By Bill Mann, MarketWatch
PORT TOWNSEND, Wash. (MarketWatch) — Will Iceland get loonie? asked one major Canadian business publication last week. Is that troubled, isolated nation about to shun the European Union and the euro and adopt the Canadian dollar as its currency?
Iceland’s fear of the euro collapsing has caused one of Iceland’s political parties to openly suggest the idea of going Canadian and dropping the idea of EU membership and currency. (And besides, the just-released see-through Canadian plastic bank notes are waycool.)
Ever since Canadian Business magazine broke the story of Iceland possibly adopting the loonie, the Canadian media has been having a field day with the story. It probably won’t happen, but a stable economy (the kind Iceland wants again) needs a stable currency. Like Canada’s.
The Bank of Canada, for its part, says it will be glad to sell Iceland all the Canadian notes and coins it wants. And that’s all it’ll say; it doesn’t comment on other countries’ monetary policies.
Iceland’s krona has taken a battering since the collapse of the country’s three major banks in 2007. The country is still struggling to recover from that speculative disaster, and the krona is still being called a glorified poker chip. Iceland’s economy may be off life support, but it’s still in serious condition.
The krona is roughly 40% from its 2007 peak. Capital controls put in place after the crisis restrict the flow of money into and out of Iceland and keep the currency stable. But if the controls are removed too soon, the krona could crash again, while keeping them for too long discourages foreign investment. Not a good situation.
Joining the EU, which Iceland saw as a way to attain a stable currency, doesn’t look like much of a lifeboat these days. Fellow northerner Canada looks like a viable Plan B to some in Iceland these days.
Aside from worries about EU stability, many Icelanders are concerned about the loss of autonomy that comes with joining, particularly if it means less control over their prized fishing industry.
A loonie plan?
So, adopting the Canadian dollar is what one political party in the Icelandic Parliament is suggesting openly. And given Iceland’s history of doing things unconventionally, who knows what might happen?
Ársæll Valfells, an assistant professor of business at the University of Iceland, and Magnus Skúlason, managing director at research firm Reykjavik Economics, are part of a small group of influential academics, economists and business people in Iceland pushing to explore adopting the loonie.
Iceland’s Progressive Party is also supportive. “If we are going to adopt another currency, then the Canadian dollar looks very promising,” says Progressive leader Sigmundur Gunnlaugsson. They’re not after a currency union, but a unilateral adoption similar to El Salvador’s 2001 switch to the U.S. dollar. (Iceland … a banana republic?)
After the banks — and the krona — collapsed in 2008, Icelanders then watched the euro zone threaten to fall apart. “People started to wonder, ‘Is this really a lifeboat?’” says Skulason. EU membership will eventually go to a referendum in the country of 320,000, but opinion polls show the majority of the population is opposed. Enter the loonie idea.
Adopting the British pound as the krona’s replacement is definitely out. Many Brits feel Icelanders swindled them. An Icelandic bank, Landsbanki, offered high-interest savings accounts to the Brits under a brand called Icesave, and when it collapsed in 2008, Britain rescued its citizens with a £2.35-billion payment and demanded reimbursement from Iceland, which has refused in two referendums. Former prime minister Gordon Brown even enacted anti-terrorism legislation to freeze Icelandic assets.
Iceland’s attempt to remake itself from an isolated fishing nation into an international banking heavyweight proved disastrous. So it’s back to basics.
A match made in currency heaven
There are plenty of ideas these days in Iceland for strengthening the economy for the future. One of the most-often-heard is ditching the krona. But for what? If the struggling EU and the pound are out, maybe the Canadian dollar is the solution.
The two countries have similar, commodity-based economies (including fishing), and Iceland has good relations with Canada — unlike, say, the UK. So the two commodities-dependent economies tend to move in the same business cycles, which is good for stability. .
The aforementioned group of prominent Icelanders has put together a white paper extolling the loonie’s virtues. It’s relatively stable and liquid, for starters. The two economies are, as mentioned above, based on resources and may have more in common than Iceland and the euro zone. Most of the work of a switch can be done in four weeks, the white paper says, stabilizing the economy and allowing easier access to capital. The group is appealing to hearts as well as minds, even pointing out that a wave of Icelanders once emigrated to Canada, and there is still an active community in Manitoba.
Progressive Party leader Gunnlaugsson told Canadian Business that he’s he’s hoping for an official nod of approval from Canada. “If there were some signs from Canada of willingness to look into this issue seriously, it would mean that Iceland’s government cannot ignore the idea,” he says.
Meanwhile, Iceland’s coalition government wants to complete the EU application process — even if it does eventually get shot down.
So far, all this loonie speculation is just a trial balloon. And as Maclean’s magazine reports, there may be another major anti-Canadian currency obstacle:
“One popular Icelandic blog raises a significant objection to the idea: anti-British loathing is, and will be for the foreseeable future, so strong in Iceland that the populace would be psychologically reluctant to accept notes bearing the face of the Queen.”
That may just harpoon the whole idea in the isolated whaling nation. .
Ásgeir Jónsson, an economics professor with the University of Iceland, thinks the country should complete its EU application and says there are other international currencies to consider, such as the yen and Swiss franc.
He admits he’s a bit mystified as to why the Canadian dollar is being touted. “In many ways, it has to do with Canada having a very positive image in Iceland.”
This relates to something I’ve been saying for years, that nobody hates Canadians. That counts for a lot.
In fact, Canada just may have the best popular image in the world. That’s the kind of thing money can’t buy — and it even makes its currency attractive.
Bill Mann is a MarketWatch columnist, based in Port Townsend, Wash.