Iceland: country overview
24 August 2012by Ina Dimireva -- last modified 25 January 2017
In March 2015 Iceland's government requested that "Iceland should not be regarded as a candidate country for EU membership". The Council took note and undertook further practical adjustments of its working procedures.
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Iceland
Member of Schengen area: Yes
Political system: Republic
Capital city: Reykjavic
Total area: 103 000 km²
Population: 0.3 million
Currency: Icelandic króna
Country overview
Iceland applied for EU membership in July 2009. In March 2015 Iceland's government requested that "Iceland should not be regarded as a candidate country for EU membership". The Council took note and undertook further practical adjustments of its working procedures.
Prior to 2009, Iceland already enjoyed a high degree of integration with the EU through membership in the European Economic Area (EEA), Schengen Area, European Free Trade Association (EFTA) and North Atlantic Treaty Organization (NATO). It is also a signatory of the Dublin regulation on asylum policy and a partner in the EU's Northern Dimension policy to promote cooperation in Northern Europe.
Through the EEA, Iceland already participates in the single market and contributes financially towards social and economic cohesion in Europe. A significant proportion of the EU's laws are applied in Iceland today. Iceland also participates, albeit with no voting rights, in a number of EU agencies and programmes, covering areas including enterprise, environment, education and research.
Iceland has been a member of The European Free Trade Association (EFTA) since 1970 and has a bilateral Free Trade Agreement with the EEC since 1972. Two thirds of Iceland's foreign trade is with EU Member States.
Economy overview
Iceland's Scandinavian-type social-market economy combines a capitalist structure and free-market principles with an extensive welfare system. Except for a brief period during the 2008 crisis, Iceland has achieved high growth, low unemployment, and a remarkably even distribution of income. The economy depends heavily on the fishing industry, which provides 40% of merchandise export earnings, more than 12% of GDP, and employs nearly 5% of the work force. It remains sensitive to declining fish stocks as well as to fluctuations in world prices for its main exports: fish and fish products, aluminum, and ferrosilicon. Since 2010, tourism has become the main pillar of Icelandic economic growth, with the number of tourists expected to reach or exceed 4.5 times the Icelandic population in 2016.
Iceland's economy has been diversifying into manufacturing and service industries in the last decade, particularly within the fields of tourism, software production, and biotechnology. In fall 2013, the Icelandic Government approved a joint application by Icelandic, Chinese, and Norwegian energy firms to conduct oil exploration off Iceland's northeast coast, although no exploration has yet taken place. Abundant geothermal and hydropower sources have attracted substantial foreign investment in the aluminum sector, boosted economic growth, and sparked some interest from high-tech firms looking to establish data centers using cheap green energy, although the financial crisis has put several investment projects on hold.
Following the privatization of the banking sector in the early 2000s, domestic banks expanded aggressively in foreign markets, and consumers and businesses borrowed heavily in foreign currencies. Worsening global financial conditions throughout 2008 resulted in a sharp depreciation of the krona vis-a-vis other major currencies. The foreign exposure of Icelandic banks, whose loans and other assets totaled more than 10 times the country's GDP, became unsustainable. Iceland's three largest banks collapsed in late 2008. The country secured over $10 billion in loans from the IMF and other countries to stabilize its currency and financial sector, and to back government guarantees for foreign deposits in Icelandic banks. GDP fell 6.8% in 2009, and unemployment peaked at 9.4% in February 2009. Three new banks were established to take over the domestic assets of the collapsed banks. Two of them have majority ownership by the State, which intends to re-privatize them.
Since the collapse of Iceland's financial sector, government economic priorities have included stabilizing the krona, implementing capital controls, reducing Iceland's high budget deficit, containing inflation, addressing high household debt, restructuring the financial sector, and diversifying the economy. Iceland's financial woes prompted an initial increase in public support to join the EU and the euro zone, with accession negotiations beginning in July 2010, but negotiations were suspended under the 2013 center-right government. Most macroeconomic indicators and employment have rebounded to pre-crisis levels, driven primarily by the unprecedented growth in tourism – averaging over 20% annually – following the well publicized volcanic eruption in 2010.
Source: Europa, The World Factbook
