MINISTER FOR FOREIGN AFFAIRS - Check against delivery -

GEIR H. HAARDE

The EEA Agreement: Taking stock and looking to the future

Reykjavík, March 31, 2006

Ladies and Gentlemen,

Although Iceland has opted to be outside the European Union, Icelanders have strong economic and political interests in Europe. We need, therefore, to maintain close relations with the EU and all its member countries.

There is, however, no compelling reason for Iceland to join the EU while there are strong arguments against seeking membership and Iceland has been doing really well economically outside the Union.

One reason for that success is our participation in the European Economic Area. It has met our expectations and will continue to serve us well as the foundation for Iceland´s relations with the EU.

It is therefore a great pleasure for me to have the opportunity - at such a distinguished gathering as we have here today - to take stock of the EEA from an Icelandic perspective and look to the future.

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Formalized trade relations between the EFTA States and the European Community began in the early 1970´s with the conclusion of bilateral free trade agreements. In the 1980’s, the Community began to lay down the foundation of the internal market which envisaged the removal of all barriers to trade in goods and services and the free movement of capital and labour.

This led to the offer by the then president of the Commission, Jacques Delors, to further enhance and institutionalise the good relations between the EU and the EFTA States by extending the internal market to the latter and creating what Delors referred to as a “European Economic Space”.

What Delors envisaged was that the European Community and EFTA could share this new economic space – which was later named the European Economic Area – although the EFTA countries would remain outside the Community.

One reason for the invitation was that, apart from Iceland and Norway, the EFTA countries were essentially prevented from joining the Community by their policies of neutrality.

After the Cold War, however, it became possible for Austria, Finland and Sweden to become members of the Community. Along with Norway, they decided in 1992 to aim for membership, while Iceland decided that the EEA Agreement was sufficient to meet its needs and aspirations.

The key issue for us was to gain access to the single market and enjoy the benefits of the four freedoms. The EEA grants Iceland participation in those fields of European integration which are most important to us, while other elements of it, which do not affect our interests or go against them, remain outside the terms of the Agreement.

Admittedly the EEA does not provide full access to political decision-making within the EU on matters relevant to the Agreement, but that was never on the agenda anyway. The EEA was, of course, not intended to be the equivalent of membership of the European Union. It is basically what Iceland wanted and negotiated back in the early 1990s. Nothing more, nothing less.

And yet advocates of EU membership for Iceland have time and again pointed to the natural difference between us and EU members when it comes to decision making and called it a major shortcoming. They have also put forward claims about other socalled weaknesses in the EEA Agreement. These have mostly centred on what are essentially technical issues. The argument being made is that because the EEA is so weak, Iceland must join the EU. To my knowledge, no one has ever managed to point out the damage that the alleged weaknesses have caused to any important Icelandic interest.

Of course problems come up, but that is to be expected in the implementation of such a wide ranging and complex phenomenon as the EEA Agreement. And yet disagreements have been relatively few and not related to the fundamental interests guarded by the Agreeement.

Although the possibilities of the EEA/EFTA countries to fully influence the content of all the aquis are understandably not perfect, we must remember that most of the time there is no disagreement between the two sides. That is partly due to the technical nature of by far the greatest majority of the issues being dealt with, but it is also and simply due to the fact that the interests and views of the EU countries in the matters covered by the EEA are usually identical to those of the EFTA countries.

When really difficult problems have arisen, the strength of the EEA and its political foundation have become apparent. I have in mind the dispute in 2003 over the Cohesion Fund. The Commission demanded that after the enlargement of the EU to include Central and Eastern European countries, the EEA/EFTA states accepted a manifold increase in the contribution to the Cohesion Fund.

The ensuing dispute was settled after the Commission conceded most of its original demands. It appeared that they did not enjoy the support of the Member States of the EU which in turn demonstrates that good political will exists within it to maintain a smooth and effective implementation of the EEA.

Ladies and gentlemen,

When Iceland, back in the early 1990s, opted for the EEA as a long term basis for its relations with the Union, it was because EU membership presented serious problems. The single most important argument made against joining related to the Common Fisheries Policy. The disadvantages of membership were generally considered so obvious that the decision to stay outside the EU hardly caused any political controversy here at that time although membership in the EEA was a major bone of political contention back in 1992 and ‘93. So, by the way, was EFTA membership in 1970. Today the EEA is not a politically contested issue in this country. Membership in the EU is not and has never really been a serious issue in the political debate in Iceland. Some people seem to think, however, that it might be possible to put negotiations with the EU “to the test”, as it is frased, meaning that we should ask for membership negotiations just to see what the outcome might be. One assumption behind this way of thinking is that Iceland would be able to obtain permanent exemptions, in particular from the Common Fisheries Policy. This is simply not correct.

To begin with, the main principle in accession negotiations with the EU is that permanent exemptions are not granted from its policies. The basic rule of the Common Fisheries Policy is that major fisheries management decisions are made not by member countries but by EU institutions. Should Iceland join the EU, regulatory powers in the field of fisheries move irretrievably to Brussels. Even if the fisheries commissioner would be an Icelandic national he or she would be bound by the principles of the common policy.

This whole idea is obviously unacceptable to Iceland.

In membership negotiations with Iceland, the EU would most likely make demands for access to Icelandic waters for fishing vessels from Member States. The principle of freedom of establishment could easily lead to the so called “quota hopping” problem, which would give EU fishing companies access through the back door to Icelandic waters.

The problem is not merely that key decisions would be transferred to Brussels, nor that other EU countries’ fleets would enter our waters aided by the phenomenon of “quota hopping”. 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, however, has no alternative but to operate its fisheries as a sustainable business sector.

A further consequence of membership would - due to a number of factors, including our standard of living and high national income - be that Icelanders would pay many billions of krónur more into the EU´s coffers than they would receive.

There are those who say that the Icelandic public would still gain as the price of food would go down should Iceland enter the EU. But we need not join for such purpose - and pay as a consequence huge amounts of money into EU funds - since we obviously have our own means, if we so choose, to reduce taxes, tariffs and other protective import restrictions on various agricultural products. That will in any case most probably happen through WTO arrangements.

It is also maintained that the admittedly high interest rates here would go down with membership of the EU and the Euro. There is, of course, no question that a small economy has to pay a certain price for keeping an independent currency. Interest rates have always 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 little unemployment.

If Iceland were a member of the eurozone, the interest rate here would almost inevitably be contrary to the requirements of our monetary policy. We have had strong economic growth for many years and we have needed to respond to inflationary pressures in the economy by raising interest rates. It is indeed unlikely, to say the least, that economic growth would be stymied in Germany, for instance, in order to keep the spectre of inflation at bay in Iceland.

Iceland´s exports of goods are not particularly diversified and are still dominated by fisheries products. This structural characteristic of our economy would make monetary union particularly risky. The exchange rate of the euro would obviously never be influenced by what might be happening in the Icelandic economy. It is, of course, too small for that.

We would face severe problems if, for example, our fisheries sector underwent a downswing at the same time as an economic upswing was taking place in the bigger countries in Europe. The euro would strengthen at the same time as the Icelandic economy was weakening and in need of a weaker, not stronger, currency. It is not difficult to imagine the consequences of such a scenario for us.

More problems would thus be created than solved. The challenge for us is to keep our own economic affairs in order rather than look for panaceas within the EU. If we succeed in that, economic stability will be ensured.

Ladies and Gentlemen,

A major challenge facing Iceland as other countries is how to take advantage of the opportunities presented by globalisation. And here the EEA makes a most valuable contribution, although it is often over-looked.

The EEA is a free trade area while the EU is a customs union. One of the defining characteristics of free trade areas is that they do not entail any common policies towards third countries. In this respect, the EEA Agreement is no different from other Free Trade Agreements and the EFTA States are therefore not bound by the EU´s Common External Trade Policy. Contracting Parties to the EEA are therefore allowed to carry out their external trade relations with third countries in any way they choose.

The EFTA States have taken advantage of this external diversity of the EEA. Together they have made EFTA the focal point of their external trade policy. It is however not EFTA as an institution that negotiates with third countries – but the members themselves collectively. This makes participation in EFTA different from the Membership of the EU, where the common institutions formulate trade policy, but not the Member States.

The EFTA States are currently only four, compared to 25 EU Member States, which has also allowed EFTA still further flexibility in its relations with third countries. This has been one of the key reasons for the success of EFTA’s policy towards third countries and has allowed it to create an extensive network of trade relations.

At present the network consists of fourteen free trade agreements and seven Declarations on co-operation. Several more agreements are currently under negotiations.

Moreover, Iceland has recently launched a study with China into the feasibility of negotiating a free trade agreement between the two countries. On this point it is worth noting that Iceland is in fact the first European country that China has approached in this manner – and that would have been unthinkable if Iceland were a member of the EU.

In addition to negotiating trade agreements, the Government must 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 tax cuts that have been 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. Icelandic membership of the EU would diminish this quality and reduce its ability to respond quickly when the need arises.

Ladies and gentlemen,

The EFTA States which are parties to the EEA Agreement – that is Iceland, Liechtenstein and Norway - have in many ways different interests, but they have one common goal in Europe and that is to be a party to the internal market.

The EEA Agreement remains at the core an internal market agreement. It has provided the EEA/EFTA states with the ability to meet their aspiration to participate in European economic integration to our advantage - while remaining outside the EU - and provided flexibility to pursue our interest in other markets in a way that best fits our interest.

Let me end by thanking the organisers of this conference which I am sure will turn out to be most interesting and useful. It is an honour to have eminent legal scholars and practitioners on various legal topics of relevance to the EEA come to Reykjavik to discuss the Agreement which is of such importance to Icelanders and so much a part of our daily life.

Thank you