Iceland must reform financial sector, adopt euro: OECD

(REYKJAVIK) - Hit by the global economic turmoil, Iceland must carry out further reform of its financial sector and adopt the euro if it joins the European Union, the OECD said in a report published Wednesday.

The Organisation for Economic Co-operation and Development assessed the impact of the financial crisis on the small north Atlantic island and made suggestions to put the country back on the road to economic recovery.

It said the Icelandic economy could bounce back if there were increased supervision of the financial sector, a "streamlining" of the large banks and if the country's public deficit were plugged by tax increases.

"In the future, financial stability will require a smaller and simpler banking system, tougher supervision," the OECD said.

The report also says Iceland should adopt the euro if it succeeds in its bid to join the European Union.

As a member of the eurozone, the OECD points out, Iceland would benefit from the credibility of the European Central Bank and avoid the extra cost of paying higher risk premiums to investors.

"If it were to become an EU member, Iceland would be advised to seek entry into the euro area as soon as possible, so as to reap the economic benefits," the report said.

Home to 320,000 people, Iceland officially applied to join the EU at the end of July, with the government aiming to become a member within the next three years.

Iceland's financial sector -- once worth 11 times the country's gross domestic product -- collapsed in October after its major banks borrowed beyond their means from foreign capital markets.

Many Icelanders saw their life savings wiped out and their angry protests forced the centre-right government to resign as the value of the krona plummeted and unemployment soared.