About an hour out of Reykjavik, a person can stand between two continents. The place is called Þingvellir. Icelanders proudly tell visitors it was the site of the world’s first Parliament, established more than one thousand years ago.
True to that parliamentary tradition, Iceland has been deliberating about possible solutions for its economic crisis for a while now.
Iceland is a fairly unique country. It straddles two continents, Europe and North America. It is the smallest country with an independent currency. It has volcanoes that can wreak havoc on international flight patterns. And it has proven amazingly resilient in the face of a credit crunch that devastated its economy.
The economic crisis hit Iceland particularly hard in 2008. Its currency, the krona, lost a lot of value. Its major banks collapsed. While Iceland is making a better recovery than Greece, the krona is still unstable.
Iceland’s parliament, the Althing, is talking about entering the EU and changing to the Euro but many Icelanders disagree. They want to pay attention to the North American side of Þingvellir. They want to adopt another currency other than the Euro: the Loonie.
Adopting another country’s currency is nothing new: Ecuador and Panama adopted the U.S. dollar, and Kosovo adopted the Euro. It usually happens when a country struggles with a large deficit, weak banks, high interest and foreign exchange rates. It’s a big deal. It’s a desperate move.
But no country has ever been interested in tying themselves to our humble dollar before.
On the surface it looks like a fabulous deal for Iceland. Canada’s Loonie is strong and safe. Adopting another currency could lower inflation and interest rates, and create a more stable environment for the financial sector. Iceland would benefit from investments.
It also looks like a fabulous deal for Canada. The Bank of Canada would benefit from the extra money in circulation. Our trade with Iceland will certainly increase.
We’d probably visit our Northern neighbours more often. We’d feel good about helping another Northern country, especially one so similar. Like us, Iceland also has lots of natural resources and an Arctic about to be opened. They have Bjork; we have Justin Bieber. They have Sigur Rós; we have Arcade Fire.
So it seems natural for us to help Iceland. But even if Canada has good intentions, it may not be beneficial to Iceland to adopt the Loonie.
Iceland is fiercely independent. In adopting the Loonie, they would be losing control over their monetary policy.
The krona’s independence was a major factor in the country’s recovery from its financial collapse. If Iceland tied its fortunes to the Loonie, it wouldn’t have the flexibility that it exercised for itself in the past. An independent, floating currency gives some protection against shocks.
Canada wouldn’t alter interest rates or change any financial policy for Iceland’s benefit. Iceland would have no control. At least in the EU, Iceland would have a small voice.
There may not even been a need for Iceland to adopt another currency. It is recovering admirably from its collapse, and it is opening up to investors slowly. As it gets more investment, it could do even better. It’s too soon to kill the krona.
Finally, Iceland would lose control over the look and feel of their money. Right now, their bills feature famous Icelandic historical figures. Their coins have engravings of fish.
Interestingly, loons eat fish.
Graphic: Brianna Whitmore The Sheaf