A comparison with European countries that fared poorly as a result of the financial crisis shows that Iceland’s exports have not grown more than those of euro area countries or those with fixed exchange rates. Actually, excluding seasonal effects, some of the fixed-rate countries have experienced greater export growth (Chart 2). 5. Actually, if exchange rate volatility is excessive and exporters are heavily leveraged in foreign currency, a large currency depreciation could conceivably have a negative impact on exports. Even though the depreciation has a positive effect on an exporter’s cash flow, the balance sheet effects could make the company technically insolvent. This complicates access to credit, which may be a prerequisite for the expansion of exports in a small economy with specialised export production. According to the above, my preliminary diagnosis is that the erosion of the value of the króna since its launch as an independent currency in 1920 can be traced to an inadequate monetary framework (particularly in the early years), general lack of discipline in economic policy-making, and the interaction of those problems with problems of running the world’s smallest independently floating currency. In order to maximise the chance of recovery, all of these underlying weaknesses must be treated simultaneously, including the instability of the  BIS central bankers’ speeches  3  currency, as some of the prescribed medications for long-term reduction of exchange rate volatility are difficult to administer unless exchange rate volatility is reduced first.
Although the Central Bank has announced its intention to intervene in the foreign exchange market more actively than it has in the past in preparation for lean times, such intervention should not be expected to have a profound or lasting impact on the exchange rate.5 Other ways to reduce harmful exchange rate fluctuations should therefore be considered. Negotiations are currently underway concerning Iceland’s possible accession to the European Union and the Economic and Monetary Union (EMU), upon fulfilment of the Maastricht criteria. If there is no advantage to a floating exchange rate – or even less than no advantage – then there is clearly no benefit in delaying membership of the European Exchange Rate Mechanism (ERM II), which precedes full membership, provided that EU membership is approved in a national referendum and by member states. How quickly Iceland fulfils the Maastricht criteria is primarily in the hands of the authorities and the social partners. In my view, the timing of membership will be determined primarily by how quickly the general government debt ratio can be lowered towards the Maastricht criteria. According to the formal requirements, general government debt must be less than 60% of GDP or fall quickly enough towards that target. Belgium, Italy, and Greece were admitted to the EMU with general government debt in excess of 100% of GDP – a decision now rued by many. Iceland will probably be subjected to more stringent requirements, for which I am tempted to be grateful.