Baltic Business Research

Summary

1. From a general point of view we should all be happy that another Nordic country wants to join the European Union, hopefully as an active and positive member. Whether Sweden always has been a strong EU supporter can be questioned. Recently, former Finnish prime minister Paavo Lipponen even accused Sweden of not always having taken its EU mandate seriously enough.

2.  There are different reasons for a country’s application for EU membership, including                         –  peace and sympathy for a co-operating Europe – also in order to tackle tough global competition                                                                                                                      –  the dominating role of the EU as a trading partner and the possibility of joining the euro later on                          –  a domestic economic emergency situation (like in Sweden in the early 1990s)                                         –  a combination of different motives.

3.  Former Polish president Aleksander Kwasniewski told me once that the first argument of peace between EU countries has been particularly important to him and most of his countrymen, since Poland in the past centuries has been a free country only for a few decades. The historical peace dimension has never been discussed very much in Sweden which is not quite justified – but understandable. In the case of distant Iceland, this possible neglect of European continental history certainly must be even more understandable.

4.  In the case of Iceland, the application for EU membership happened to a great extent due to economic crisis reasons. This is not a bad reason per se. In emergency situations, it is usually easier to secure relatively high political and public support for such a big step. But things may happen quite rapidly. This calls for good transparency and information to the voters – but also to the more domestically oriented politicians.

5.  Thus the issue of transparency should not be underestimated and should include information on the EU itself and both the advantages and the challenges for Iceland. There will be changes in legislation, institutions, the corporate sector, the banks, the labor markets, etc. Icelanders should be aware of these changes before joining the EU. However, Iceland’s previous EEA joining will make things easier in a number of areas.

 6. Another big issue will be the (probable) future Icelandic position with regards to the EMU. Current difficulties for the euro should not deter them. Currencies go up and down, particularly reserve currencies. Sure, the European Union has to work out some major structural problems in a number of member countries. But even the US and the UK – the main current speculation centers against the euro – have their homemade problems which at some point will send currencies in another direction again, this time favoring the euro.   

7.  However, the current euro crisis again stresses a fact that is sometimes neglected: Economic stability begins at home. As the examples from the Baltic countries and Greece show, strong links to the euro and EMU membership cannot serve as a rescue anchor if a country suffers from major domestic economic imbalances.

8.  In my opinion the analysis of the economic balance of a country applying for EU membership should not be limited to what is still called convergence criteria, i.e. total public debt, annual fiscal performance, inflation, the exchange rate before joining and long-term rates – but also the structural situation and the fundamental prospects of the current account. This is an issue that Iceland should think about in order to avoid joining the euro prematurely – even if many observers think that Iceland applied for EMU membership mainly with the objective to introduce the euro in the foreseeable future. Thus, preparing Iceland for the euro should include a long-term strategy for structurally improved exports and – if possible – also for some long-term reduction of imports.   

9.  This strategy has to include a number of important contributions from growth policy to the current account balance – or call it from the supply side if you want. Some of these factors that contribute to the creation of even more entrepreneurship and product development are a favorable general economic climate, improvements in education, innovation, well-functioning financial markets, good institutions, labor market immigration, etc. R&D as a share of GDP, for example, is just around 3 percent which certainly must be considered as moderate. And it should not be overlooked:  According to article 109 j 1 of the Maastricht treaty, the current account balance matters when a county wants to join the EMU. Unfortunately, nobody ever cared about this detail, probably because there are no numerical targets for an acceptable current account deficit. However, this – academically understandable – lack does not make the issue of a sustained acceptable deficit in the current account less important.  

 10.  Once Iceland has formally joined the E(M)U, North America has taken this big step as well (if we neglect the French Islands of St. Pierre and Miquelon off the coast of Canada which already have the euro). Surprised? Of course, this comment is related to Iceland, since the big island of Iceland geographically is located in both Europe and America.