Issues affecting the Icelandic króna Icelandic króna

1 issues affecting icelandic króna

1.1 2008 financial crisis
1.2 iceland , euro
1.3 iceland , unilateral adoption of currency

issues affecting icelandic króna

iceland not member of european union , not use euro. icelandic currency low-volume world currency, managed central bank. value in terms of toward other currencies has historically been swift change, example against , canadian dollars, , other nordic currencies (swedish krona, norwegian krone, danish krone), , euro. example, during first half of 2006, icelandic króna ranged between 50 , 80 per dollar. prior currency s collapse in october 2008, króna considered overvalued.

in shops electronic payment accepted. other currencies accepted in iceland. notable exception keflavík international airport (which has many transfer passengers), dollar, euro , other currencies accepted merchants. stores in downtown reykjavík accept foreign currencies.

iceland s overall level of technological sophistication noteworthy. iceland s per capita computer usage, example, among highest in world: far higher uk or us. saturation of technology in iceland has had ramifications in monetary system: high proportion of payments in iceland made electronically, e.g. debit or credit cards or online bank transfers. largest denomination banknote, 10,000 krónur note (around €83 in july 2017) has relatively low value, therefore of iceland s high value trades done in electronic transfers , other currencies.

2008 financial crisis

exchange rate isk per euro 2000 mid-2010

in october 2008, financial crisis of 2007–2008 brought collapse of icelandic banking sector. value of icelandic króna dropped, , on 7 october 2008 icelandic central bank attempted peg @ 131 against euro. peg abandoned next day. króna later dropped again , 340 against euro before trade in currency suspended (by comparison, rate @ start of 2008 90 krónur euro). after period of tentative, low-volume international trading in króna, activity had been expected pick again throughout november 2008, albeit still low liquidity, iceland secured international monetary fund loan. however, of january 2009 króna still not being traded regularly, ecb reference rate being set intermittently, last time on 3 december 2008 @ 290 króna per euro.

the icelandic króna lowered in value against dollar, around 50 80 per dollar 110–115 per dollar; mid-november 2008 had continued lower 135 dollar. of 2 april 2009, value hovered around 119 per dollar, maintaining value on next 2 years 23 march 2011, prices around 114 per dollar. this, high costs foreign traders , tourists thereby dropped, iceland s trade , tourism industry hope exploit. in july 2008, big mac cost equivalent of us$6, versus $3.57 in us.

iceland , euro

theoretically adoption of euro have several advantages. adopting perceived historically stronger currency might iceland avoid turbulence surrounding speculations in international financial markets . in addition, icelandic economists listed several arguments in favour of euro before crisis. in terms of growth potentials , welfare, euro expected bring lower long-term interest rates [...]. of course increase capital investment , labour productivity. euro might lower consumer prices facilitating comparison other euro countries. because of volatility between euro , króna, former foreign minister valgerður sverrisdóttir considered idea iceland might dollarize eurozone without joining european union.

opinion regarding euro mixed among icelanders. opinion poll iceland joining european union released on 11 september 2007 showed 53% of respondents in favour of adopting euro, 37% opposed , 10% undecided. poll produced icelandic newspaper fréttablaðið , released on 30 september 2007 showed 56% opposed euro adoption , 44% in favour. in january 2008, poll icelandic chamber of commerce put support iceland abandon króna currency @ 63%. number of companies in iceland, such Össur, have started pay employees in euros or dollars, due high inflation , high volatility.

the financial crisis prompted further calls iceland join eurozone. in january 2009, 1 senior icelandic official stated due crisis króna dead. need new currency. serious option euro. in march 2009, report iceland s minister foreign affairs, Össur skarphédinsson, considered 3 options: retaining króna, adopting euro without joining eu , adopting euro through eu membership. report recommended third option.

an economic study of impact of adoption of euro iceland found icelandic króna acts both barrier , buffer international trade, , joining eu , adopting euro, icelandic international trade might 60% higher.

in july 2009, alþingi (parliament) narrowly voted apply eu membership, application has been frozen since 2013 (see accession of iceland european union).

in march 2015, icelandic authorities announced letter presidency of council of european union iceland should not seen candidate state, , there no specific plans continue membership process. leaders of ruling government parties have stated króna remain iceland s currency @ least foreseeable future.

iceland , unilateral adoption of currency

some small countries such el salvador, ecuador , montenegro have unilaterally adopted use of more stable foreign currency means of controlling inflation. cost of high, adopting country loses control on monetary policy, , benefits of seignorage. currency board second tier solution, exchange rate of currency fixed of country, or basket of currencies.

in gallup poll, 7 out of ten icelanders participated in poll stated preference abandon currency adopt another, , favoured choice canadian dollar, outscoring united states dollar, euro, , norwegian krone. canada favoured due northern geography , similar resource based economy, in addition relative economic stability. canadian ambassador iceland stated iceland adopt currency if wishes. however, should noted idea of unilateral foreign currency adoption has been suggested in iceland, influenced economic turmoil related banking crisis of 2008, , remains seen if continue seen feasible option greater future.

mr. arnór sighvatsson, deputy governor of central bank of iceland, @ meeting of icelandic federation of labour on 10 january 2012, said:

of view unilateral adoption of foreign currency or currency board considered prudent if of iceland s largest banks owned strong foreign bank financial strength provide them liquidity during times of distress. second, unilateral adoption of currency solution hardly worth considering unless emu membership has been ruled out foreseeable future, entails cost of purchase of new base money banking system (generally in range of 70–100 billion krónur in recent years) , larger precautionary foreign exchange reserves (particularly if banks not foreign-owned). pointless pay price few years benefit, plus seigniorage revert permanently ecb. currencies other euro have been mentioned. considering characteristics required of such currency, there no other comes close being beneficial iceland euro is.

as of 2016, icelandic authorities have no plans adopt foreign currency.