With its economy in tatters, Iceland could become the next country to join the European Union.
Iceland’s decision to join the EU is mostly influenced by the devastating economical effect of its liquidity crisis that hit the nation last October. Within just a few months of the crisis, Iceland’s public debt surged to 8 times the size of the country’s gross domestic product (GDP).
“That is the most historic vote in our parliament since the founding of the republic,” said Johanna Sigurdardottir, the prime minister of Iceland. Iceland’s application is likely to be processed by Brussels within two years, putting Iceland ahead of the other two candidates—Turkey and Croatia who are due to be processed by 2015.
“I am happy to see that the expansion perspectives for [the] EU have also reached the Northwestern corner of Europe,” said Olli Rehn, EU enlargement commissioner.
“The decision of Iceland’s Parliament shows the vitality of European projects and makes it clear how much hope comes from Europe,” said EU Commissioner Jose Manuel Barroso.
Since last October, the Icelandic krona has lost 85 percent of its value against the euro. Just prior to the crisis, the three biggest Icelandic banks—Glitnir, Landsbanki and Kaupthing—each had an exorbitant amount of foreign debt. Unable to pay off their mounting debt with the weakened Icelandic currency, the banks defaulted and dragged the entire Icelandic financial sector into complete bankruptcy.
Economists believe that if Iceland was using the euro as its currency, this crisis could largely have been averted as the euro could provide stability against such currency fluctuations that crippled Iceland’s economy. Besides a strong euro, joining the EU could provide the country with better financial and political support to survive the economic crisis.
The decision to join the EU has also met with much controversy. If approved, Iceland could lose its independence and would have to share its fishing territories with other EU states. Fishing is by far the biggest industry in Iceland, providing 40 percent of the country’s revenues.
Other than fishing, Iceland lacks any significant natural resources. However, instead of importing oil and gas, Iceland generates 99 percent of its electricity needs via renewable sources such as hydro-electric and geothermal power.
Prior to its economic crisis, the United Nations Human Development Index ranked Iceland number one among developed countries. It was also was the 5th most productive country in the world in GDP with $54,858 per capita.
To fight the inflation that plagued the country’s currency, Iceland raised its interest rate to 18 percent last October.