Iceland urged to choose over currency

Iceland urged to choose over currency

By David Ibison in Stockholm

Published: February 13 2008 13:40 | Last updated: February 13 2008 13:40

The gradual “euroisation” of Iceland’s economy is “highly problematic and probably unstable”, the government was warned on Wednesday. It was also told that it had to decide between its own ­currency and the euro as soon as possible.

Richard Portes, author of an independent report on the! Icelandic economy, said that unilateral euroisation was feasible and need not limit Iceland’s political independence. “Because of the exceptionally high degree of exchange rate passthrough into domestic prices and equally exceptional financial openness of Iceland, unilateral euroisation would not be sacrificing much effective monetary policy independence,” he told the Icelandic Chamber of Commerce.

His remarks come amid an intensification in recent weeks of the debate over euroisation after Iceland’s central bank refused an application by the country’s largest company to ditch the kronor and adopt the euro as its main currency.

Kaupthing, a bank with total assets of 5,500bn kronor (€56bn, $81.6bn, £41.6bn) applied to record its accounts, financial statements and list its shares in euros, the second bank to do so. Other companies are keen to follow suit.

However, speaking at the same meeting as Mr Portes, Jürgen Stark, a European Central Bank board member, said the bank opposed a non-eurozone country adopting the euro unilaterally.

“Allowing [an EU] member state or a future member state to take a “short cut’ to the euro, rather than following the official roadmap, could be detrimental to that country and possibly the euro area,” he said.

Prof Portes said the costs of euroisation, such as the loss of seigniorage (printing money) and the absence of a lender of last resort, were less important than the ­benefits. The advantages included a boost to trade and investment, a fall in transactions costs and a bigger, more liquid capital market.

Trichet plea on deposit insurance

Differences in bank deposit insurance schemes across the EU hinder financial integration and are raising issues for crisis prevention, according to Jean-Claude Trichet, European Central Bank president. Ralph Atkins reports from Frankfurt.

Mr Trichet, speaking in Frankfurt, urged EU states to drop schemes offering only partial coverage for smaller deposits – which could encourage bank runs – or into which financial institutions paid only after the event.

His plea follows the Northern Rock bank crisis in the UK, which has highlighted the problems.

Differences between schemes created complexities and additional costs in retail banking, one of the less integrated parts of European financial markets, Mr Trichet argued.

The ECB president said a “significant change in culture” was needed to heed the lessons of recent financial market turmoil.

He stressed the importance of greater transparency and of looking at the financial system as a whole. “Nothing works in the present world if it is not done at the global level.”