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Talk that Iceland might adopt the Canadian dollar has been doing the rounds for months now.At first, it sounded crazy to us. Iceland seriously wants to adopt the “loonie”? But the more we read, the more we found out that it made sense. And more and more, it’s beginning a real possibility.
We spent some time today talking on the phone with Icelandic economist Heidar Gudjonsson. Heidar is managing director of Ursus, an investment company in Zürich, Switzerland, and chairman of Iceland’s Centre for Social and Economic Research (RSE), an independent think tank.
Heidar is well involved in the debate over the loonie — he was recently in Canada, where he notably told a conference that if Iceland joined the loonie, Greenland would likely follow.
Here’s a portion of our conversation with Heidar…
AT: How seriously is this proposal being talked about in Iceland?
HG: It’s being discussed seriously. The Minister of Economy, he went to Canada six weeks ago and had meetings with Bank of Canada and with regulators, and I think the Ministry of Finance as well. And he then came back to Iceland, and he said publicly that this was an option that could not be ruled out and we should also look into the option of a bilateral union.
AT: Could you explain the bilateral union?
HG: The unilateral currency option is what business in Iceland has been calling for. That means that basically doing away with the central bank in Iceland, and doing away with the krona, and instead using the Canadian dollar without having any say in their monetary policy.
A bilateral is more of a currency union, where Iceland might have a say in Canadian monetary politics.
AT: How much support does this proposal have within Iceland, particularly within the business community?
HG: It has growing support within the business community because the current capital controls are strangling the economy. So the delegation that visited Canada went with the Confederation of Icelandic Employers and Confederation of Icelandic Industries — these confederations represent the vast majority of Icelandic business.
AT: Do you personally think it’s a good idea?
HG: Yes, I think it’s a good idea — because there’s no perfect idea, and in currencies, there’s no perfect currency.
The problems Iceland is facing are very acute, and we need a solution within the next year or two. The reason we’re in a tough spot is that the capital controls which are in place are stifling economic growth, hindering all investments, and they create basically a current account deficit, rather than improving the current account. And there are big maturities coming up on Icelandic loans. So we need inflow to pay for the upcoming outflow.
So otherwise, Icelandic actually faces the risk of defaulting on its foreign debt as early as 2016.
AT: Why in particular is the Canadian dollar a more attractive prospect than the euro or even the U.S. dollar?
HG: The euro is such that the EU, while they cannot stop anyone from unilaterally adopting the euro… they can make their life miserable. Because we would need to bank with European banks, and they, in return, need to bank with the ECB. So it will be tough for a country which needs European banks to have the ECB as represent itself.
On the U.S. dollar, it’s a bit different. There are several reasons why Iceland will take the Canadian dollar rather than the U.S. dollar. The first reason is cultural. Around 200,000 Icelanders live in Canada. And life in the Arctic and life in the north is different from life in the south. So Icelanders feel close connections with Canada, just as they feel close connections with many people that live in the northern areas of Norway and other places.
The second reason is that the business cycles of Iceland and Canada are much more similar: we’re both resource exporters.
The third is that Canada doesn’t have an outsized financial system. The U.S. has a much bigger financial system. I would argue that Canada has a much more healthy financial system. Given the sad experience the Icelandic population had with near-financial collapse, they will always be wary to take up, like for instance, the euro because of the financial issues the euro has, and the banking system there, and then the dollar, with the big banks there.
Please note the transcript has been lightly edited for clarity.
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