NEWS THAT Iceland's Independence Party is shifting towards support for accession to the European Union came alongside yesterday's agreement that British and other foreign depositors in its banks will be compensated according to EU rules.
Both developments herald a remarkable turnaround in the island's fortunes over the last two months, since being hit by the financial tsunami to which it was brutally exposed by recent banking history. Iceland became a centre of speculative overseas investment based on highly leveraged funds after its government put up interest rates in 2001 to prevent inflation. Huge inflows of capital on deposit were then used to fund the takeover of retail chains throughout Europe, as the country raced up the international league table of per capita wealth and the krona's value strengthened.
After a few short weeks that favourable scenario lies in ruins. The free market framework has been transformed into a centrally managed economy, its major banks are nationalised and its ratio of government debt to gross domestic product has soared from 29 to 109 per cent. The krona collapsed in a classic run on the currency, leaving Iceland in a state of near-bankruptcy without any wider supports to draw upon. To cap it all Iceland turned in the middle of this meltdown to Russia for financial help when others refused, including the British who froze its funds with anti-terrorist legislation.
Instead of going in the Russian direction Icelandic leaders have decided it is better to rely on Brussels and the EU for help out of its isolation. The agreement reached on bank depositors allows $2 billion emergency funding from the International Monetary Fund to be matched with $3 billion loans mainly from Nordic states and banks. Afflicted with the same financial disease, the Russians proved unwilling to advance such funds.
In deciding to bring forward its conference on possible EU accession to January Iceland's conservative ruling party signals how profoundly this economic shock has affected its political system. Traditionally opposed to EU membership, the Independence Party led by prime minister Geir Haarde now says it is essential for a small state to have the protection of euro membership for a highly open economy. Some 70 per cent of Icelanders agree. The traditional objection that its strong fishing industry could not withstand EU competition has been reconsidered in the search for economic and political security. The lessons for Ireland, had we not been in the euro during these same weeks, are plain to see.