British-Icelandic Chamber of Commerce
November 6 2001
British-Icelandic Chamber of Commerce
Ladies and Gentlemen:
It is a pleasure to be here today and have this opportunity to talk to you about economic developments in Iceland and our relations with Europe. Two sides of the same coin. Since the European Union is our main market region, relations with the Community have a major effect on economic developments in Iceland.
The past ten years have been an eventful period in Iceland's economic history. Its economy has undergone fundamental changes. These changes were based on the successful action taken by nations which have produced the best economic performance. The driving force behind these reforms was the conviction that it was in the nation's best interests to entrust value creation to the market, while the Government should focus on creating general and sensible rules and norms for it. A persistent fiscal deficit posed a serious threat to economic stability. There were numerous state enterprises which drained the taxpayers' money and, what is worse, disrupted the competitive position. The banking system was still largely run by the state and it was common for political allocations of capital to be made through it and the many state funds. Business planning was complicated by frequent and unforeseeable swings in the economic cycle which only to a limited extent obeyed the normal laws of a healthy economy. The Government repeatedly resorted to what were called "specific measures", which more often than not produced more difficult problems than the ones they were supposed to solve.
One of the first tasks was to put the financial system on a firm footing. Enormous sums had been spent on short-term rescue operations, which often involved helping companies, especially in the fisheries sector, to live with the consequences of wrong economic policies. It was important to start the new decade with a clean sheet and get to grips with the problem that was faced. A major privatisation programme was launched. Companies were sold which seemed obviously better off in private hands, thereby reducing the treasury's outlays to them and earning it revenues from their sale instead. The economy strengthened when these businesses went onto the market, and the position of the treasury was strengthened too. Privatisation is still in full swing, although it must be admitted that market conditions are not favourable at the moment. Iceland Telecom is now being privatised and work is in progress on the sale of state holdings in two commercial banks. Once these businesses have been sold, the state will have withdrawn from the telecommunications and financial markets, which is only to be welcomed. A key issue in the transformation of the Icelandic economy was to establish firm fiscal management. This has been successfully achieved. The treasury is in a strong position now and has produced a considerable budget surplus for several years. Its debt has been amortised, thereby reducing the debt service burden, and it is hoped that the treasury will have paid off its debts in three years' time. The financial and stock markets have matured greatly over the past ten years, a necessary measure in order to ensure the efficient flow of capital in the economy. Privatisation of financial institutions has contributed to this, but the decisive factor was the deregulation of capital movements to and from Iceland. Last but not least, Iceland decided to become a member of the European Economic Area in 1994. This agreement granted Iceland access to the EU single market, thereby ensuring that the country had no need to join the EU itself. These changes to Iceland's economic infrastructure have all proved very successful. GDP growth over the period 1995 to 2000 was more than 25% and people's disposable income grew on a corresponding scale. Iceland's competitiveness has improved and it is now ranked 16th in the world in studies by the World Economic Forum and Harvard University, and fifth in terms of access and quality of the business environment for start-up companies. Iceland's economy is now much more diversified, with more and stronger pillars and dynamic innovation of all kinds.
Ladies and Gentlemen:
The Government of Iceland now faces two main tasks. One is to conserve and consolidate the benefits of the economic reforms that have been made over the past decade. The other is to lay the foundation for Iceland's next economic growth phase. Of course there are many considerations to bear in mind. Growth will be stimulated from many directions over the next few years. The economy is more diversified and open, and it is impossible to foresee all possible developments.
Given the importance of the EU for Iceland's foreign trade, it is not unnatural to ask why the Icelandic government has not asked for talks on membership. There are many answers to this question. Admittedly there is nothing in the Icelandic economy itself that prompts such a question. However, political fashion or determinism, and the enlargement of the EU into Eastern Europe, bring such questions to the fore. But although the arguments in favour of membership seem to be entirely lacking, there is every reason for presenting the arguments against it. One of the most crucial points is that we Icelanders have regarded the European Union's Common Fisheries Policy as unacceptable. It is simply out of the question for a sovereign nation to sign away jurisdiction over its most important resource. As most people know – but some people choose to ignore – talks on membership of the EU are not negotiations in the accepted sense of the word. Candidate countries cannot change any of the EU's rules, but can only squeeze out deadlines of various lengths for bringing their own rules into line with those of Brussels. Temporary adjustment periods do not help Iceland at all as far as fishing rights in the Exclusive Economic Zone are concerned. Thus it is not surprising that no Icelandic political party has included EU membership on its agenda. Besides the fundamental issue of the Common Fisheries Policy, many other factors serve to dampen Iceland's interest in joining. Most things suggest that the Community is moving towards further political and economic integration. Closer integration in these fields is widely felt necessary in order to ensure that the single currency, the Euro, achieves the strength that was originally envisaged for it. For example, this is the view held by Guy Verhofstadt, Prime Minister of Belgium, who is currently President of the European Council. The Economist recently quoted a speech in which Mr. Verhofstadt called for a common EU defence policy, a common social and economic policy and direct elections to the presidency of the European Commission. Mr. Verhofstadt pointed out specifically that the Euro's weak market position could be explained by the lack of a common economic policy among EU nations and insufficient political unity. Iceland's trade interests certainly demand secure access to the EU market. But it is not consistent with Icelandic interests to submit its common trade and economic policies. It is obvious that Iceland's interests and circumstances by no means go hand in hand with the factors that determine EU strategies. One example is Iceland's potential for attracting foreign investment. Geographically speaking, Iceland is off the beaten track and we cannot take it for granted that foreign investors consider our country as an option. The opening up of financial markets has also made it easy for Icelandic businesses to relocate their activities in other countries if they see fit. So it is vital for us to have full control over the type of business environment we create in Iceland. The Icelandic government has very recently decided to cut corporate income tax from 30% to 18%. This tax cut is one measure aimed at making Iceland's business environment an attractive place for domestic and foreign companies to operate. We are convinced that this tax cut, together with other plans announced at the same time, will attract the interest of foreign investors. Many Icelandic companies which had been seriously considering relocating their activities in other countries have already announced publicly that they will continue to operate in Iceland because of the tax cuts. So it is not consistent with Iceland's interests for the Government to surrender the chance to shape its own business and economic policies. Of course it is out of the question to hand away the authority to make decisions in such important areas as economic policy, business, foreign affairs and social issues, and retain only fields such as education, sports and the arts, which the Belgian Prime Minister regards as the only ones that should be under the control of individual national governments. Nations need to compete to offer the best environment for people and business, and we should be wary of attempts to eradicate such competition.
Ladies and Gentlemen:
In recent months the Icelandic currency, the króna, has experienced fluctuations in the foreign exchange market, and has depreciated against the main currencies in which Iceland trades. This unease has led certain impulsive people to make snap judgements that Iceland needs to join the EU immediately and adopt the Euro. The Icelandic króna, they claim, is clearly too small to function as a credible currency. Uncertainty about foreign exchange developments is a barrier to foreign investment and damages Icelandic business, it is also claimed.
Admittedly, exchange rate uncertainties are unfortunate for businesses and for the whole community. The depreciation of the króna at the moment can above all be traced to the fact that the economy has been adjusting to a recent phase of overheating. For the seven years before this unease began to be felt, the Icelandic króna was one of the most stable currencies in our part of the world and easily withstood the huge slide in the Euro. Our currency was neither larger nor smaller at that time than it is now. Everything suggests that the present problem will be a short-lived one that will be resolved as soon as the economy has adjusted to new conditions. It should also be mentioned that Iceland reviewed its Central Bank Act this spring. It was decided to abandon the old regime of keeping the exchange rate within a target band, the króna was floated in the market and the Central Bank's role henceforth has become to seek to achieve specified inflation targets set by the Government. In order to do this, the Central Bank was granted greater independence and full control over interest rate decisions. It is natural for the market to take its time about adapting to this change and the fact that the exchange rate is now free to fluctuate on a fairly large scale without the Central Bank seeing grounds to intervene. I hardly need to point out that introducing the Euro is not a short-term economic measure. Preconditions for doing so are EU membership and an adjustment period. In all it would take 8 to 10 years to complete such action, if anyone wanted to take it, which is not the case in Iceland. But more importantly, there are few signs that membership of the Euro is consistent with Iceland's economic interests. The Icelandic economy differs from the continental European economies in many ways. Repeated experience shows that economic developments in Iceland are always completely different from those in, say, France or Germany at any time. Iceland is still highly dependent on fisheries, for example, and swings in that sector do not necessarily keep pace with what is happening in the economies of the large continental countries. The exchange rate of the Euro will never reflect what is happening in Iceland, our economy is simply too small for that. Iceland would face intolerable problems if, for example, its export industries were on a downswing at the same time as an upswing was taking place in Germany and France. The common currency would be strengthening then, at the same time as Iceland's economy was weakening. In my view it would be totally irresponsible of the Icelandic Government to agree to membership of the EU and adopt the Euro as its currency without any decisive proof that the Icelandic economy was fully synchronised with the economies of the Euro countries from one period to the next.
Ladies and Gentlemen:
Iceland's relations with the European Union are certainly important. Not only because of the major trade interests that are at stake in its cooperation with the EU, but also because of historical and cultural links with Community members. Although Iceland does not think that its interests are best served by joining the EU, it is nonetheless a European nation in the finest sense of the term and therefore has much in common with other countries in the continent. The European Union is based on the noble ideal of peace in Europe. Close cooperation among its member states, some of which were invariably involved in disputes and even wars with each other, has proved successful and brought them benefits. Shared values and shared interests are one of the best possible guarantees for peace. The Community's enlargement towards Eastern Europe is an important and historic opportunity to unite the continent after the division that followed the Second World War. Some people are surprised that Iceland supports EU enlargement into Eastern Europe but is not interested in applying for membership itself. We are sometimes compared to clergymen who tell other people what sort of conduct will earn them a place in Paradise, but then act in a way that is more likely to send them somewhere else. But Iceland does not oppose the European Union and is in favour of allowing those European nations to join it which consider they will benefit from doing so. The nations now pressing to be allowed to join the EU appear to view this as the best way of safeguarding their interests, and Iceland duly supports their plans. Enlargement will hopefully bolster stability in the continent and at the same time expand the European Economic Area, thereby presenting Iceland with new and exciting business opportunities.
Ladies and Gentlemen:
Economic developments in Iceland over the past decade have brought great benefits for our nation. Globalisation of business opens up new possibilities for Iceland and economic growth in the future will depend not least on how well we succeed in taking advantage of these new opportunities. A business-friendly environment and a well educated and enterprising nation are the resources with which we will face the new times ahead. I am completely convinced that Iceland will prosper best in the closest possible cooperation with other nations. Icelandic-British relations are excellent and the UK is one of our very most important trading partners. I would therefore like to take this opportunity to thank the British-Icelandic Chamber of Commerce for their fine work and contributions towards increased trade between these neighbouring countries. I would particularly like to thank you for arranging this meeting and at the same time thank the Icelandic Embassy for taking part in its preparation. I hope that relations between the UK and Iceland will continue to be as close in the future as they are at present, and that trade between our countries will thrive and flourish.