Daði says euro could anchor Icelandic economic stability

Finance Minister Daði Már Kristófersson says a fixed exchange rate through the euro could provide the credible anchor needed for a national consensus on economic policy, mbl.is reports.

He said it was not particularly surprising that a large majority of the public believes the government has performed poorly in its efforts to lower inflation and interest rates. Around 85 percent of respondents in a Gallup poll conducted for Viðskiptablaðið said the government had handled economic management badly.

Daði said fixed exchange rates had played that role in Iceland’s previous national consensus. He acknowledged that the króna had been relatively stable since the adoption of the country’s new monetary policy, contributing to lower inflation, but said Iceland still lacked a credible long term anchor.

“No one would have wanted more than I did for greater progress to have been made in bringing inflation down,” Daði said. “I will nevertheless continue this fight.”

He said fiscal policy was a key part of achieving lasting success against inflation. Balanced government budgets, which are due to be presented after the end of the month, would be a major step in that direction, he said.

Prime Minister Kristrún Frostadóttir said in a national address this week that lowering interest rates and increasing stability would require the courage and willingness to negotiate Iceland’s entry into the European Union.

Daði said that EU membership could make some things easier, but that the central problem was the credibility of Iceland’s economic policy and inflation expectations.

“There is clearly a long standing problem. We lack a credible anchor,” he said.

He said history showed that stable external conditions could produce results. Inflation expectations had remained stable for a long period while Iceland’s capital controls were in place, he said, although controls were too costly a price to pay for stability. After they were lifted, conditions began to deteriorate.

Daði said he would continue working toward price stability regardless of the outcome of a referendum on EU membership. He rejected suggestions that the government had given up on the EU process, saying the issue remained one of his highest priorities.