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“Icelandic Foreign Policy in a Changing World”

address by

His Excellency Mr. Geir H. Haarde,

Minister for Foreign Affairs of Iceland

Deutsche Gesellschaft für Auswärtige Politik

Berlin, 29.03.2006

Ladies and Gentlemen,

It is indeed a pleasure and great honour to be invited to speak here today at the Deutsche Gesellschaft für Auswärtige Politik.

Allow me to start with a few comments on the relationship between Iceland and Germany. Even if our formal political relations date back only a half century, they have deep roots.

Recorded contacts between Iceland and Germany reach back nearly a millennium. The first Icelandic bishop was consecrated in Bremen in 1056 and the earliest mention of Iceland as an identified nation is to be found in Adam of Bremen’s “History of the Church in Hamburg”. From that time onward, Germany has been a major source, and frequently the chief source, of central European influence in Iceland.

Indeed, the 16th century is, in Icelandic history books, referred to as the German century. The Hanseatic League was active in Iceland and brought with it new ideas from the continent. German products were then, as they are now, greatly appreciated in Iceland for their quality. Even German beer was more highly prized than Danish beer!

In the 19th century, with the development of national consciousness across Europe, Germany played a crucial role for Iceland, as it did for our neighbouring countries in Northern Europe. Even if most of our leading national pioneers of the time went to Denmark and the other Nordic countries, Germany was close at hand and remained a source of much influence. Our Romantics, writers and artists, came to Germany for inspiration. To no other country do we owe as much for the remarkable revival and flourishing of Icelandic music in the 20th century as to Germany. Many of our leading musicians were educated here and a number of German musicians and conductors moved to Iceland and made significant contributions to the establishment of a thriving musical scene there.

Since formal establishment of diplomatic relations in 1952, we have cooperated closely. Indeed, Germany is our second biggest trading partner today. Within the European context, be it on questions of our interests within the European Economic Area, where German help has at times been crucial, or in the field of European security and political cooperation within NATO, it has been reassuring for us to have such a close and understanding ally in Europe.

Ladies and Gentlemen,

Most world leaders are in agreement that today we face a greater range of threats and challenges, global and regional, than ever before. Terrorism, proliferation of weapons of mass destruction, cross-border crime, environmental degradation and energy security are issues which exercised world leaders at the UN Summit in New York last year.

These are issues which, by their nature, can have a major impact beyond the borders of any one country and must be addressed through international cooperation in multilateral fora. As Kofi Annan has stated, “In a world of interconnected threats and challenges, it is in each country’s self-interest that all of them are addressed effectively ... by broad, deep and sustained global cooperation.”

It is obvious that Iceland’s geographical position is not a protection against the wide range of threats and challenges facing the world today. Any nation, mine included, assessing its defence and security needs must see them in the light of the global and multifarious nature of current security challenges.

For this reason, Iceland’s long-term emphasis on cooperation in multilateral fora and on the importance of a strengthened and effective United Nations will continue. In this context let me add that, for the first time, Iceland is a candidate for a non-permanent seat at the United Nations Security Council for the period 2009-2010. Our arguments for the candidature are simple. Iceland is willing and ready to take on an active role and responsibility in contributing to solutions on the most pressing international issues. It is a fundamental element of the legitimacy of the UN that all nations, big and small, should serve their turn on the most important institutions.

But Mr. Chairman, while multilateral action to address threats at their roots is essential, it is also the solemn obligation of any government to make credible provision for the protection of its people.

In Iceland’s case, we have sought for nearly sixty years to ensure our security through defence arrangements with the USA and through membership of NATO.

Allow me to give a brief overview of our defence policy to date.

It emerged, following World War II, that the major security threat to Iceland came from an expansionist Soviet Union. Iceland became a founding member of NATO and through its geostrategic position in the Atlantic – midway between the Soviet Union and the United States – we provided the Alliance with a key strategic asset in the Keflavik base, guarding the air and sea lanes of communication across the North Atlantic.

Underpinning Iceland’s national security at this time was, on the one hand, our NATO membership and, on the other hand, the Defence Agreement with the United States dating from 1951. In this context it is important to underline the fact that Iceland has no military forces of its own.

Transformation and adjustment of postures have become buzzwords in the defence field. The United States has been reducing drastically its military presence in Europe (I am aware that this has in particularly been the case here in Germany!). Iceland is no exception – we have seen over a number of years considerable down-sizing of the US presence at the base in Keflavik.

The argument for the adjustment in the posture of forces has many merits – it is clear that resources are now needed in other parts of the world. The refocusing of much of NATO’s activity to deal with crises out of area which could nevertheless have major implications in area, is necessary.

But equally clear to us is that each country in the Alliance, Iceland included, must have credible defence, including sufficient air cover. We cannot accept – and we assumed our Allies would take the same view – that Iceland should be the only NATO ally without credible defences. Like in any other NATO country, Iceland’s territorial integrity and air space must be defended against the unknown.

Iceland has been conducting talks with the United States for some years now on the future of our defence relationship. The talks have to a large extent revolved around the question of how Iceland and the United States might share the costs of the airfield at the Keflavik base, with the aim of Iceland taking on a much larger share.

On March 15, the United States Government informed the Icelandic authorities of its decision to end the permanent presence of US fighter aircraft at the Keflavik base no later than by the end of September this year. After that date there will be no significant permanent US military presence in Iceland. The aircraft may in fact leave considerably earlier than September in order to allow support units to depart in time.

This unilateral decision was a great disappointment to the Government of Iceland, in particular since, in our view, we were in the middle of negotiations. Iceland had made concrete proposals that included a large contribution to the day-to-day costs of operating the Keflavik base through the assumption by Iceland of all costs related to operation and maintenance of the airfield at the base. Iceland thus stood ready to take over full responsibility and the financial burden of providing the US and our Allies with a major facility in the North Atlantic, and also search and rescue services to support US and allied forces in the area. These proposals on cost sharing were made in good faith in response to US requests and proposals and in an effort to facilitate the permanent stationing of US fighter aircraft at Keflavik and safeguard the Iceland-US defence relationship.

We have taken up the withdrawal of US forces with the Secretary General of NATO since a lack of credible defence in Iceland is inevitably also a NATO concern. A further concern, in particular to our neighbours, is the fact that with the fighters the SAR (Search and Rescue) helicopters will be removed, which affects security and safety in the North Atlantic. Iceland will therefore have to move much more quickly to acquire a SAR capacity than anticipated.

What has never in our view been in doubt is the central need for a credible defence capability. I am encouraged that our American friends have in recent days reaffirmed their determination to ensure Iceland’s defence although without a permanent presence of US fighter aircrafts. It remains to be seen whether and how this can be done in a credible and effective manner. Talks on this question between Icelandic and US officials will resume in Reykjavík next Friday.

Ladies and Gentleman,

In my remarks I have been focusing on Iceland’s security policy.

I would now like to turn to the considerable opportunities provided by globalisation and inform you of how Icelanders have been seeking to grasp these opportunities.

In less than two decades Iceland has developed rapidly from a narrowly resource based and heavily regulated economy to a diversified free market economy. Iceland has for a number of years had an annual economic growth of 5-6 per cent, with very low unemployment and in recent years energetic outward investment by Icelandic companies, principally in Northern Europe, but also in Eastern Europe and in Asia. Indeed, Icelandic companies now employ over 100 thousand people outside Iceland. This is a 25% increase over the course of one year and an impressive figure bearing in mind the Icelandic work force itself is only 165 thousand.

Several factors have contributed to this development, not least the policies pursued by the government of Iceland in recent years. In the past 15 years we have liberalised and deregulated with the aim of improving the environment in which economic entrepreneurs operate.

Gone are the days when the state owned the three largest banks in Iceland, ran a shipping company and even produced fertilizer and cement. The Government has also greatly reduced corporate taxes, which has attracted foreign investors, encouraged local investment and discouraged our companies from moving abroad. Lower taxes and the Government’s privatisation programme along with sound economic policies have created stable economic conditions for Icelandic – and foreign - businesses to operate in. Thus corporate tax was reduced from 50% in 1990 to 18% 2002.

And Icelanders are not only investing abroad. They are also investing at home, not least in the harnessing of the energy resources, both hydropower and geothermal power. International companies are also investing heavily in aluminium production in Iceland based on secure clean electricity at competitive prices. All this is now resulting in a sustained boom in the Icelandic economy with, as mentioned before, high annual growth rates. Although this has led to some market turbulence in Iceland recently, we are confident that we can maintain economic stability over the long term.

We have been able to reduce government debt radically bringing it from 52.3% of GDP in 1995 to 17.8% in 2005 and net government debt is less than 6%.

Another factor is Iceland’s pension system which is stronger than in most comparable countries. Already, at the beginning of the 1970s a private pension fund scheme was established, which is now more or less fully funded. A few years ago, similar changes were made to the public pension system and as a result this system will in due course also be fully funded. Increased freedom of choice, i.e. greater emphasis on voluntary pension savings, is also an important element. As a result, pension fund assets have grown dramatically as a percentage of GDP. Pension fund assets, foreign and domestic, are now equivalent to about 120% of GDP.

One of the main characteristics of the Icelandic labour market is unusually high employment participation across all age groups. The unemployment rate is for the time being below what the OECD estimates as a natural rate of unemployment, 2,75%. In fact we have for decades not experienced long term unemployment rate over 5%. Today nearly 85% of the population is active in the labour market while the corresponding rate in the EU is 63 to 65%. In the last 25 years participation by women has grown from 60 per cent to 76 per cent, which is the highest in the OECD.

Iceland has a relatively young labour force with the rate of child birth being higher than in the EU15 countries, except for Ireland. Child care is undoubtedly a major factor in encouraging families to have more children and in allowing women to participate fully in the labour market. In 2003 around 94% of children from 3 to 5 years old attended pre-primary schools and around 40% of newborns up to 2 years of age attended such schools.

Another contributing factor may be the generous nine-month maternity/paternity leave which was introduced in the year 2000. The novelty is that each parent has the right to a three month non-transferable leave with 80% of full pay. In addition, there are another three months that the parents can divide between themselves as they please. So far the experience has been extremely positive and 90 per cent of Icelandic fathers take advantage of their right to paternity leave. This has enabled parents to share from the beginning the responsibility of bringing up children.

The diversification in the Icelandic economy has to a large extent been driven by people with strong educational backgrounds. The Icelandic education system is a good preparation, but also important has been the large number of Icelanders studying at foreign universities, including German ones, bringing back know-how and contacts.

While the government has worked hard to ensure that the domestic economic environment is business friendly, it has also sought to make sure that Icelandic companies have operating conditions at least as good as their competitors in the international market.

We have highly successful companies in software, biotechnology, aviation and tourism, banking and financial services, in addition to the traditional fisheries industry. Furthermore in sectors including prosthetics and generic pharmaceuticals, as well as the retail sector.

The establishment of the European Economic Area in 1994 was a major step which we took together with the other EFTA countries at the time. The EEA provided access to the EU’s Internal Market with freedom of movement of goods, services, labour and capital in the whole area. In addition, we contribute generously with Norway and Liechtenstein to the solidarity funds for less developed parts of the EU. We consider the EEA to be a remarkable success and a durable arrangement.

With respect to the EU and EFTA, I know it is of some curiosity here in Germany, whether Iceland has plans to join the European Union. We follow developments within the EU very closely – after all the EU is by far our biggest trading partner, and some of our closest friends are members. We wish the EU well and want to see it succeed in its endeavours. Indeed, I would say that the EU is one of the major contributors to peace both in our region and world wide. However, there are no pressing reasons for Iceland to join the Union; indeed, there are certain matters, such as the EU’s common fisheries policy, which would make joining very problematic.

The very different nature of our economies would also present major obstacles. Economic fluctuations in Iceland do not follow the same cycle as those in the major economies of the euro zone. The rate of the euro and the interest rate policy of the European Central Bank reflect conditions in the major economies of the euro zone and not conditions as they are in Iceland. The Icelandic economy is frequently in a different phase to the major EU countries. Thus Iceland has completely different requirements in economic management than the larger countries of the euro zone, not least in matters of interest rates.

Ladies and Gentlemen,

Iceland, despite its geographical position between the European and American continents, does not see itself constrained by this geography. In recent years we have put much effort into concluding trade agreements with countries far from our back door. Our membership of EFTA, together with Liechtenstein, Norway and Switzerland has made us participants in a 14 country network of free trade agreements covering all continents. In recent years we have paid great attention to new markets in Asia. Thus Iceland recently opened an embassy in New Delhi with the aim of increasing trade with India – indeed, there are already highly successful Icelandic businesses operating on the Subcontinent. Earlier this month we began exploratory talks on the feasibility of a bilateral free trade agreement with China.

So as you can see Iceland is busy like all other countries, looking after her interests in a rapidly changing world.

Allow me in conclusion to thank the Deutsche Gesellschaft für Auswärtige Politik for the opportunity to come here and talk to you about Icelandic issues. I thank you for your attention. I will of course be happy to answer any questions you may have.