Ráðstefna um alþjóðavæðingu og gjaldmiðla
Ladies and gentlemen,
The fast-paced globalization has been highly beneficial for the Icelandic economy. Remarkable success of Icelandic firms, in banking, retailing, food processing, transportation and several other sectors, abroad is a living testament to that.
The success can be attributed to several interlinked conditions. In addition to the obvious entrepreneurial drive which characterizes Icelandic businesses, these conditions fall into two broad categories. Structural conditions, such as domestic skills, regulation and taxation, which have been relatively favorable to expanding firms and economic integration, through international and bilateral free-trade initiatives and most importantly our membership to the European Economic Area.
Our increased capability to do business across borders also introduces new challenges, that need to be addressed. A pressing one, and the one addressed here to day, is the future of small domestic currencies and the interlinked question of monetary policy.
Robert Mundell, the Nobel laureate and honorary professor at the University of Iceland, is rightly referred to as one of the fathers of the Euro. Dispite the fact that his optimal currency areas theory has been misinterpreted in the recent past and used as an argument against membership to the EMU. This is particularly ironic given the fact that Professor Mundell himself considers the world as a whole as an optimal currency area, and promotes a common world currency, the INTOR.
It is fair to say that the field of world politics is not ready for such a huge step, but there is definitely a strong support in favor of his view: that the world is in need of fewer national currencies than before.
The Icelandic krona is among the smallest currencies in the world. It is small in the sense that it is used by a small number of people in trade and a miniscule share of world assets are denominated in the Icelandic krona. It is therefore an important question to ask: if it should be maintained as an independent currency or if Iceland should join a larger monetary system. I believe that a reform in this respect is a logical consequence of globalization, and a necessity if Icelandic business is to continue to flourish abroad.
It is obvious that the most relevant alternative to the krona is the euro. About half of our trade in goods and services is in euro and this ratio is bound to rise when new member states adopt the euro. No other currency comes close in this comparison. As active members of the European single market it is the only consistent choice in the long term.
There are benefits and costs associated with adopting the Euro, that need to be analyzed in detail and discussed openly before any decision is made. This conference is not a small step that direction.
At this point the evidence is compelling, suggesting that the only viable means of adopting the Euro is to join the European Monetary Union, following full membership to the European Union.
Representatives of the European Central Bank have been very clear on the issue of a bilateral monetary agreement. It is not open for discussion. The precedence of bilateral agreements is irrelevant, as only microstates that previously used currencies that merged into the euro and countries recovering from a complete economic meltdown, like Montenegro and Kosovo, have been granted such status. Clearly Iceland does not fall into either category.
Most experts consider an unilateral adoption, in the form of dollarization or a currency board arrangement, an inferior option. Unilateral adoption is clearly an expensive method, requiring either substantial foreign reserves or a loss in the value of assets dominated in Icelandic krona. Iceland would also forfeit any seignorage income and domestic banks would be left without a fully functioning lender of last resort.
Such costs are probably much higher than any potential costs associated with EU membership. Moreover, the full benefits of Euro adoption, in terms of increased trade, investments and reductions in prices, are also to a large extent related to EU membership.
Whether to adopt the euro and if we should join the European Union, are two interlinked questions that we need to focus our attention to. There are still many issues to be raised and many questions to be answered before taking any definite steps. Still we should not waist time and prepare for the inevitable restructuring of our currency arrangements and monetary policy.
Today we are standing at a crossroad. Recent turmoil on international financial markets has given us still further evidence of the fact that a free floating krona is and will be a particularly volatile krona. At the same time, I believe that the room for open and debate about the long-term arrangements of our monetary policy has opened up considerably.
I particularly welcome this initiative, by the independent thing tank - RSE - and hope this promising conference will prove a valuable addition to the ongoing debate.