German-Icelandic Chamber of Commerce
April 24 2002
German-Icelandic Chamber of Commerce - April 2002
It is a great pleasure for me to address this meeting of the German-Icelandic Chamber of Commerce. Everyone who knows anything about Iceland and its economy is aware of how important foreign trade is to our nation. Iceland's economic well-being is closely connected with how well it manages to deliver its goods to foreign markets, and also with easy and efficient importing. The activities of the German-Icelandic Chamber of Commerce is therefore engaged in very important activities. It represents a fine platform for partnerships by people who do business between our countries, and both the Iceland Chamber of Commerce and the German-Icelandic Chamber of Commerce deserve our thanks for their good support for this body.
Iceland and Germany are friendly nations. Our relationship is strong and built on an old foundation. We are now celebrating fifty years of diplomatic relations between our countries. This has been a successful and productive relationship and we have every reason to expect that it will remain so for the foreseeable future. But relations between our countries go back much further than that. German influences were felt in Iceland from very early times. The first bishops of Iceland were educated in Germany in the eleventh century and German clerics were deeply involved in the start of Christianity in Iceland. Merchants from the Hanseatic League featured very prominently in Icelandic trade, so prominently in fact that Norwegian and Danish kings regarded it as an important task to stop them trading with the Icelanders, and succeeded in doing so in the end. The same applied to trading by the English, and this was followed by a trade monopoly imposed by the colonial rulers, and one of the most miserable periods in Icelandic history. So it is not surprising that free trade was one of the main principles in Iceland's campaign for independence. National independence and freedom of trade were, and are, inseparable concepts. German intellectuals in the nineteenth century took a keen interest in Icelandic affairs. The leading figures included people such as Konrad Maurer, who was not only absorbed in the ancient language and literature, but likewise took a vivid interest in the Icelandic nation and its welfare. Among other things, this interest appeared in the form of articles on Icelandic issues in the German press, which was of great importance to the leaders of the Icelandic independence movement. These and many other examples show beyond all doubt the strong and close links between our countries. We are not only celebrating fifty years of diplomatic relations now, but also remembering centuries of good relations and we welcome continuing close contact between us.
The relations between Iceland and Germany clearly show that in historical, cultural and economic terms, Iceland is a European nation. Europe is Iceland's most important market region and our culture and history are part of the European heritage. Nonetheless, Iceland has chosen to remain outside the European Union. As we have assessed the situation, it is incompatible with our national interests to join the EU. However, Iceland does belong to the European Economic Area. That treaty has served Iceland very well, ensuring us access to the EU single market. But although Iceland has opted to remain outside the Community, this does not alter the fact, which we are very proud of, that we are a European nation. Of course we can be pro-European without being pro-European Union. And we can definitely take a positive view of the European Union even though our interests and political objectives lead to the conclusion that we wish to remain outside it. There is no question that the ideal on which the European Union is founded, namely peace in Europe based on free trade and close relations, is a noble one, and the Community has certainly played its part in securing peace and promoting prosperity in Europe.
Ladies and Gentlemen:
The treaty on the European Economic Area, coupled with systematic measures for the deregulation of markets, firm fiscal management and extensive privatization, has contributed to creating one of the greatest periods of economic growth in Icelandic history. Since 1994, GDP has grown by more than 25%, real disposable incomes by the same amount, and treasury debt has been repaid on a significant scale. In recent times, in fact, we have had to tackle the consequences of some overheating of the economy, but the end to that is now in sight. Inflation, after exceeding for a while the limits within which the Central Bank is supposed to keep it, is now rapidly slowing down and is expected to finish between 2% and 3% this year, instead of 9% last year. Interest rates have been high in Iceland due to inflationary pressures, but the Central Bank recently cut its policy interest rate and in light of rapidly decreasing inflation, the Bank can be expected to continue to bring down interest rates in the coming months. The current account deficit, which for a while was sizeable, has shrunk very sharply, showing how flexible the Icelandic economy is. It can therefore rightly be claimed that the Icelandic economy has reached a turning point in the past few months. The overheating of the economy after five years with annual growth of 5% or more has now come to an end and there is every reason to feel sure that exciting times lie ahead for our nation's economy. I think that we have made wise use of the economic boom in Iceland. The Icelandic economy is now far more diverse and dynamic than it was at the beginning of the last decade, and has more growth edges than before. The treasury is in a good position, as reflected in the recent credit rating for the Republic of Iceland awarded by the international agency Moody's. This affirmed the great confidence that Iceland enjoys in international finance markets. The firm position of the treasury keeps the pillars of the welfare system secure, and Icelandic pension fund arrangements are such that no one needs to fear heavier taxes in order to meet pension payments in the future. A firm foundation has therefore been laid for the next economic growth phase. A wide range of opportunities are at hand and above all it is now up to us in Iceland how we succeed in taking advantage of them. I would like to use this occasion to mention several factors which I think will have a major effect on economic growth in Iceland in the next few years.
The first is that the globalisation of business will produce good opportunities for Iceland. Advances in transportation and telecommunications have broken Iceland's isolation and we now have more potential than ever before for taking part in global trade with full force. A nation which is so highly dependent on imports and exports has no alternative but to support free international trade, and our own history shows that there is no better way to help nations with poor living standards than for them to have the chance of trading with other nations and thereby benefit from their special position and specialist skills.
Overseas investments by Icelanders are also very much on the increase. Pension funds, businesses and individuals have greatly stepped up their foreign investments in recent years, which is a welcome trend. This spreads the risk in the economy and at the same time brings people in Iceland know-how and experience which can be put to good use. Since Iceland is not exactly on the beaten track for investors, we need to make a special effort to attract them to our country. The government took the first steps in this direction recently by reducing corporate income tax from 30% to 18%. It was also decided to allow companies to keep their accounts in the currency that suits them best. These measures will undoubtedly make companies from other countries more interested in Iceland, but they are equally important in ensuring that Icelandic companies do not relocate their activities elsewhere. Talking about taxation, I really cannot avoid mentioning here that it was the German-educated bishop Gissur Ísleifsson who was the first person to levy taxes in Iceland. It came as a surprise that he succeeded with this plan, and it was said that the Icelanders had only agreed to it in order to please him. The fact is that Icelanders are far less willing to please their government when it comes to taxation these days and firm demands are being made that it should continue to make tax cuts in the coming years.
Thirdly, I would like to mention education and science as the impetus behind economic growth in the years and decades to come. Iceland has a good education system and scientific activities of all kinds have been steadily gaining strength in recent decades. It has been particularly interesting to see the changes which have taken place in education at university level. Supply has increased enormously and the links between industry and university-level studies have been significantly boosted. New colleges and course of study have emerged which give the University of Iceland tough competition for students and teachers. This is a very important factor for the evolution of the Icelandic economy. The great revolution which took place in living standards in the twentieth century was primarily driven by utilization of natural resources, namely the fish in the sea and the energy inherent in waterfalls. Expertise and new technology enable Icelanders to identify new and better ways to utilize these resources, and at the same time leave us better equipped to find new resources and utilize them. One example is the remarkable research now being conducted into production and utilization of hydrogen fuel. If these pilot schemes prove successful, they will give us an environmentally friendly and economical energy source which will have enormous significance and many applications. "Vits er þörf þeim er víða ratar" – "wisdom is needed by those who travel wide" – an ancient Icelandic poem says. This is a universal truth: a small nation's strength at international level is determined not least by how well it manages to educate its citizens and foster its scientific activities.
Ladies and Gentlemen:
Obviously it is impossible to give a complete and exhaustive account of all the factors that are likely to affect economic growth in Iceland in the years to come. The economy is far too complex and subtle for that. Nonetheless, various principles still apply which any nation needs to abide by if it wishes to secure economic growth and higher real incomes. Free trade, transparent government, a balanced budget, low taxes and sensible monetary policy – these are all factors of crucial importance when it comes to the question of economic growth and the prosperity of nations. The government's task is to make sure that industry and business are given a sensible framework to operate in, and it is then the task of industry and business to expand within that framework and make the most of the opportunities that are available.
Once again, ladies and gentlemen, I would like to thank the German-Icelandic Chamber of Commerce for their invitation to address this meeting, and I wish its members all the best in their work.