Iceland’s study of the benefits of adopting the Canadian dollar as its official currency has, so far, mostly had the economic effect here of creating a mini-boom in Björk jokes (Bjökes?). If Iceland actually went ahead with it, that would, in the short-to-medium term, probably still be the main effect on us. The tiny north Atlantic state wouldn’t gain any influence over our monetary affairs. That indeed would be the whole point of Iceland loonie-izing—to foster trust and stability amongst foreign lenders and savers within Iceland, by surrendering the sovereign right to independent central banking.
Essentially, they would be renting Mark Carney’s reputation from us. They wouldn’t need special permission. It’s a simple matter of becoming a customer of the Bank of Canada. Many countries in this hemisphere already have currencies backed, in part, by reserves of Canadian dollars.
Whether Iceland decided to circulate physical Canadian notes and coins, or simply took the “currency board” approach and pegged its unit to our dollar, there would be a benefit to our federal treasury in the form of “seigniorage.” (That is to say, our central bank would earn interest on the securities Iceland’s currency board exchanged for a hoard of our dollars, and if those dollars were circulated, they would need to be replaced as they wore out.) But don’t expect to throw a big national party with the proceeds. The seigniorage the Bank of Canada earns from our own economy, about a hundred times as large as Iceland’s, is only $2 billion a year.
In other words, the appropriate Canadian attitude toward Icelandic loonification is probably “Why not?”
It is hard to be sure how serious a possibility our dollar is for Iceland. There is agreement that Iceland must choose some external basis for its currency as it prepares to loosen controls on cross-border capital flows imposed in the wake of its banking system’s dramatic 2008 collapse. The Icelandic króna fell from 131 to the euro to 340 almost overnight before the introduction of those capital controls. Iceland wants to rejoin the mainstream of world finance, but it can no longer do so with a fairy tale unit of account. The choice, says Prime Minister Jóhanna Sigurðardóttir, is between “surrendering” by adopting some other country’s currency or joining the European Union and taking the euro.
Her opponents don’t see much of a difference, surrender-wise. (Either you conduct an independent monetary policy, determining your own inflation rates and money supply, or you don’t.) Since isolated Iceland isn’t really part of any optimum currency area at all, there are no ideal choices, but the theory is that both Iceland and Canada are commodity-dependent and would therefore have business cycles in approximate sync. Other observers note, however, that Canada’s exchange rates are increasingly influenced by oil prices. Iceland does not yet have an offshore oil industry, although it has marketed a few undersea oil leases.
Dean Baker, a U.S. economist of the left, famous for predicting the financial crisis, says Iceland should be “thanking the god of small currencies” it was able to ratchet down the króna in 2008. He calls the loonie an “especially bizarre” choice for an Icelandic currency. The right policy for an emergency isn’t necessarily the right one for a rebuild, but if you’re going to use a unit of account tied to oil prices, being a net seller of oil does seem like a good idea.
Barring a sudden change of government, and such a thing is always possible in a country that is essentially a fairly close-knit extended family, the dream of a loonie-denominated Iceland will probably remain just that—which seems like a shame. No Canadian heart fails to feel romantic stirrings at the thought of a land peopled by the same restless Scandinavians who left their hairpins and knitting needles at L’Anse aux Meadows. More than 90,000 of us are descended from the Icelandic diaspora; Icelandic Canadians, a miniscule fragment of a fragment of the human species, have competed at Cannes, mapped the High Arctic, helped win the Second World War, and orbited the Earth.
The adoption of the Canadian dollar by Iceland would create an incentive for new economic ties between the countries, and social and political ties are rarely slow to follow. Is that worth something? The Norwegians, our fellow oil exporters, seem to think so: one of their top economists, Oystein Noreng, wrote a newspaper article this month urging Iceland to adopt Norway’s currency. It would, he contended, lay the groundwork for partnership between the two countries on circumpolar issues and economic policy—even future Icelandic oil development. “Canada” substitutes pretty neatly for “Norway” in his argument, so shouldn’t somebody be making the sales pitch on our behalf?