Hildur rejects euro as answer to Iceland’s economic woes

Independence Party politician Hildur Sverrisdóttir has sharply criticised government supporters following the Central Bank’s policy rate increase, accusing them of using the decision to argue for Icelandic membership of the European Union and adoption of the euro, mbl.is reports.

In a social media post, Hildur said it was strange to witness what she described as the governing parties’ “poorly concealed joy” over the rate increase. She said the government had failed to bring the economy under control and that its supporters were now trying to blame the Icelandic króna for the situation.

“The euro does not lower inflation and interest rates. We ourselves need to have brought the economy into balance before adopting the euro is an option,” Hildur wrote.

The euro is not the solution

Hildur said countries must meet economic conditions before adopting the euro. She therefore considered it wrong to present the currency as a solution to Iceland’s current inflation and interest rate problems.

She also said a fixed exchange rate could have particular disadvantages for a resource-driven economy such as Iceland’s. In such circumstances, adjustments to economic fluctuations could instead appear as unemployment when the exchange rate could no longer absorb part of the changes.

Hildur also questioned whether lower interest rates alone would improve households’ situation. Lower rates could, among other things, push up asset prices, she said. She added that there was no evidence that people found it easier to buy housing in European Union countries or could buy more food with their wages than people in Iceland.

“In my sincere opinion, the euro is far from being the solution in our particular Icelandic circumstances, as people have been told continuously,” she said.

Reversed progress

Hildur said the government had primarily been elected to bring inflation and interest rates under control. Inflation had been declining and a cycle of rate cuts had begun when the current government took office, she said, but that progress had since been reversed.

She said government decisions, including tax increases, had contributed to the reversal and referred to the Central Bank’s reasoning for raising rates.

Hildur also recalled that inflation had been around or below the Central Bank’s inflation target from 2014 to 2020. In her view, this showed that price stability could be maintained with the Icelandic króna.

She said the economic consequences of the coronavirus pandemic, the war in Ukraine and natural disasters in Grindavík had required extensive government measures. Those measures had been costly and fuelled inflation, she said, but the trend had been brought back in the right direction before the change of government.

Interest rates and prices are not negotiated

Hildur rejected the idea that the currency itself was the cause of the economic problems.

“Currencies, whether they are called the Swedish or Icelandic króna, the franc or the euro, have no independent will. They merely reflect the condition of the area in which they are used,” she wrote.

She also stressed that any potential negotiations on Icelandic membership of the European Union would not concern interest rates, inflation or prices. Nothing on those matters would be negotiated in accession talks, she said.

Iceland therefore needs to bring its economic affairs under control regardless of whether it later joins the European Union.

“The task belongs solely to us and to those we elect to govern the country,” Hildur said.