assets, heaping losses on international bondholders while maintaining local deposit and payment facilities.

The central bank then imposed capital restrictions to stem the krona sell-off that ensued. The measures were in contrast to those taken in Greece and Ireland, where EU bailout terms dictated bondholders be protected and euro membership prevented the trade benefit of currency depreciation.

Nobel economics laureate Paul Krugman praised Iceland’s model, calling it “bankrupting yourself to recovery”.

The island’s currency decline transformed at least six years of trade deficits into a surplus one year after its banks collapsed. Unemployment dropped to 8.1% in April from 8.6% in March.

Still, Iceland might have fared better if it had been backed by the EU, Skarphedinsson said.

“The hard efforts that the EU is undertaking to shore up the finances of those countries in dire straits show that it is better to have the EU as your backbone than not,” he said.

Iceland’s economy will expand 1.5% this year and 2.6% in 2012, the Organisation for Economic Cooperation and Development said in its latest set of forecasts in November.

Ireland’s economy will grow 0.6% this year and 1.9% in 2012, the European Commission said, while Greece’s economy will contract 3.5% in 2011 and grow 1.1% next year.

According to central bank governor Mar Gudmundsson, Iceland still needs a weak krona to buoy its economic recovery.

The currency’s real exchange rate is 20% below the 30-year average “and hopefully will stay low for quite some time”, Gudmundsson said yesterday.

“The recovery is still weak and unemployment is still close to the peak.”