March 5, 2012 / 12:17 PM / 5 years ago

Canadian ambassador stirs currency debate in Iceland

4 Min Read

A hologram security feature is seen on the new Canadian 100 dollar bill made of polymer in Toronto November 14, 2011.Mark Blinch

STOCKHOLM (Reuters) - Canada's ambassador to Iceland stirred up controversy over the future of the North Atlantic island's currency at the weekend, saying the nation of 320,000 would be welcome to start talks on adopting the Canadian dollar.

After Iceland's financial collapse in 2008, there has been much political discussion over whether to stick with the krona or adopt another currency to help bring stability to the economy.

Having already begun talks on joining the European Union, the country is widely expected to adopt the euro, although opposition to EU accession is growing.

Ambassador Alan Bones told Icelandic national broadcaster RUV on Friday that the Canadian government was willing to hold talks with Iceland on whether to adopt the loonie if Icelanders wanted to.

Bones had also been due to speak at a meeting of the Progressive Party, the country's second-biggest opposition group, on Saturday to address the issue again, but his speech was cancelled.

Canadian media reported that their government had cancelled the speech, while Iceland's foreign minister said Reykjavik had not objected to it.

"In fact, I'm all in favor of discussing the alternatives we may have to the krona," Foreign Minister Ossur Skarphedinsson told Icelandic radio.

Progressive Party leader Sigmundur Gunnlaugsson told daily Morgunbladid his party only wanted to promote debate on the topic.

"It's not like we are fighting for the adoption of the Canadian dollar. We are simply trying to generate a debate about the various possibilities Iceland has," he told the paper.

"It's one thing for the government to focus on the euro but a seriously bad thing that it tries to stop any debate about other possibilities."

Iceland has not said it wants to adopt the euro, but future membership of the EU would make that the most likely outcome.

However, about 60 percent of Icelanders are now against joining the 27-member European bloc, according to a recent Capacent Gallup poll.

Furthermore, some economists argue that Iceland's economy is not in synch with the euro zone and that ECB monetary policy would therefore not help give Iceland a more stable economy.

They say the Canadian dollar would be more suitable than the euro because Canada's economy is more resource-based, much like that of Iceland, where the biggest exports are aluminum, fish and minerals.

Trade with Canada, however, is minimal.

A Gallup poll in June last year showed 30 percent of Icelanders were in favor of adopting the loonie, with 38 percent against.

Iceland is still pulling out of the slump after the late-2008 financial collapse, and the economy is expected to grow around 2.5 percent this year.

The country has raised money on the international bond markets and has regained its investment grade rating from agency Fitch, but much remains to be done.

Key to returning to economic normality will be the removal of capital controls, put in place at the height of the crisis.

With inflation well above target, however, some economists worry whether controls can be removed without destabilizing the currency again.

Reporting by Omar Valdimarsson

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