Why Iceland Almost Adopted the Canadian Dollar (but didn’t)

In 2012, and to a smaller extent 2013, Iceland was giving serious consideration to the adoption of the Canadian dollar. While the reasons why Canada would be agreeable to this arrangement are seemingly axiomatic (seigniorage, further clout in European affairs), the picture was less clear for Iceland. Why would Iceland choose to abolish monetary policy tools in order to adopt a currency that has little network effects and limited trade benefits?

Economic Similarity

Both Iceland and Canada have economies that are primarily resource driven. Iceland’s economy is highly dependent on the fishing and aluminum exporting business. In the future, the economy will be heavily energy-driven as the vast potential of Iceland’s geothermal energy begins to be untapped. However, there is still a large magnitude of divergence in the business cycles of the two countries, so the fit is not seamless. Additionally, Canada is not the only choice of currency if Iceland highly prioritizes the tracking of commodities. The Australian dollar would also be a fine choice.

Strong, Stable Currency (and Central Bank)

At the time, the Canadian dollar was extremely strong. It seems counterintuitive to want to adopt a strong currency as a struggling nation (the negative export effects, for an export-friendly nation like Iceland, are less than ideal). However, with the uncertainty surrounding the credit of Icelandic businesses at the time, this stability could be welcomed.

Additionally, Canada’s Central Bank was perceived to be very competent at the time, as the country faired extremely well during the recession of 2008 (relatively speaking). The strength of the Canada’s monetary policy was cited by the Icelandic Central Bank.[1]

Increased Trade

By adopting the Canadian currency, it would reduce trade barriers between the two countries. This increased trade would certainly be beneficial to both economies. However, opportunity cost must be taken into account here, as adopting a currency of Iceland’s more prominent trade partners could be more beneficial for the economy in the long-term.

Sentimental Reasons

Lastly, it’s impossible to ignore the sentimental reasons for Iceland to adopt the Loonie. Iceland and Canada are both cold, arctic countries with a penchant for amiability. The potential to further embody the true north strong and free must be alluring to both nations. If the relationship were to have been fruitful, then the possibility of Greenland’s adoption would work to further galvanize this sentiment.

Conclusion

While there are clearly some reasons pointing to the adoption of the Loonie by Iceland, in the end it should come as no surprise the country chose to explore other options. The adverse effects of the abandonment of monetary policy control, compounded by the opportunity cost of adopting the Canadian dollar, make the Icelandic Central Bank’s decision a cogent one.

[1] http://www.theglobeandmail.com/report-on-business/top-business-stories/canadian-dollar-a-poor-choice-for-iceland-central-bank-says/article4564361/