Iceland: Rebuilding stability

Iceland is regaining stability in the aftermath of the financial crisis. The main task now is to sustain economic growth, which turned out to be higher than expected last year. To tap the full potential, the economy has to become more diversified and a long-term solution for the currency regime has to be found. The country, as Ms Oddný G. Harðardóttir, Finance Minister of Iceland, says in the interview, has many fundamental strengths: “highly educated and young population, good legal framework and connections to the rest of the world”.

The Icelandic economy has been through a severe financial and economic crisis. What are the lessons and how do you see the future economic path of the country? Where do you see potential?

“”More diversity”—those are the words to sum up the main lessons learned from the economic crisis. The Icelandic economy was hit so severely due to the fact that we had put too many eggs in one basket.

Our policy now is to build a diverse economic foundation for our society and ensure that our road to recovery is marked by a return to the Nordic welfare state model and thus by good cooperation with the Nordic and Baltic countries as well as with international financial institutions such as NIB.

We are still too depended on production related to natural resources. I see Iceland as country producing more value-added goods and services in the future. For that we have all the most important factors: a highly educated and young population, good legal framework and connections to the rest of the world. Once Iceland’s biggest economic challenge, the currency issue, has been solved I see things moving at a faster pace.”

What is the growth forecast for 2012? Where will the growth come from now and in the future?

“We recently got the positive results of 2011 where our GDP grew 3.1% instead of 2.5% as planned. The growth has been driven by both increased private consumption and corporate investment, which is a pattern normally seen at the end of a recession, while public consumption has been on a path of decline and was reduced last year by 0.6% The government has been pursuing a restrictive fiscal policy, from which we will benefit in the long run.

This year we estimate a shift towards more investment-driven growth of 2.5%. The growth has to be both sustained and sustainable and therefore we need to focus on our comparable advantages in both resources and manpower and skills. We need to expand our knowledge based industries.”

Iceland’s possible EU accession has been on the agenda during the crisis as well as the currency regime. How do you see the prospects for a possible EU membership now? What are the alternatives for currency regime?

“According to the opinion polls, Icelandic voters are in favour of the negotiation process and want it to be brought to its logical conclusion. They want the Government to finalise negotiations and to present options which can be assessed in a rational and factual manner. They then want to cast their vote in a referendum.

Our responsibility is to ensure that the options presented are the best possible options. The heaviest question will be fishery related issues. Fisheries are an extremely important industry for our country. People here are aware of the fact that EU’s fishery policy has not been successful, neither in protecting the stocks nor in bringing enough profitability to the industry. We believe that our fishery policy has led to a sustainable and profitable operation, which underpins the economic wellbeing of the nation. We must be able to secure that any option presented on this matter be in Iceland’s favour and not against it.

Regarding the currency regime, the policy of my party, the Social Democratic Party, is to adopt the euro once we have joined the European Union. I firmly believe that if we stick to a restrictive fiscal policy and are successful in increasing our value-added export, we can live with the Icelandic krona, but an international currency like the euro is more likely to bring much needed stability to our economy.”

With NIB, Iceland’s main energy production company Landsvirkjun is now constructing a new hydropower plant which will feed clean electricity to power-intensive industries on the island. The Búðarháls hydropower plant was the first major project on the island after the economic crash. How important is the renewable energy for Iceland’s revival?

“Very important. As we know, Iceland has abundant renewable energy potential, both hydro and geothermal. The power industry and the related energy-intensive industry forms one of the foundations of our economy. Very soon, for the first time in history, the parliament will pass a parliamentary resolution on the master plan for utilisation of hydro and geothermal power. This will allow us to make longer term planning on new power plants and thus produce goods with very low carbon footprint for the world market. We are very pleased with NIB’s support to the Búðarháls project and firmly believe that the Bank has made a good investment decision.”

Ms Harðardóttir shared her thoughts on the economic perspectives of the country in connection with the meeting of NIB’s Board of Governors, which she chaired in Reykjavik in at the end of March 2012.