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Denmark, Iceland look again at euro as crisis takes its toll

Posted by smeddum on October 27, 2008

Denmark, Iceland look again at euro as crisis takes its toll
27 October 2008, 23:50 CET
(STOCKHOLM) – Denmark and Iceland, two of the four Nordic countries still outside the eurozone, have begun seriously debating swapping their currencies for the euro as they take a beating in the global financial crisis.

“The issue of Europe and the euro is directly linked to the crisis,” the head of Iceland’s Institute of Economic Studies, Gunnar Haraldsson, told AFP.

Norway and Sweden have been less affected by the financial turmoil and debate there has been muted, while Finland is the only Nordic country to be a member of the eurozone.

In Iceland, which along with Norway is also not a member of the European Union, some 72.5 percent of people are now in favour of adopting the euro, according to a poll published Monday in daily Frettabladid.

Iceland’s once booming financial sector has collapsed under the weight of the worldwide credit crunch, forcing the government to take control of the major banks.

Since January, its currency has nosedived 40 percent, sparking concern among Iceland’s 320,000 inhabitants about the safety of their savings and the economy.

“Icelanders are starting to have doubts about their krona. An increasing number think the only solution is to act with other countries and not in isolation,” Haraldsson said.

Iceland has never applied for EU membership but Haraldsson said the turnaround in public opinion could be permanent.

He noted that even fishermen, a vehemently anti-EU lobby, have softened their position with increasing calls for greater monetary stability.

In Denmark, the euro debate has resurfaced in recent weeks even though Prime Minister Anders Fogh Rasmussen has rejected the idea of a referendum any time soon.

Danes rejected the single currency in a vote in 2000.

Last week, the Danish central bank raised its key interest rates by a half-point to 5.50 percent to support the krone, which has come under fierce pressure as investors dump it in favour of bigger and safer currencies.

The EU country has a fixed exchange rate policy with the euro, which allows the krone to fluctuate 2.25 percent around the set level of 746.038 kroner for 100 euros.

Rasmussen recently acknowledged that his country “can see how detrimental it is to remain outside the eurozone during this crisis.”

At least one Danish eurosceptic opposition party, the Socialist People’s Party, has begun discussing the possibility of adopting the euro.

In Norway and Sweden, the euro debate has remained low-key. Their currencies have lost 9.2 percent and 7.0 percent respectively against the euro but economists note that weaker currencies also bring a welcome rise in exports.

Swedes rejected the euro in a 2003 referendum.

“I think to some extent there will be a more friendly euro environment after this sharp decline in the currency. It could be an issue in Sweden’s elections in 2010,” SEB bank chief economist Haakan Frisen said.

Sweden’s conservative Prime Minister Fredrik Reinfeldt has repeatedly said the euro is not on the agenda during his mandate, which ends in 2010, but has noted the current crisis could change Swedes’ opinion.

“When it’s good weather it’s not such a big deal to have a currency of your own,” he said, adding: “But when it’s a little bit unsafe out there it’s best to be inside a currency like the euro.”

Fredrik Langdal of the Swedish Institute for European Policy Studies said the debate remained muted in Sweden because the country had been relatively unscathed by the financial crisis.

But the question could rise to the fore next year when Sweden takes over the European Union presidency or if Denmark “decides to organise a referendum then it could put pressure on Sweden,” he said.

Meanwhile, oil-rich Norway remains an oddball in the European picture: when oil prices are high it needs high interest rates to prevent its economy from overheating, while other European countries generally need low interest rates.

This makes the euro and European monetary policy less suited for Norway, which has already rejected EU membership twice, in 1972 and 1994.

Text and Picture Copyright 2008 AFP. All other Copyright 2008 EUbusiness Ltd. All rights reserved. This material is intended solely for personal use. Any other reproduction, publication or redistribution of this material without the written agreement of the copyright owner is strictly forbidden and any breach of copyright will be considered actionable.

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