Financial Regulatory Forum

ANALYSIS – Icesave row, Greece feed anti-EU fire in Iceland

By Reuters Staff
March 8, 2010

By Wojciech Moskwa

REYKJAVIK, March 8 (Reuters) – In the eyes of Icelanders, it seems Brussels can do no right. When it comes to fish, European Union bureaucrats intervene too much. When it comes to debt crises like Icesave or Greece, EU leaders simply don’t do enough.

The result is that on an island which has plenty of good reasons to join the bloc, interest in membership is now waning.

And that increases the odds that Iceland’s long-term future could be that it slips back into being a rocky outpost on the northern fringe of Europe, with its embattled currency prey to the ebbs and flows of financial markets.

“People are growing suspicious of the EU,” said Gudbjorg Andrea Jonsdottir, director at pollster Capacent. “They see the way Greece is being treated and realise that the type of security they hoped to gain as an EU member may not be there for the taking.”

The island nation of 320,000 people sought EU shelter after the collapse of its banks in 2008, seeing membership as a road out of a crisis that has hobbled its small independent currency and plunged the economy into deep recession.

Last month Brussels invited Reykjavik to accession talks. But the EU question has dropped down the list of priorities for the Icelandic government, which is preoccupied with settling $5 billion in “Icesave” debts to Britain and the Netherlands.

The Icesave row has prevented International Monetary Fund aid from flowing and deepened Iceland’s economic woes.

“The Icesave case has certainly not made the EU more popular,” Finance Minister Steingrimur Sigfusson said.

“There are other problems as well … it is evident that individual EU states are not getting all that much support,” he said, referring to euro zone member Greece’s debt problems.

GREEK EXAMPLE

Historically, Iceland has been wary of the EU.

Descendants of the Vikings, Icelanders have always prided themselves on their independence. And the country’s influential fishing lobby has cried foul at the idea of Brussels taking control of its fish-rich waters.

“Our fish stocks are basically all we have now that our banks collapsed, and much bigger EU states want to get their hands on them,” taxi driver Helgi Jonsson said.

The pain felt from the financial crisis overshadowed these concerns for a while. After a razor-thin vote in parliament, Reykjavik finally applied for EU membership last July.

Once entry talks conclude, Icelanders will decide in a referendum whether to join.

Opinion polls show EU entry is now supported by less than a third of Icelanders while half are explicitly opposed. Polls released 8 months ago when Iceland submitted its EU application showed a narrow majority in favour of joining.

With entry talks likely to last at least a year — no entry target date has been yet — there is time for Icelandic public opinion to shift again once the “Icesave” row is resolved.

“It’s obvious the support for EU membership in Iceland is receding fast — mainly because people tend to link our ongoing dispute with the UK and the Netherlands to possible EU membership,” said Eirikur Bergmann Einarsson, professor at Iceland’s Bifrost University.

“But this is nothing new, the sentiment here has always swung wildly,” he said, adding it could easily shift again.

DEBT-COLLECTION

In a referendum on debts on Saturday, Icelanders soundly rejected the last “Icesave” accord, venting anger at local bankers and politicians blamed for the collapse, as well as the “unfair” repayment terms offered by Britain and the Netherlands.

Though not part of the negotiations, the EU was also blamed.

“The Icelandic public at large felt the EU was taking sides with the British and the Dutch,” Foreign Minister Ossur Skarphedinsson said. “It was felt that the EU was supporting the British and the Dutch in abusing the IMF to hand-collect debts.”

Finance Minister Sigfusson said the crisis had convinced many of the benefits of having an independent currency, which can be devalued to make exports more competitive.

The Icelandic crown has stabilised at around half of its value from 2007 but is only internally convertible with Iceland banning capital account flows due to fears over capital flight.

The growing disenchantment with the prospects of EU membership goes hand-in-hand with the realisation by Icelanders that they themselves must ultimately solve their crisis.

“There is no quick-fix for us, that’s become clear. I am a European, but I’m not sure if EU membership is the solution,” said Albert Olafsson, an auditor in Reykjavik.

(Editing by Noah Barkin) ((wojciech.moskwa@reuters.com; +47 22 93 69 62; Reuters messaging: rm://wojciech.moskwa.reuters.com@reuters.net))

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