First We Conquer Iceland

The law of unintended consequences states that actions, especially governmental ones, always have unintended and unpredictable effects. These unanticipated effects can be far more powerful than the planned ones. Thus, economists often use this law as a warning to politicians that policies commonly ‘achieve’ the opposite of their intentions. For example, raising the minimum wage to ease the burden on workers usually causes more unemployment, especially among marginal workers. Similarly, raising taxes often diminishes tax revenues.

But sometimes unintended consequences are nothing short of delightful. Consider the prospect of Iceland abandoning the krona and adopting the dollar as its currency. No, no, not the US Greenback but the Canadian “loonie,” so named for the water fowl imprinted on the flipside of its one-dollar coin.

[Disclaimer: the author admits to being a Canadian who wishes to vacation in Iceland and, so, she may be biased in deciding what is delightful.]

Since the 2008 financial crisis in which its top three banks collapsed, Iceland has eyed other currencies with the goal of establishing both stability and liquidity even at the cost of losing control of its own monetary policies.

Why is the possibility of adopting the loonie “an unintended consequence”? Because up until now, the currency overwhelmingly favored for adoption was the euro. Iceland applied to join the European Union in 2009 and formal negotiations began in 2011, with the issue of fisheries being particularly sensitive. Iceland has exclusive fishing rights to the 200 nautical miles surrounding its shores and fish constitute its largest export by far. There is understandable reluctance to entering an agreement that would open up Iceland’s fishing zone to competitors.

Moreover, the recent rockiness of the Eurozone and the euro itself cannot be encouraging to Icelanders. Indeed, given that Iceland rebounded from its fiscal crisis by defaulting on debts and not bailing out banks, it is unlikely to sympathize with the hysteria surrounding a Greek default. A recent Capacent Gallup poll found that 60 percent of Icelanders now oppose union with the Eurozone. The Finance Minister is among them. Who knew that strict fishing policies and the coddling of Greece would make the loonie glimmer in Icelandic eyes?

And, so, prominent Icelandic businessmen, opposition politicians and much of the public are favoring a move toward the loonie; the Canadian Ambassador Alan Bones had been scheduled to address the possibility of currency sharing at a political conference in Reykjavik over the weekend. But the Canadian government apparently reconsidered the appropriateness of the venue for such a discussion; the conference had been sponsored by a specific political faction within Iceland. Instead, last Friday, the Canadian Ambassador announced on the Icelandic national broadcaster RUV that Ottawa was quite open to holding talks on the subject. The Icelandic Foreign Minister Ossur Skarphedinsson stated “I’m all in favor of discussing the alternatives we may have to the krona.”

On the street level, the Canadian public seems tickled. Indeed, in a recent column entitled “Five reasons why Iceland should adopt the Canadian dollar,” Michael Babad offered as the concluding reason:

“5. Our glowing hearts. For Iceland, do not underestimate friendship in this post-crisis era of currency manipulation and mounting trade tensions. We’re a wonderful people, they’re a wonderful people. We’ve got a beautiful country, they’ve got a beautiful country. True, it gets cold in Canada in the winter, but remember we’re talking about Iceland.

“And surely we can forgive them for Björk.” [Björk Guðmundsdóttir is an Icelandic singer-songwriter.]

Icelanders seem receptive as well. According to the Globe and Mail, “In a recent Gallup poll, seven out of 10 Icelanders said they would happily dump their volatile and fragile krona for another currency. Their favoured alternative is the Canadian dollar, easily outscoring the US dollar, the euro and the Norwegian krone.” There are no reports of the Icelandic government opening discussions, however.

There are several reasons for the Canadian dollar — usually viewed as the Greenback’s poor cousin — to be preferred over the euro. The loonie has a AAA sovereign debt rating and Canada has very little debt compared to every other Western nation. The Globe and Mail provides other reasons:

“It [the loonie] offers the tantalizing prospect of a stable, liquid currency that roughly tracks global commodity prices, nicely matching Iceland’s own economy, which is dependent on fish and aluminum exports, and in the future, energy.

There’s also a more sentimental reason. They’re both cold, Arctic countries. “The average person looks at it this way: Canada is a younger version of the US. Canada has more natural resources than the US, it’s less developed, has more land, lots of water,” explained Heidar Gudjonsson, an economist and chairman of the Research Centre for Social and Economic Studies, Iceland’s largest think tank. “And Canada thinks about the Arctic.”

Economic commentator ZeroHedge (Tyler Durden) ends his report on Iceland’s longing look at the loonie with a warning, “So be careful Canada: with great power, comes great a desire to distribute wealth. And we have all seen what happens next.”

Will currency imperialism go to Canada’s head? Fear not, ZeroHedge. I still remember the contest run by Canada’s national magazine Macleans years ago. It wanted to come up with a phrase that captured what was quintessentially Canadian, similar to the down-under phrase “As American as apple pie.” And, so, Macleans invited readers to fill in the blank: “As Canadian as _________.” The challenge was distinguishing Canada from its neighbor who was louder, flashier, (then) richer, sexier and, well, add “er” onto almost any adjective.

The winner? “As Canadian as possible under the circumstances.” Arrogance is not a problem.


Wendy McElroy,
for The Daily Reckoning