Centre for European Policy Studies,
Bruxelles, 31 May, 2005.

It gives me a great pleasure to speak to you here today. At the outset I want to thank the Centre for European Policy Studies for arranging this meeting and to give me the opportunity to talk about Iceland’s participation in the European integration.

I come to Brussels at this time with my fellow members of the Committee on Europe, as we have been entrusted with the task by our Government to make a study of Iceland's ties with the European Union.

This morning we had the pleasure of meeting with EU enlargement Commissioner Mr. Olli Rehn. His task is, as all of you know, to negotiate with those who want to become members of the Union.

Last April, when opinion polls indicated clear French rejection of the EU Constitution The Financial Times speculated that Reykjavik might provide the European Union with its much wanted Plan B, as Eurocrats were desperate for a strategy should France reject the constitution. The FT's idea was that we would present this plan to Mr. Rhen.

As we all know the French did reject the Constitution, so if we were here on a rescue mission, we should have brought a plan B to Mr. Rehn this morning. But as we are only on a fact finding tour and not seeking membership of the Union we are not going to interfere in its internal matters.

Iceland is one of the few European countries where there has never been a referendum on any European issue and when invited to address you here today, ladies and gentlemen, I considered it might be of value to you if I tried to answer two questions often put to us Icelanders here in Brussels: “Why is Iceland not a member of the European Union?” and “What prevents Iceland from applying for membership in the European Union?”

When The Financial Times speculated about our meeting with the Commissioner for enlargement it kindly said: "The affluent island wouldn't be a problem for the EU to absorb, particularly when compared with aspirants such as Albania and Bosnia. But would Reykjavik be ready to take the plunge? Maybe, if the island spells the end to the EU's constitutional headache, Brussels would make it an offer it couldn't refuse. Those Icelandic fish could be safe for a while yet."

Yes, it is of course about fish - but there is more to it as I intend to spell out – and trust me, we did not get any offer from Brussels this morning.

Iceland - basic facts.

First some basic facts:

Iceland is a volcanic island in the North Atlantic, about 100 thousand square kilometres in size, more than three times the size of Belgium.

Iceland controls 758 thousand square kilometres of the North Atlantic Ocean within its economic zone.

Iceland with only about 290 thousand inhabitants is the 11th largest fishing nation in the world, exporting nearly all its catch as domestic market is relatively small. In 2003 fish and other marine products accounted for 62% of merchandise export and 41% of total exports.

Iceland has extensive hydro and geothermal resources and is the only country in Western Europe that still has large-scale, competitively priced power remaining to be harnessed from such sources. 99,7 % of all electricity in Iceland is from renewable sources and less than one-quarter of the energy potential has been tapped, although electricity consumption per capita is the highest in the world.

GNI per capita amounted to 30.1 thousand USD in 2003, the seventh highest in the world, somewhat above the EU average. The unemployment rate is now 2.4%.

Life expectancy of Icelandic women is 83 years and 79 of men, and we speak our own language, Icelandic, which belongs to the Nordic group of Germanic languages.

In 2002, Iceland had 569 passengers’ cars per 1000 inhabitants, the third highest ratio within the OECD after USA and Australia.

In 2003 Iceland had the second-highest mobile telephone penetration in the world.

In 2003 81% of individuals in Iceland (at the age of 16-74 years) were Internet users, which was a higher level than any EU member state had and well above the EU average, which was 50%.

The Republic of Iceland was established in 1944, when full independence was gained from Denmark. Iceland has a parliamentary system of government with 63 members of parliament, the Althingi.

Governments are normally formed by a coalition of two or more political parties that have held majority in parliament. There are now five parties represented in the Althingi: The Independence Party (right of centre) with 23 seats; the Social Democratic Alliance (left of centre) with 20 seats; the Progressive Party (centre) with 12 seats, the Left-Green Movement with 5 seats and the Liberal Party with 3 seats. All the parties are represented in the Committee on Europe, present here today. Since 1995 there have been successive coalition governments of the Independence Party and the Progressive Party. The next general election is to be held in 2007.

Iceland belongs to the Nordic countries, is a member of the United Nations, IMF, World Bank, OECD, EBRD, WTO, EFTA, the European Economic Area and Schengen, Council of Europe and OSCE. Iceland was a founding member of NATO and has had a bilateral defence agreement with the United States since 1951.

Membership of EFTA.

For a long time, participation in European integration has been high on the political agenda in Iceland.

Just over forty years ago, the Government of Iceland faced the question of whether the country should become involved in the European integration process by applying for associate membership of the European Economic Community (EEC). These speculations were brought to an end in 1963, when President Charles de Gaulle of France refused to have Britain, one of Iceland’s most important trading partners, admitted to the community.

At that time, Iceland’s economy was so heavily dominated by the fishing industry that there was not felt to be any need to take part in international collaboration on free trade and economics. Iceland’s export trade was very restricted in variety, and protective tariffs were high.

During the 1960s various manufacturing industries began to flourish, and in the same decade Iceland started to exploit its electrical energy resources in the service of heavy industry, sited at an aluminium smelter in Iceland owned by Alusuisse. This was the first major investment by a multinational company in the country, the aim from Iceland’s point of view being to diversify the economy.

It was not until 1970 that Iceland joined the European Free Trade Association (EFTA). Membership of EFTA was Iceland's first step towards active and direct participation in European co-operation on free trade.

Icelandic industrialists were those who campaigned hardest to have Iceland join EFTA, and the accession agreement guaranteed them the means of adapting to a climate of free trade.

When we talk about Iceland’s attitude towards economic and trade collaboration with the other nations of Europe, it is important to bear in mind the different viewpoints held by leaders of the country’s manufacturing industries, on the one hand, and of its fishing and seafood-production industries, on the other.

Today, leaders of the manufacturing industries are still arguing, just as they did when Iceland joined EFTA that the country should go as far as it possibly can in joining in with the other nations of Europe, and become a member of the European Union.

In the fisheries sector, on the other hand, there is little support for this view. There, it is argued that membership of the European Union would not guarantee recognition of Iceland’s management of its own fisheries in the long term and the 200 mile economic zone would become a common European area.

Membership of the EEA.

The 1980s saw the European Economic Community (EEC) develop into the European Community (EC) and the emergence of the “four freedoms” in trade in the Single market. The European Union invited Iceland and other EFTA countries to cooperate more closely with it and take part in its single market, by establishing the European Economic Area, as it became necessary to bring trade relations between EFTA and the EC into line with these changes.

Membership of the EEA proved to be a deeply divisive issue in Iceland’s parliament, the Althingi. The opposition fought hard against the ratification of the EEA Agreement and used every weapon; including the argument that membership would constitute a violation of the Icelandic Constitution, which prohibited such a transfer of sovereign power to an international institution. The Government, on the other hand, based its case on an opinion given by legal experts that refuted these arguments. Apart from the EEA Agreement, no other issue has received more detailed or longer discussion in the history of the Althingi, which goes back nearly 1,100 years.

The political evaluation by the government parties, the Independence Party and the Social Democrats, was clear and straightforward: that Iceland could decide to join other EFTA states in applying for membership of the European Union. However, as there was no support in the Althingi for such a move, the government saw membership of the EEA as the most sensible option.

I am convinced that if we had set our sights on membership of the European Union at that sensitive time, the electorate would have rejected it and also membership of the EEA. This would have left Iceland in the same position as Switzerland, and would have made it necessary for us to seek a bilateral agreement with the European Union.

The EEA Agreement.

The EEA Agreement, establishing the European Economic Area, was signed in 1992 and entered into force in 1994.

Through the EEA Agreement Iceland has access to the extended Internal market of the European Union - and it should also be noted that we have opened up our market for all our European counterparts.

This agreement is unique as its institutional set up enables the European Economic Area to be governed by a common legal framework without compromising the decision making autonomy in the EU and without transferring any legal powers from national legislators in EEA EFTA States to supranational power.

The common legal framework in the European Economic Area is ensured as the contents of the EEA Agreement change in step with legislative developments within the European Union in the fields that it covers, yet without interfering with the foundation on which co-operation is based. Iceland contributes to the shaping of legislation in the European Union but has no voting rights in its institutions.

Further the EEA Agreement enables Iceland to participate in EU programmes and Agencies which are co-financed by EFTA States and the European Union.

During the time that I was Minister of Education, Science and Culture – a period of nearly seven years – I saw at first hand how important it is for Iceland to be involved in European networks in the fields of higher education, science and research. For a small and isolated island nation with its own language, it is invaluable to be under evaluation according to the highest European standards in the fields of science and research, and to have the opportunity to lead a variety of collaborative projects. The alternative – the isolation of universities or scientific institutions – is perhaps one of the greatest dangers that face us in an age of globalisation.

Iceland together with the EFTA States contributes more per capita than most EU Member States towards decreasing the economic and social disparities among the different regions of the European Union.

For Iceland, the key issue is that the EEA Agreement ensures us access to the Community’s single market without committing us to the Common Fisheries Policy, the Common Agricultural Policy, Common Commercial Policy or the Monetary Union. These elements are outside the EEA Agreement as well as the Common Foreign and Security Policy and matters relating to Home and Justice Affairs.

Political Considerations.

In time of global change Iceland has, like any other sovereign state, to redefine its goals and the means to achieve them.

Firstly, we already have an international agreement (the EEA Agreement) as the basis for broad and fruitful co-operation between Iceland and the European Union.

Secondly, it was clear when we entered into this agreement that it might apply only to Iceland and Liechtenstein. With the change in the political landscape in Europe after the collapse of the Soviet Union, our former EFTA countries Austria, Finland and Sweden joined the EU at about the same time that negotiations on the European Economic Area (EEA) were drawing to a close. The Norwegian government also intended to opt for EU membership but, for a second time, the Norwegian people rejected this in a referendum. Switzerland held a referendum in which EEA membership were offered. This offer was not accepted and consequently a membership of the EU was not considered a possibility either. Since then Switzerland, being an EFTA state, has made bilateral agreements with the EU.

Thirdly, Iceland participates in an extensive network of free trade agreements world wide by joining the other EFTA States, including Switzerland, as Iceland retains its treaty making powers in its trade relations with third countries since the EU Commercial Policy does not form part of the EEA Agreement.

Fourthly, Iceland has a bilateral defence agreement with the United States. This agreement is still in full force today and continues to play an important role for both nations. Thus, the country has been committed as part of a larger whole in the context of defence and security.

Fifthly Iceland participates in the Schengen cooperation on basis of special arrangements after the Schengen co-operation was taken over by the European Union.

My sixth and last point is that Iceland has turned its attention westwards across the Atlantic no less than eastwards when it comes to international collaboration. Although Iceland’s cultural roots lie in Europe, it has strong links with the explorers who struck out to the west - to Greenland, Canada and the United States. Iceland’s closest western neighbour, Greenland, is the only country to have left the European Union.

Evaluation.

Iceland’s experience of the EEA Agreement has been very positive.

The ten years that Iceland has been a member of the EEA have seen its economy and business sector grow and develop more vigorously than ever before. The EEA Agreement was one of many factors in this development as it opened up for new market possibilities and created new legal environment.

In recent years Iceland has enjoyed higher rates of economic growth than the EU member states – in 2004 economic growth was 5.2% in Iceland compared to 1.9% in the Euro zone – and as stated before with virtually non-existent unemployment whereas the average unemployment among young people in the EU is 20%, and only 40% of Europeans aged 55 to 65 have jobs.

The Icelandic economy is sound and the outlook is bright. The main challenges in economic management in Iceland are how to maintain balance and avoid inflation.

Icelandic companies are increasingly turning their attention to European markets, not least since Iceland’s financial market was liberalised with the privatisation and sale of the state-owned banks. While this applies to all sections of the economy, some of the most striking examples are the fishing industry, airline operations, banking, telecommunications services, pharmaceuticals production and retailing.

In 2003, a little over three-quarters of merchandise exports went to EEA member countries, which also were the source of 64% of imports.

The Government has actively encouraged foreign direct investment in power intensive industries; European companies have however reacted with very little interest. By contrast, large industrial concerns based in North America have reacted very positively and shown a great deal of interest in establishing a presence in the Icelandic business sector. The Canadian company Alcan is the largest manufacturing facility after it bought the aluminium smelter that was built by Alusuisse in the 1960s. A new aluminium smelter owned by the US Corporation Alcoa is to be built on the east coast of Iceland, in connection with a huge hydropower development, the Kárahnjúkar Power Plant. Smaller US investors are also involved in the expansion of their own aluminium smelter closer to Reykjavík in the southwest corner of the country.

The Committee on Europe.

Shortly before the general elections of 2003, Prime Minister Davíð Oddsson, voiced the idea of establishing an all-party committee to discuss Iceland’s position towards developments in Europe.

This idea was well received by the other party leaders, and on 14 July 2004 the Prime Minister appointed a Committee on Europe. Its task is to examine the implementation of the EEA Agreement, to see whether exemptions are granted in new accession agreements with the EU, and if so, what form these take, what membership of the EU would cost the Icelandic Treasury, both in the short and the long term, and what the pros and cons would be of adopting the Euro in Iceland. The committee was also entrusted with examining the effects of the EU constitution on Iceland’s situation, and discussing any other matters concerning Iceland’s relations with the EU that it considered would throw light on the country’s position with regard to European integration.

It is not up to this committee to propose that Iceland should remain outside the European Union or that it should join it. There may be differences of opinion on this important question within the committee, but they have not influenced our work, which is aimed at gathering the most reliable possible information on those aspects of European integration that must be examined when assessing Iceland’s future position and policy.

It was decided at the outset that some of the funding granted to the committee should be spent on researching and writing reports on particular topics that the committee thought necessary to examine in more detail. As of now we have only authorized one such study. This is due not least to the fact that many studies have already been made by the Government, by interest groups, by research institutes and by independent scholars of most of the issues and questions that call for attention when a task like this is carried out.

In short, it is safe to say that in the period of just over ten years since Iceland joined the EEA, a great deal has been done to examine whether or not this arrangement does adequately serve the country’s interests and whether or not membership of the EU would bring any added advantages.

Conclusions.

I have now spelled out the main features that have to be kept in mind when discussing Iceland and the European integration. It is now time to draw some conclusions.

The European Economic Area Agreement continues to serve its purpose, which is to ensure the EEA - EFTA States’ participation in the Internal Market.

The co-operation between the European Union and the EEA - EFTA States on the basis of the EEA Agreement is very positive and the agreement is functioning well.

The decision to remain outside the EU has not caused economic problems in Iceland.

Fisheries are still a major economic and trade factor for Iceland. At the same time as fish stocks in European Union waters have been depleted and the fishing fleet is dwindling under the Common Fisheries Policy Iceland has introduced a comprehensive fisheries management system based on individual transferable quotas without state grants or subsidies. The system ensures responsible use and sustainability of fish stocks without endangering the survival of Icelandic fishing and fish-processing industries. Massive over fishing as well as ineffective conservation and decision making has been avoided.

The fisheries sector in Iceland is a sustainable business sector. Several of the leading fisheries companies rank with the largest private companies in Iceland. Their fishing vessels are regarded as among the most modern and technically advanced in the world. By adapting to Union standards Icelandic fisheries and fishery policy would be seriously downgraded.

The Icelandic króna has recently risen in value; some people are of the opinion that it has risen too far, but the suggestion of adopting the Euro is meaningless unless it is coupled with a proposal to join the European Union. There would be no sense in Iceland’s adopting the Euro without at the same time becoming a member of the safety network based on the European Central Bank’s monetary policy. The economic challenges faced by Iceland are quite different from those of the rest of Europe, since policies there aim at stimulating the economy, whereas Iceland's problem is to try to prevent its overheating.

As Iceland has retained its treaty making powers in its trade relations with third countries we are participating in a wide ranging net of free trade agreements with partners world wide. In this respect membership of EFTA is important for Iceland. Of course the EFTA States might by some not be seen as attractive a partner as the EU when it boils down to trade figures, but let me nevertheless make two points in this context.

Firstly, all the EFTA´s free trade agreements contain a clause ensuring free trade in fish products which the EU Agreements generally do not. This is of great importance for Iceland as fish is by far our most important export commodity as I have mentioned before. Secondly, the decision making process in Iceland is fast and the country does not pose the same threat to potential trading partners as the sizeable EU does. This has enabled us for example to initiate a joint free trade feasibility study with China, which is as of yet neither ready to take up free trade talks with the EU nor our partners in EFTA. This would not have been possible for Iceland within the EU as our interests are better off not being compromised in a larger block.

The ideal behind European integration is based on a longing for peace in Europe and the brilliant solution of making the economies of the various countries, including old enemies, so closely intertwined as to eliminate the likelihood that conflict could ever again break out between them.

Naturally, Iceland supports all measures to secure peace, but this does not automatically mean accepting the view that the only way to do this is to join the European Union. As a North Atlantic country, Iceland is much more concerned with peace and security in the North Atlantic region, which is currently more the business of the United States of America than of the European Union. From the point of view of Iceland´s defence interests, membership of the EU could never replace the defence agreement with the US.

The EEA Agreement would have retained its value even if Norway had entered the European Union. At the time that the EEA Agreement was being negotiated, the Norwegian government was aiming at joining the EU, but the Norwegian people rejected this idea when it was put to a referendum. The volume of administrative procedures would have been cut if Norway had left EFTA, but the EEA agreement would still have guaranteed Iceland and Liechtenstein access to the European Economic Area.

Democratic deficit is a term intended to describe how remote the decisions taken in the European Union have become from the ordinary citizen. Decisions are taken by bureaucrats on behalf of the Commission here in Brussels without the involvement of elected representatives.

The EEA Agreement does not guarantee Iceland the right to vote when political decisions are taken within the EU. There is no disputing this point. On the other hand, it is a matter of opinion how much this really matters, in the last analysis, when membership obligations are compared with the influence that Iceland could as a member in reality exert in the EU’s specialist committees, bureaucratic and political structure and consultative forums involving bureaucrats, politicians, parliamentarians and ministers.

It has been maintained by some of those in favour of Iceland joining the Union that as we are bound by the EEA agreement to implement about 80% of the aquis communitaire without any direct political influence on its substance we would be much better off as a member state. The problem with this argument is that in the ten years since the EEA Agreement entered into force only 6.5% of the total aquis communitaire has been established as being EEA relevant. In the same period amendments to Icelandic law were required in the case of 101 incorporated acts.

In the Icelandic debate it is sometimes said that the politicians, diplomats and bureaucrats who have the most contact with the EU’s institutions quickly come to adopt the view that Iceland should join the Union. The political and institutional magnetism of Brussels is said to be so strong that it is difficult to resist its attraction. While I do not underestimate the power of this attraction, I believe that without other incentives as well, we are unlikely to see a broad consensus develop in favour of Icelandic membership of the EU.

We Icelanders have many decades of experience during the Cold War of how deep-seated dissension on a cornerstone of foreign policy can be a difficult burden on all political activity in the country. It could not be the aim of responsible politicians to unleash such dissension unless clear and overriding national interests were involved.

To my mind, there are no overriding interests in favour of joining the European Union currently at stake. Membership is not on the agenda of any of the Icelandic political parties. Of course, circumstances may change, in which case it will be up to politicians to make the appropriate response, with the interests of their nation as their guiding principle.

All the Icelandic political parties are in agreement that if it comes to answering the question of whether or not Iceland should join the European Union, the issue would be put to the nation in a special referendum, in addition to which it would be necessary to amend the Constitution to remove all doubts about the legality of an assignment of power to an international institution.

As Minister of Justice, I take part in meetings of the ministers of the Schengen member states. This is the only forum where an Icelandic minister works on a regular basis with his colleagues from EU member states, and referring to this experience I do not believe it is of crucial importance for Icelandic interests to join the EU in order to have political influence. I believe it is of just as much value, if not of greater value, to have the EEA Agreement as a basis for co-operation between a small state and the European Union.

Ladies and gentlemen,

I have come to the end of my lecture. I hope I have been able to give you a better picture of the Icelandic position.

In the wake of the French no-vote a critical debate has started on what is going on in the European Union. Our experience proofs that European co-operation can be beneficial without joining the European Union – we see it as Plan B. We should not forget, that being pro-European is not the same thing as supporting the European Union, the European Commission and courts.

We Icelanders are most certainly pro-European. We want close cooperation with all those who adhere to the high European ideals of prosperity, peace and freedom. We follow those aims but have for ourselves chosen a route outside the European Union – a pragmatic one but not only because of the fish! We take this route as it is beneficial for us and without harm to anyone else.