The Monetary Future: Icelandic Currency Crisis: Is the Euro Iceland's Answer?

Wednesday, October 21, 2009

Icelandic Currency Crisis: Is the Euro Iceland's Answer?

By Michael Marr
Financial Services Technology
Monday, October 12, 2009

http://www.fsteurope.com/news/icelandic-currency/

In late September 2008, over the space of just several short weeks, Iceland's three major banks collapsed. Now, as other nations begin to show signs of recovery, Iceland is trying to rebuild itself.

Reykjavik, Iceland

The Icelandic economic crisis, the largest suffered by any country in economic history relative to size, has completely rocked the small nation - once, bolstered by foreign investment, one of the most successful economies in the world.

Now though Iceland's currency - the króna - has halved in value, and back in January, at the height of the crisis, protests, escalated by conflict between anti-government campaigners and the police, finally led to the resignation of the government in power.

In their place now is the new government - a coalition between the Social Democratic Alliance and the Left-Green Movement - led by Jóhanna Sigurðardóttir , and some people live in hope that the new government will look to usher in a return to more traditional Icelandic values, such as thrift and hard work.

However, a year on from the meltdown, many analysts are beginning to ask whether Iceland real solution is to ditch its fragile currency and join Europe and the euro - a notion backed by Sigurðardóttir and her party.

And yet, its not all bad news for Iceland, with reports showing that both the nation's fishing and aluminium industries are doing notably well. In fact, there are already three major aluminium plants in the country, with a fourth currently under construction, and a fifth already in the planing stages.

But, the plants, once majorly apposed by government group (and now junior-partners in the coalition) the Left-Greens, has led Iceland's finance minister - and Left-Green party member - Steingrímur Sigfússon to express doubt over joining the eurozone.

"The flexibility and adaptability that having your own currency gives may turn out to be very helpful when it comes to recovery," he told BBC News.

The real concern is that, a year on from the crisis, while many Icelanders now display a sense of shame over the get-rich-quick schemes the country once adopted, they have only resulting in one thing: a hefty bill that Icelanders will be paying off for years to come.

The fact is, with politicians across Europe seemingly paying lip service to the notion of "recovery," the eurozone is fast becoming political priority.

As such, while Iceland's prime minister believes the euro will help with recovery and others believe independence will serve them better, the debate looks set to continue.

But as short-sighted calls to set up pan-European banking regulations has already been proved, the EU is sometimes the root of the problem and not the solution.

As such, perhaps Iceland should cling onto to its current status of independence: it did - after all - make them rich in the first place.