Will Iceland Go Loonie?

Iceland is considering adopting the Canadian dollar as its official currency:

Will the loonie soon be flying high in … Iceland?

For months, Icelanders have been toying with the idea of ditching the tarnished krona, which has never fully recovered from the collapse of the financial system four years ago.

But one of the intriguing suggestions floating around the North Atlantic island is that instead of the adopting the euro — a natural fit given that Iceland has taken initial steps to join the European Union — it might cast a furtive eye to the Canadian loonie.

This is not as outlandish as it sounds. Canada’s banking system is something Iceland’s is not — sound — and the Canadian economy, with its mooring in much-desired natural resource wealth, is among the most stable and predictable in the advanced world.

Canada also does not have the massive overhang of sovereign debt that will trouble Europe or even the United States for years.

The euro would seem like a more natural choice but you can see why some Icelanders might be nervous about the euro right about now.

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Dave Schuler
About Dave Schuler
Over the years Dave Schuler has worked as a martial arts instructor, a handyman, a musician, a cook, and a translator. He's owned his own company for the last thirty years and has a post-graduate degree in his field. He comes from a family of politicians, teachers, and vaudeville entertainers. All-in-all a pretty good preparation for blogging. He has contributed to OTB since November 2006 but mostly writes at his own blog, The Glittering Eye, which he started in March 2004.

Comments

  1. Ben Wolf says:

    Adopting a foreign currency will be a major mistake, putting Iceland in a situation where it will eventually be unable to manage its debts or manipulate the strength of its currency to deal with trade imbalances.

  2. John Burgess says:

    @Ben Wolf: Given that Iceland is looking at Canadian currency, I think the risks you mention, while real, are very low. Now, if Canada suddenly sought to join the EU, all bets would be off.

  3. KariQ says:

    Granted, Canada is relatively stable, but abandoning your own currency and adopting another country’s is a hazardous undertaking for any country. I really hope they don’t go down that road; the potential negative consequences are far worse than the issues they are dealing with now.

  4. Ben Wolf says:

    @John Burgess: It’s not an issue of something going horribly wrong with the Canadian economy. Iceland is running a trade deficit. Using the Canadian currency, a currency it cannot create at need, means net financial assets (money) will gradually drain out of its economy as it trades currency for the goods and services it imports. This is identical to the scenario which put Greece in its current state and which nearly destroyed the Argentinian economy at the beginning of the 2000’s. Iceland will have to start borrowing to make up the financial leakage and eventually will not be able to service its debt burden.

  5. Richard Gardner says:

    First off, I lived in Iceland for 2 years over a decade ago (before the New Vikings wrecked economic havoc) so I do sort-of follow what is happening there. I can sort-of read the local papers (morning blather – the major daily Mogunblaðið – I have the codes still memorized for eth ð) – Icelandic isn’t the easiest language (28 forms of horse – hestur).

    This is a county of about 300K. My small city in the USA is 200K (my county is 1M). It really isn’t enough to support fish money (cough, Kronur – all the coins have fish on them, so called fish money by the non-Islenskur).

    Next, Iceland is NOT part of the EU. they are EFTA (ditto Norway and Switzerland). They pretend to be European. I’ve pissed off a few Icelanders calling them North Americans – but they are. Tectonic Plate puts 80% of the population in North America. Sorry Egilstaðir.

    Next, Iceland and Canada do have significant trading (as far as Iceland is concerned, insignificant to Canada). This isn’t Argentina/USA. But they have an issue with the USA as they refuse to admit that thy would all be herding sheep if it wasn’t for the former base at Keflavik.

    I love Iceland, but I call them a white tribe. But they have energy, energy, energy, either for Al and ferrosilicates, or export to Europe.

  6. Dave Anderson says:

    @Richard Garner — the problem with Iceland is not population size as other very small nations can float a currency. The problem of dollarization (US or Canadian) is that it gives up flexibility to an entity that a much smaller nation has no influence upon nor a synchronized economic cycle.

    The Canadian dollar is a dollar for two very seperate economies as it is. The first is resource extraction, specifically oil which is a big internationally trade-able commodity. And the second is the heavy industrial/commerce economy of the Great Lakes and St. Lawrence River Valley. Right now the oil exports is prompting a very high loonie, while the manufacturing and value-added commerce segments would do much better under a weak loonie. The Canadian central bank won’t care what the Icelandic tourist or fishing industry wants when it sets policy.