Iceland’s business leaders are railing against the government for severing ties with Europe, arguing the move will hurt the island’s trade prospects and leave it with a currency no one wants.
Joining the European Union, and then the euro, is crucial if Iceland is to achieve sustainable economic growth as crisis management policies since 2008 start to backfire, the head of the nation’s largest listed company said.
“The new government has backed out of the EU accession talks and thereby taken away the long-term plan that was in place, without replacing it with anything else,” Jon Sigurdsson, chief executive officer of Ossur hf, which makes the prosthetic blades used by Olympic athlete Oscar Pistorius, said in a phone interview last week. “The problem with the krona is that no one has any faith in it.”
Iceland’s government was voted into office in April after pledging to end EU talks and promising tax cuts and mortgage debt forgiveness to support households. The decision to back away from Brussels marked a reversal of course after the previous administration said Iceland should pursue euro adoption once krona restrictions in place since 2008 are lifted.
Though most polls show Icelanders agree with the government’s decision to turn away from Europe, business leaders are now speaking out and urging a political rethink.
“Iceland should complete the accession talks,” Helgi S. Gunnarsson, CEO of facilities management company Reginn hf, said in an interview. “Removing capital controls is going to be a lot more challenging than people allege these days. It’s going to be painful. It would be easier if we were assisted by the EU.”
The controls, put in place after Iceland’s three biggest banks failed in October 2008, are blocking $7.2 billion in assets from exiting the $14 billion economy. The decision to shield Iceland’s currency market, which was approved by the International Monetary Fund, has since proved controversial as authorities in Reykjavik struggle to exit the regime without triggering a krona sell-off.
“There doesn’t seem to be any long-term plans which will allow the government to liberalize the market and lift capital controls,” Sigurdsson said. “Backing out of the European Union accession talks was bad news.”
An economy Iceland’s size can’t navigate its way through the risks entailed in such a step without the help of a larger bloc like the EU, according to Sigurdsson. His company is the largest on Iceland’s stock exchange, valued at 96.6 billion kronur ($794 million).
“The continued use of the krona will mean that we will fall behind other nations and become even less competitive,” he said. “If we want to be on par with our neighboring countries when it comes to standard of living and economic growth, Iceland has to be a part of the international business environment.”
The capital controls are hurting the company in a myriad of ways, he said, including restricting investments in its shares and making it impossible to sell bonds abroad even as the company’s day-to-day business is exempt from the controls. It also can’t pay out stock options to foreign employees.
The company is now dependent on financing through its foreign subsidiaries and has to ask for exemptions from the central bank.
“While the capital controls are still in place, no banker in his right mind will send money to Iceland,” Sigurdsson said.
Ossur shares have risen 9.8 percent this year, and are up 34 percent since July. They have more than doubled in price since the end of 2008.
The krona restrictions have forced investors into local assets, prompting concern of a bubble, Sigridur Benediktsdottir, head of financial stability at the Reykjavik-based central bank, said in an interview in May.
Finance Minister Bjarni Benediktsson in the run-up to the election said he wants to build the economy on the krona and that joining the euro would bring about its own problems, such as unemployment. He said on Oct. 31 that he was optimistic he would soon be in a position to remove the krona restrictions, which he says could take as little as six months.
Iceland has been seeking to peg its comeback on its traditional growth engines such as fishing and tourism and has even signed a free trade agreement with China. The volcanic island is investigating whether it can build a power cable to the U.K. to export its cheap and renewable geothermal energy to the European markets.
The island has a better chance of realizing its economic ambitions if it joins the EU and the euro, Gunnarsson at Reginn said.
“We can’t stay locked in a box forever,” he said.