English summary

How about the euro?

 Summary of the main findings in the book How about the euro? (i. Hvað með evruna?) by political science professor Eiríkur Bergmann Einarsson and economy professor Jón Þór Sturluson. Published by Bifrost University Press in mars 2008.

In monetary policy Iceland has only two main realistic options. Either too stay the course with free floating krona or join the EU and adopt the euro after fulfilling the criteria’s of the Economic and monetary union.

The Icelandic krona is the smallest free floating currency in the world. The krona has proved increasingly voilatile and troublesome for Icelandic business. Half of Iceland’s foreign trade is in euro’s.

The main benefit of the euro is that it would function as a stabilizing factor for the fluctuating Icelandic economy. The main disadvantages is that the Icelandic Central bank will no longer have the power to increase or lower interest rates to fit developments in the internal Icelandic economy.

Main benefits of the euro for the Icelandic economy:

The small and unstable Icelandic krona has hindered foreign direct investment in Iceland which should increase by 20% if Iceland adopts the euro.

• The krona has hindered foreign trade. It is predicted that introduction of the euro will increase foreign trade by 50%.

• Interest rates are high in Iceland. The risk of currency fluctuations has however hindered Icelanders in taking loans from foreign banks in euro’s. With the introduction the the euro real interest rates will lower significantly.

• With the euro the current transfer cost between IS krona and the euro which is calculated at close to one percent of the GDP will disappear.

• The introduction of the euro will lower costs within the Icelandic economy that can amount to 120 million euro’s a year.

• Adopting the euro will lower prices in Iceland. If Iceland will both join the EU and adopt the euro prices should fall by at least 15%

• Taking all this into account Iceland’s GDP should increase by 6 – 8% and purchasing power should increase by 24% after adopting the euro.