More euro madness

So now Sjálfstæðisflokkurinn (the Independence Party to English speakers) have decided they want Iceland to adopt the euro after all… Not to join the European Union, at least not when they answered the questionnaire posed by the Reykjavík Grapevine (maybe they've changed their minds on that one as well…), but simply to decree that the euro will henceforth be the currency of Iceland.

The idea isn't a new one – indeed it dates from long before the current financial crisis. The response from the European Commission and the European Central Bank has been a consistent "no", most recently from Commissioner for Enlargement Olli Rehn in January 2009 and from ECB board member Jürgen Stark in February 2008. Before the kreppa, it was usually the bankers who were keen to adopt the euro, which makes it all the stranger that Sjálfstæðisflokkurinn should choose to put aside its traditional reticence just now, with less than a week to go until the parliamentary elections. Perhaps they think it will somehow make them sound "pro-European", or perhaps they just think it's more sensible than talking about adopting the Norwegian krona. It is more sensible than talking about adopting the Norwegian krona, but not by much.

How would this currency changeover come about? Well let's imagine that a Sjálfstæðisflokkurinn government were to decide to change the króna, not for the euro but for gold: one króna being worth a couple of thousandths of a gram of gold. It's not a silly as it sounds: it is the equivalent of the gold standard used by most major economies from 1946 to 1971. First the government buys enough gold to compensate the holders of all the króna banknotes in circulation, some 22 billion krónur. Then it simply insists on selling all Icelandic exports for gold – that would make the fish market in my native Grimsby a much more glamorous place! – and offers to pay for imports in gold. Not everyone would accept gold in return for sending goods to Iceland but, so long as imports were roughly equivalent to exports, the Central Bank of Iceland could sell some of the gold to buy dollars or euros or Thai bahts or whatever to pay for imports.

At first sight, it looks feasible to change the króna for another currency, based on that analysis. After all, the international reserves of the Central Bank of Iceland amount to some 383 billion krónur, more than enough to buy back all the krónur banknotes and still have plenty left over. But it ignores the fact that the "money" in circulation is much more than physical notes and coins, and, in the case of Iceland, not all of it is held by residents who can easily be subjected to exchange controls.

Accurate figures are hard to come by, but most estimates I've seen of the "glacier bond" problem put it at around 500 billion krónur. These are foreign investors who have lent money (in krónur) to the Icelandic government, the Íbúðalánasjóður (Housing Finance Fund) or the Central Bank of Iceland. They are being paid back in krónur when the bonds or certificates of deposits mature but, since last November, they cannot convert those krónur into foreign currencies, only reinvest the money within Iceland. If Iceland were to adopt the euro, these bonds and certificates of deposit would have to be repaid in euros, and the CBI simply doesn't have that much foreign currency at the moment.

No country has unilaterally adopted the euro in the way that Sjálfstæðisflokkurinn proposes. Several countries outside the EU use the euro as their currency, but this was because they didn't have their own currency when the euro was introduced. Take Andorra for an example: before 1999, it used both the French franc and the Spanish peseta. When those currencies were abolished in 1999, all Andorran assets and liabilities in France and in Spain were automatically converted into euros; when euro notes and coins were introduced in 2002, the French and Spanish notes and coins circulating in Andorra were exchanged for euros at the respective central banks. On the other hand, Andorran banks cannot turn to the European Central Bank if they get into difficulties, as Andorra is not a member of the EU or the eurozone.

Sjálfstæðisflokkurinn's idea is not just unworkable, it is sheer intellectual dishonesty. This party – whose membership is around 25% of the Icelandic electorate and which has been the most voted party for most of the last century – seems to believe that the nation belongs to them and that they have a god-given right to govern. I can only hope that ordinary Icelanders will take the opprotunity to send it to the outer reaches of the political wilderness next Saturday.

***UPDATE*** (Tuesday 21 April)

• NewsFrettir reports the comments of Professor Kristjan Vigfusson, saying that Sjálfstæðisflokkurinn's proposal is unrealistic.
• Economic Disaster Area reports that Sjálfstæðisflokkurinn is plastering Reykjavík with posters announcing their mad idea.

***UPDATE*** (Friday 24 April)

• J. Halldór in Morgunblaðið seems more optimistic about Sjálfstæðisflokkurinn with this cartoon. Only time will tell.