MINISTER FOR FOREIGN AFFAIRS - Check against delivery –

GEIR H. HAARDE

Opening address at the Sixth Consular Conference

Hotel Nordica, May 8 2006

Distinguished audience,

Ladies and gentlemen,

The Sixth Consular Conference in Iceland is now held with a record attendance. I welcome to this conference, from all the world’s continents, 165 consuls out of a total of 253 Icelandic honorary consuls. Six consuls have attended every consular conference from the first one held in 1971, when they were among the 85 honorary consuls then attending. Some of you are here for the first time in your life and others come here regularly. The longest serving consul present here, Mr. Naschitz of Tel Aviv has been consul for fifty years, which is remarkable when you consider the fact that the first Icelandic honorary consul was appointed in 1942.

The role of our honorary consuls, has not diminished with globalization. On the contrary, thanks to the information technology you have never been as well-informed about what happens in Iceland and thus better prepared for your roles. The media, the internet and printed information can, however, never give you the full picture. Nothing will ever replace getting to know the people behind the volume of statistics and information. You simply cannot create a real human bond with e-mails and streaming internet exclusively.

I am particularly glad to receive all of you and hope that you will enjoy and experience Iceland to the fullest during the next few days.

Ladies and Gentlemen,

Today I would like to discuss two subjects that I think will interest you. One is my favourite as former Finance Minister – i.e. developments in the Icelandic economy and the other topic is the new Foreign Minister’s most important issue – Iceland’s security and defence position.

So let’s start with the economic situation in Iceland. The Icelandic economy has recently become one of the most studied economies in the world. It has received attention in international media and among international investors and financial institutions as never before. This can be both good and bad and the Icelandic stock market and the currency have been through a bit turbulent times these past weeks. I myself like to look at the positive side and the opportunities that this unexpected international attention has created in terms of recognition of our “brand name”, better understanding of our particular economic circumstances and hence hopefully a better long-term business outlook for our companies.

But what is it that has caught the world’s attention – what has been the development? 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 average annual economic growth rate 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, North America 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 that the Icelandic work force itself is only 165 thousand. These successful companies are in various industries such as banking and financial services, software, biotechnology, aviation and tourism, prosthetics and generic pharmaceuticals as well as the retail business, in addition to the traditional fisheries industry.

But 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 and renewable energy at competitive prices. All this has led to a sustained boom in the Icelandic economy, which has resulted in an increase in the purchasing power of the average person by about 50% over a ten year period.

Several factors have contributed to this economic 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. The Government has also greatly reduced corporate taxes, from 50% in 1990 to 18% 2002 – which has attracted foreign investors, encouraged local investment and discouraged our companies from moving abroad - and most interestingly, increased the governments revenues from this particular source of income. Government debt has furthermore been reduced radically from about 52% of GDP in 1995 to less than 18% in 2005 and net debt is less than 6%. Lower taxes and the Government’s privatisation programme along with sound economic policies have created a solid groundwork for Icelandic – and foreign – businesses to operate in.

The flexibility of the economy, particularly in the labour market which is rigid in many other countries, is also very important and provides for quick adaptability to changes in the external environment or domestic imbalances.

Another important factor in our economic development is Iceland’s fully funded pension system, which is stronger than in most comparable countries. Pension fund assets have grown dramatically as a percentage of GDP and are now equivalent to about 120% of GDP.

Finally, I would like to mention the importance of our membership in the European Economic Area. The establishment of the EEA in 1994 was a major step which we took together with 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. We consider the EEA to be a remarkable success and a durable arrangement. 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. 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 highly problematic.

As I mentioned earlier, there has been much written about Iceland and our economic situation in the international media these past few weeks. Some reports have been positive and others have been quite critical – that’s life. The Icelandic economy is so small that such publicity has quick effects. Some of the reports have been factually inaccurate, conclusions based on unfounded assumptions and the uniqueness and strengths of Iceland have not been recognized. Reputation is a valuable asset and the task ahead is to inform those around us about Iceland and its economy.

Last week at a meeting in New York, the Iceland Chamber of Commerce presented a new report by Professors Fred Mishkin and Tryggvi Þór Herbertsson on Financial Stability in Iceland. In short, the Professors concluded that Iceland’s economic fundamentals are strong, and despite recent commentary there is no imminent threat to our economy or financial stability. Let me read to you a paragraph from their report.

“Iceland is unique in that it is the smallest economy in the world to have its own currency and a flexible exchange rate. It has experienced high current account deficits before, but rapid adjustment has taken place in the past without significantly stressing the Icelandic financial system. Iceland is also an advanced country with excellent institutions (low corruption, rule of law, high education, and freedom of the press). In addition, its financial regulation and supervision is considered to be of high quality. Iceland also has a strong fiscal position that is far superior to what is seen in the United States, Japan and Europe. Iceland’s financial sector has undergone a substantial liberalization, which was complete over a decade ago, and its banking sector has been transformed from one focused mainly on domestic markets to one providing financial intermediation services to the rest of the world, particularly Scandinavia and the UK.”

The authors then go on to conclude that while there certainly are some imbalances in Iceland’s economy, financial fragility is not a problem and the likelihood of a financial meltdown is low. They make four policy recommendations of an institutional nature, none of which imply a radical change of current policy.

I strongly recommend this report to all those interested in gaining a better understanding of the fundamentals of the Icelandic economy.

Ladies and Gentlemen,

Let me know turn your attention to Iceland’s defence policy. It is the solemn obligation of any government to make credible provision for the protection of its people both internally and externally. In Iceland’s case, we, for nearly sixty years, ensured our security through mutually beneficial defence arrangements with the USA and through our membership of the North Atlantic Alliance.

In the post Cold War era transformation and adjustment of postures have become the order of the day. The United States has been reducing drastically its military presence in Europe and Iceland is no exception – we have over a number of years seen considerable down-sizing of the US presence at the base in Keflavik.

The argument for the change or adjustment in the posture of forces has many merits – it is clear that resources are now needed in other parts of the world as traditional territorial threats in the North Atlantic have withered. The refocusing of much of NATO’s activity to deal with crises out of its geographical area which could nevertheless have major implications in area or worldwide, is necessary.

But it seems equally clear to us that every country in the Alliance, Iceland included, must have credible defences, including sufficient air cover. Like in any other NATO country, Iceland’s territorial integrity and air space must be defended against the unknown.

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 there will be no significant US military presence in Iceland. The aircrafts may in fact leave earlier in order to allow support units to depart in time.

This announcement was a great disappointment to the Government of Iceland, in particular since, in our view, we were in the middle of negotiations on cost-sharing. The United States have, however, reaffirmed their political commitment to the defence of Iceland on the basis of the 1951 Defence Agreement between the two countries. This will now have to be done without the permanent stationing of US forces in the country. The details of this, including a new defence plan for Iceland, remain to be worked out but talks are ongoing between the two governments and will hopefully come to a successful conclusion soon.

The economic consequences of the base closure will be small, but Iceland will now take over completely the operation of the airport at Keflavík as well as the search and rescue functions provided by the Americans.

Ladies and Gentlemen,

Let me add one more subject. As you know, Iceland is for the first time a candidate for a non-permanent seat on the UN Security Council for the period 2009-2010. Although elections are not until the autumn 2008, campaigning has started, as there are three contenders for two seats. Our competitors are Turkey and Austria.

We believe that Iceland has a strong claim to a seat on the Security Council. We have been members of the UN since 1946 but have never before sought a seat on the Council. There is a strong tradition that a Nordic country has a seat on the Council every other term. Our candidacy is Nordic and we have the active support of our colleagues in Denmark, Finland, Norway and Sweden in what will be a challenging campaign.

Our arguments are simple. Iceland is willing and ready to take on an active role and responsibility in contributing to solutions to 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 its most important institutions.

How is the campaign going? In terms of written promises we are already well on the way to the two thirds majority of 128 votes which will be needed in the General Assembly in 2008. But the votes will be cast secretly so we have no way of knowing in the end whether all promises were delivered, so there is much work to be done. Ambassador Sigríður Snævarr is coordinating this work. Your support, where practicable, would be appreciated, particularly in capitals where we have no embassy.

Dear friends,

Your work on behalf of Iceland is highly valued and appreciated. I have gotten to know several of you personally over the years and experienced the kind assistance you so often provide.

Let me thank you once again for your valuable service. I hope you will enjoy the conference and related activities.