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Will Iceland Switch to the Canadian Dollar?

  • By Andrew Deichler
  • Published: 2011-11-21

A push is underway for Iceland to switch its currency from the oft-troubled krona to the Canadian dollar, according to a report in Canadian Business. Despite bouncing back considerably from the financial crisis of 2008, Iceland is considering new strategies as it continues to struggle with high unemployment, a high office vacancy rate and a weakened currency.

The krona has been problematic for years, subject to frequent devaluations and massive swings by speculators. Its value shot up 87 percent between 2001 and 2007 as interest rates surged, attracting speculators who would borrow money in low-yield currencies, invest it in the high-yield krona, and then profit on the carry trade. But after Iceland’s top banks were unable to meet obligations and collapsed in 2008, the speculators jumped ship and the krona plummeted 92 percent.

Iceland has begun the application process to enter the European Union, a risky and unpopular move given the eurozone debt crisis and the fear that Iceland could lose much of its autonomy. In response, a group of Icelandic academics, economists and business people, as well as the Progressive Party, have begun exploring the idea of a switch to the Canadian dollar.

Supporters of the switch cite the stable Canadian banking system and currency. Additionally, the two nations’ economies are similar in that both are centered around natural resources. Iceland also enjoys a strong trade partnership with Canada.

But there is a downside, as adopting another country’s currency would give Iceland no power over its monetary policy at times, such as when economic stimulus is necessary. Some critics also feel that support for adopting the CAD has more to do with Iceland’s cozy relationship with Canada, rather than for any sound economic reasons. For the moment, the Icelandic government is not backing off from its intentions to complete the EU application process. The Progressive Party, however, is hoping to gain some support from Canada.

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