It looks very much as if Iceland’s obligation to recompense the UK and the Netherlands for reimbursing depositors following the collapse of Landsbanki in 2008 is headed for years of litigation in the EFTA Court – not good news for those hoping for Iceland’s early EU membership. The question is whether the two creditors will allow the issue to be parked while membership negotiations proceed to a happy ending.
The Reykjavik government had negotiated much less aggressive repayment terms following the 93 per cent rejection in last year’s referendum and these had been approved in the Althing by a two thirds majority. The €3.8bn repayment timetable was extended from 8 to 22 years, out to 2046, and the interest rate cut from 5.5 per cent to 3.5 for the UK and 3 per cent for the Netherlands. Yet voters still resented having to compensate for the deeds (or misdeeds) of private banks and have thrown out the package.
Enlargement talks are due to begin again in late June, but even if difficult negotiating issues like mackerel quotas and whaling can be resolved and the negotiations brought to a successful end, Icelanders will still be asked to approve EU entry in a referendum. An Icelandic “yes” is no foregone conclusion, despite the economic arguments. Indeed, a sceptic might ask whether Ireland inside the eurozone is any better off than Iceland outside it, except that Iceland may find it more difficult to borrow on international markets until the new repayment schedule is agreed.
The people of Iceland are in good company in resenting the medicine which their leaders are forcing upon them. After its defeat in parliament, Portugal’s caretaker government is plunged into new talks with the European Commission, the ECB and the IMF as it applies for bail-out treatment under the European Financial Stability Facility.
This will mean tough new measures, such as more flexible employment laws, a further retreat from social support and a major privatisation programme, yet with no guarantee that an incoming government following the June 5 elections would support the package.
The Portuguese bail-out faces a further obstacle: the leader of the eurosceptic True Finns party has said that his party will vote against Finnish participation in a Portuguese bail-out following the Finnish general election on April 17, much to the consternation of Commissioner Olli Rehn, who fears that his home country could jeopardise the eurozone economic recovery programme.
The British government will also come under domestic pressure to minimise its contribution to the Portuguese bail-out package, and is playing down its potential liabilities, although it has a fundamental interest in a stable euro. I see that – together with Sweden – Britain has politely declined the invitation to participate in the co-ordinating principles of the Euro Pact, thus opting out of any opportunity to influence policy.
It does strike me that this opt-out further weakens Britain’s influence over evolving financial services legislation, where the atmosphere is already poisoned by the sentiment that financial markets are to blame for all our troubles and by the feeling that even the pressures on the eurozone are caused by conspiring money markets rather than by economic reality.
However, despite the troubles of the “peripheral” trio, the economic climate does seem to be improving. The German economy continues to grow rapidly, boosting imports as well as exports, and Spain seems likely to weather Portugal’s bail-out crisis without any domino effect – Madrid was able to sell three-year government bonds at less than 4 per cent interest on Thursday and Spanish borrowing is at manageable levels. It is the unemployment level which is the biggest worry for Spain.
The euro continues to strengthen against the dollar, suggesting that market confidence is growing, albeit helped by the quarter point rise in interest rates. Maybe the markets are becoming convinced that the eurozone will indeed take all necessary measures to secure its future. The political will is unswerving. Sadly this is no guarantee of the economic recovery which is vital for the future stability of its weaker member states.
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November 4, 2022