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Iceland's Economic Rebound Continues

Iceland's economic 'rebound' continues

by Dean Carroll

28 September 2012

         


European Union candidate country Iceland's economic resurgence continued this year as a result of "solid policy implementation" and a stabilised krona currency, according to the International Monetary Fund. The financial monitoring review conducted by the IMF stated that the nation's outlook was "upbeat", providing Eurosceptic nationalists with further ammunition to fight against Iceland's proposed EU membership.

Outlining the economic "rebound", the IMF said: "Following a deep and protracted recession, the economy grew by 2.6 per cent in 2011, a performance that looks set to be broadly repeated in 2012 and sustained over the medium term. The output gap is closing, unemployment has decreased, and inflation - though still high - is expected to converge toward the central bank's target of 2.5 per cent in the medium term; if monetary tightening resumes. Public and external debt ratios are on a downward path and financial sector conditions are improving. The fiscal consolidation is broadly on track."

Iceland's progress towards joining the EU club could yet stall if the United Kingdom and Netherlands threaten to veto the country's accession – due to its failure to repay €4bn to 400,000 British and Dutch investors, who lost out when Landsbanki collapsed in 2008. Conflict with the EU over Iceland's whaling and fisheries policies are also yet to be resolved. In addition, public opinion in the country seems to be set firmly against EU membership - cementing the impasse.

However, since formal discussions started two years ago - 18 chapters have been opened, of which 10 have been provisionally closed. In total, there are 35 areas of EU policy and law with which candidate countries have to align themselves. The EU's enlargement commissioner Stefan Füle previously said that Iceland's progress constituted a "very good achievement". It was "proof of the firm commitment by the Icelandic government and the EU to the accession process", he added. Iceland is a member of the Schengen passport free travel area, and the European Economic Area – meaning it participates in the EU's internal market without being a full member state. As a result it already complies with many of the EU's entrance requirements.

But the IMF warned that the eurozone crisis could still have a dramatic impact on Iceland's finances despite its geographical and monetary separation from the EU. "An intensification of the euro area crisis could harm exports, growth and market access," stated the report. "A setback in fiscal consolidation could undermine confidence and impede access to financial markets. Finally, growth could be reduced by delays in investments in the energy-related sector or by an inflation-induced wage-price spiral.

"Banks' balance sheets have strengthened but risks still need to be addressed. The three largest banks are profitable and well-capitalised but nonperforming loan ratios are still high, though well below their post-crisis peak. Although progress has been made, legacy risks remain, including a reliance on deposits locked in by capital controls, asset-liability mismatches, and loan and deposit concentration. There is also still uncertainty in the face of Supreme Court rulings on foreign exchange-indexed loans."

Read more: http://www.publicserviceeurope.com/article/2520/icelands-economic-rebound-continues#ixzz282sbXKwX