Outside the EU: The Case of Iceland
Speech by the Prime Minister of Iceland, Davíð Oddsson,
at Linacre College, University of Oxford
27 April 2004

It is a great pleasure and a very informative experience for me to visit the University of Oxford, one of the leading educational establishments in the world, past and present. It is also a great honour for me to address you here and have the opportunity to discuss Icelandic issues and viewpoints.

This year marks the centenary of Home Rule in Iceland and the appointment of Iceland’s first Prime Minister. With Home Rule, the focus of Icelandic politics returned to the country after the centre of government had been abroad for almost 700 years, first in Norway and later in Denmark. In 1918, Iceland became a free sovereign state under the Danish crown.

Its newly acquired political freedom unleashed great progress in most fields of Icelandic society. In the space of a few decades Iceland broke out of poverty towards prosperity. Today, this nation with its population of just under three hundred thousand enjoys one of the highest living standards in the world. This progress was built on fisheries, which are still one of the pillars of the economy, although it is much more diversified today.

The central policy of Icelandic governments, ever since the nation gained full independence from Denmark and the Republic of Iceland was established in 1944, has been to play an active part in international cooperation. Besides its membership of the United Nations, NATO, Nordic cooperation and the European Free Trade Association, EFTA, Iceland is an active participant in many international organisations. One measure of our ambition in this regard is that Iceland is seeking election to the UN Security Council for the term 2009-2010.

However, Iceland has not sought after membership of the European Union. This may seem strange, given how eager most European countries have been to join the EU, and even stranger still given that the EU is by far the largest market for Icelandic exports, and that virtually all our neighbours and allies in Europe belong to the Community.

Nonetheless, there is no compelling reason for Iceland to join the EU and a number of strong reasons for remaining outside it. And the fact of the matter is that we are performing very well outside the EU.

I should underline from the start that although Iceland has opted to remain outside the EU and geologically speaking lies on the boundary between Europe and America, the Icelanders regard themselves as an entirely European nation. This is logical in the light of our history and culture. And on account of our strong economic and political interests in Europe, we naturally need to cultivate very carefully our relations with the continent, and engage in close contact with the EU.

When I took over as Prime Minister of Iceland in 1991, negotiations were pending with the EU on the European Economic Area Agreement. This came about when the European Union invited the EFTA countries to cooperate more closely with it and take part in its single market. The reason for this offer was that, apart from Iceland and Norway, the EFTA countries were prevented from joining the EU by their policies of neutrality. After the Cold War a window opened for the neutral EFTA countries – Austria, Finland and Sweden – to become members of the EU. Along with Norway, they decided in 1992 to aim for membership, while Iceland decided to allow the EEA Agreement to suffice. Norway later rejected EU membership in a referendum. Thus there are now three EFTA countries in the European Economic Area, namely Iceland, Liechtenstein and Norway, while Switzerland, a member of EFTA, opted to remain outside the EEA.

For Iceland, the key issue is that the EEA Agreement ensures us access to the Community’s single market. Admittedly it does not give us full access to political decision-making within the EU, but that was never on the agenda anyway. On the other hand Iceland did not need to accept any aspects of Union policy that it did not want. Thus the EEA Agreement grants access to the areas of European cooperation that are most interesting for Iceland, while other elements of it, which do not affect Icelandic interests or are directly opposed to them, remain outside the terms of the Agreement.

Of those elements directly opposed to our interests, the first to mention is the EU’s Common Fisheries Policy. The basic principle that major fisheries policy decisions are made not by member countries but by EU institutions is unacceptable for Iceland in all respects. From a historical perspective it would be peculiar, to say the least, to give up jurisdiction over the fishing grounds around Iceland less than thirty years after achieving final victory in the Cod Wars against our neighbours and good friends here in Britain. In fact, I understand that many in Grimsby and Hull believe that British fisheries have come off worse from their dealings with the EU and its fisheries policy than they ever did from the Cod Wars with us.

The basic principle in membership negotiations with the EU is that permanent exemptions are never granted from Community policies. Of course the Common Fisheries Policy is no exception. The problem is not merely that key decisions would be transferred to Brussels, nor that other EU countries’ fleets would enter Icelandic waters through the back door by so called “quota hopping”, which has presented a particular problem to British fishermen. Just as important is the fact that the entire operating environment for fisheries within the EU is completely different from that in Iceland. In the EU, fisheries are largely regarded as a branch of regional development. Iceland has no alternative but to operate its fisheries as a sustainable business sector.

Another disadvantage of membership is connected with monetary union. The fact that our exports of goods are not particularly diversified – and still dominated by fisheries products – would make monetary union an enormous risk for us. The exchange rate of the euro would obviously never be influenced by what might be happening in Iceland, even if we belonged to the EU. Our economy is simply too small for that. We would face unbearable and irresolvable problems if, for example, our fisheries sector underwent a downswing at the same time as an upswing was taking place in Germany and France. The common currency would be strengthening then, at the same time as Icelandic industry was weakening, which would deliver serious shocks to our economy. There is no question that a small economy has to pay a certain price for keeping an independent currency – interest rates have been higher in Iceland than in most of the EU, for example. But Iceland has also experienced stronger economic growth than most EU countries, with very low unemployment. In part this explains the interest rate differential between Iceland and the EU. The differential is smaller compared with EU countries that have been experiencing robust growth, such as here in the UK.

A further noteworthy disadvantage of EU membership is that Iceland would probably need to make one of the highest per capita contributions to EU common funds, on account of its very high national income. It is equally certain that Iceland would pay much more to the EU than it would receive in return.

The fact that no political party in Iceland has put EU membership on its policy agenda speaks volumes about the disadvantages of membership for us. They are obvious, as numerous reports written in Iceland have confirmed. Nonetheless, some of my countrymen advocate EU membership, and one party considers that negotiations with the EU should be “put to the test”, as they call it. This implies that permanent exemptions can be obtained, in particular from the Common Fisheries Policy, which is simply not correct.

Because of the weakness of their own arguments, advocates of EU membership often put forward claims about weaknesses in the EEA Agreement, which are supposed to show that we must join the EU, but prove to be very thin on closer examination. These mostly either centre on technical issues or complain about Iceland not having representatives on certain committees and therefore lacking influence. No one has ever managed to point out the damage that this lack of influence has caused to Iceland’s economic interests.

Iceland’s experience of the EEA Agreement has been positive and the decision to remain outside the EU has not caused economic problems of any kind. On the contrary, Iceland has sustained impressive GDP growth ever since 1995, with the sole exception of 2002. Growth was around 4% last year and is forecast at around 4% or more over the next few years. Such growth figures leave no doubt about how difficult it would be for Iceland to take part in European Monetary Union. In recent years the Central Bank of Iceland’s main task has been to ensure that the economy does not overheat, as reflected in its interest rate policy. At the same time, the European Central Bank’s key interest rates have been set with the aim of reviving the continental economies, especially those of Germany and France. Of course the bank’s interest rate policy should be tailored to the largest economies in the monetary union, and not the smallest ones. For example, euro interest rates would never be raised in order to prevent inflation in Iceland, at the expense of economic growth in Germany.

Successful economic policies are based on a productive fiscal and monetary policy mix. In recent years the Icelandic Treasury has strengthened its position substantially. Central government debt was equivalent to more than 50% of GDP in 1995, but has now been brought down to 15%. This is a very gratifying turnaround. It is interesting to note that this good fiscal result has been achieved at the same time as taxes have been cut. Corporate income tax was 50% at the beginning of the nineteen-nineties but has now been brought down to 18%. As it happens, this tax now yields much more revenue for the Treasury after it was reduced, which is a good illustration of the way that excessive taxation stifles the economy.

During the current Icelandic Government’s term of office, personal income tax will be cut by four percentage points, inheritance tax, which could sometimes amount to as much as 45%, has been cut and will henceforth never be higher than 5%, and value-added tax will also be lowered. An income tax surcharge on the highest incomes, which was 7% at its highest, will moreover be removed during the current term. These tax reductions will doubtless boost the Icelandic economy in the years to come. The more income that is left at the disposal of those who earn it, the more diverse and energetic our whole society will be.

The planned tax cuts will also boost real wages significantly in the years to come. As it happens, real wages have already grown vigorously in recent years. Since 1995 real wages have gone up by 30%, which shows that economic growth has been quickly and definitely passed on to the general public. It is also gratifying to note that real wages have grown fastest among the lowest-income groups. In my opinion, the increase in real wages has made people more aware of the importance of robust economic growth, low inflation and moderate taxation. Over the period from 1980 to 1990, real wages grew by only just over 4%, compared with 30% in recent years, so there is clearly a lot to gain from the Government managing to continue on the course it has set.

The economic climate in Iceland is favourable at the moment. Foreign investment has increased sharply, taxes have been reduced, fish stocks are growing, the Treasury is in balance and the country’s pension funds are strong. Of course there are always various challenges to be faced. Iceland has not become the first country in the world to have no problems. Far from it. But I believe that great opportunities are on the horizon for Iceland, above all because we have managed to lay the foundation for dynamic economic growth and strengthen our social infrastructure significantly. Spending on education and the health service has been increased by several tens of percent in recent years and Iceland now ranks among the leading countries in terms of expenditure in these areas.

One of the main challenges facing Iceland in the next few years will be how we take advantage of the opportunities presented by globalisation. Icelandic businesses and individuals have growing opportunities to operate and work outside Iceland. Thus we need to ensure that Iceland remains an attractive environment for companies and individuals to conduct their business in. Low taxes are an important factor in this respect, and the tax cuts that Iceland has made in recent years have undoubtedly strengthened the country’s competitive position in the global marketplace. But our greatest strength lies in our high level of education and a labour force that is well equipped to tackle the changes brought about by greater technology and globalisation. The chief advantage of a small economy in the global context is its flexibility and responsiveness. I am convinced that Icelandic membership of the EU would diminish this quality and reduce its ability to respond quickly when the need arises.

The importance of the EU for Icelandic business makes smooth relations with the Community vital. The EEA Agreement fulfils the hopes vested in it when it was negotiated and secures Iceland’s core interests in its dealings with the EU, without the disadvantages that membership would entail for us. It should be noted here that Icelandic advocates of EU membership claim that, if Norway joins the EU, it will be beyond the scope of Iceland and Liechtenstein to maintain the EEA Agreement for their part. However, when the EEA Agreement was made, it was clear that our partners in Austria, Finland, Sweden and Norway would leave EFTA for the EU. Norway in fact withdrew its application for membership in 1994, the year that the EEA Agreement entered into force, while the other three joined the Community. If such a situation arises that Iceland and Liechtenstein are the only ones left on the EFTA side, the EU is unlikely to have any major worries about the integrity of the implementation of the EEA by two small non-members.

Ladies and Gentlemen

Although Iceland is not on its way into the EU, we are a European nation in the finest sense of the term and have much in common with the rest of the continent. We are profoundly aware that the European Union has its roots in the tragic history that the continent experienced in the twentieth century and the Union is based on a noble ideal of lasting peace in Europe. Close cooperation among its member states has in this respect proved successful and brought them benefits. The enlargement of the EU into Eastern Europe is a key factor for peace and stability in the continent.

This does not alter the fact that the EU does not guarantee the military security of its members, nor will it do so for the foreseeable future. Iceland has no armed forces of its own; participation in NATO, and a defence agreement with the United States that has been in effect since 1951, have been the cornerstones of our defence and security policy.

In the post-Cold War era, NATO has continued to be crucial, despite the collapse of communism. The disputes about the invasion of Iraq were a serious setback for the Alliance but hopefully it will once again be shown that the transatlantic link is built on fundamental common interests and remains indispensable.

Iceland supported the invasion of Iraq last year. This decision was founded on the Government’s steadfast conviction that Saddam Hussein’s regime was a threat to peace and security. For more than a decade Iraq had flouted UN resolutions and demands for disarmament. This was impossible to accept, and so was the risk that the dictatorship might build up strength until it became even more dangerous than before. The invasion of Iraq prevented that. And notwithstanding disputes over the legality of the war, there is no doubt that a serious threat to stability in that region has been removed. Work is now in progress on rebuilding the country and to try to establish a democracy. Such a policy must surely have the wholehearted support of everyone who desires peace in the Middle East.

To conclude, I would like to thank the Vice Chancellor for inviting me to visit the University of Oxford. I look forward to finding out even more about the university’s activities, having this afternoon already paid a visit to the English Faculty accompanied by Dr. Heather O’Donoghue, University Reader in Ancient Icelandic Literature, to see the collection of Icelandic literature and to meet with her students.

It is a great pleasure for me to announce the decision by the Government of Iceland to donate 25,000 pounds for use in Icelandic studies here at Oxford University. I would like to ask the Vice Chancellor to accept this grant, which I hope will strengthen even further the links between Oxford University and Iceland, and your students’ interest in ancient Icelandic literature.