“We all know that the Icelandic króna is not to the benefit of the Icelandic population. It actually benefits politicians and public officials. They can maintain central control of the system. It is a power tool so these same people can be careless when it comes to fiscal control—they can always just print more bank notes,” said Heiðar Már Guðjónsson, economist and head of the board of directors of Vodafone, in an interview with Stöð 2 on Wednesday.
Heiðar Már has been outspoken when it comes to his opinions on the status of the Icelandic króna.
Nobel-Prize winning economist Milton Friedman visited Iceland 30 years ago just after the króna was re-evaluated due to hyperinflation. At the time, he stated that Iceland’s economy was too small for an independent currency and proposed a unilateral adoption of the American dollar. Since then, repeated ‘quick fixes’ and mistakes have been made in managing the króna, both through floating the currency and fixing it, a mixture of both, as well introducing restrictive measures from time to time, leading to the overvaluing of the króna that caused to deepen the economic collapse of 2008.
Heiðar Már emphasized that it is clear that the capital controls in place at present are not sustainable. He pointed out that 33 countries worldwide have unilaterally adopted a foreign currency and most of them have been successful. Sixty countries have bound their currency to another and most of them have also done well, he said. Joining an international currency regime will lead to lower long-term interest rates, increased access to capital and commercial financing, and lower transaction costs in the business sector.
Iceland’s employment sector is capital-intensive and the cost of that capital plays an important role in its mismanagement. Iceland’s interest rate risk is significantly higher in comparison to its’ neighboring countries, and therefore interest rates could possibly decrease by 50 percent with the adoption of an international currency.
“I somehow think this is the only way forward,” Heiðar Már added, also pointing out that no solution is perfect. He himself would prefer to see the adoption of the American dollar, but says that the Canadian dollar is an interesting option and possibly easier in implementation. Iceland and Canada share a similar resource-based economy and northern geography, the Canadian dollar is stable and he reasoned that Canadian companies are more likely than American ones to outsource some of their activities to Iceland. In addition, he considers there to be a good chance of negotiating with the Canadian Central Bank to assist with currency adoption, despite the lack of an economic union between the two countries.