As many people know, Iceland is a small island country located southeast of Greenland, with a population of approximately 320,000. This European nation has had its own currency, the Krona, since 1885 and there have always been speculations that a country with such a small population would struggle with its own currency. Unfortunately, for Iceland, those speculations came true. This country has essentially been running a “financial bubble” over the past few decades, and though this economic structure can help build a high value economy, it can crumble very quickly. This is what happened in 2008. At the height of the economic recession, Iceland experienced the largest banking collapse in economic history. Since then, Iceland has been in a large financial crisis, and has been trying to regain economic stability. In order to do this, Iceland, as expected, applied the European Union (EU). However, due to the recent economic instability of the Eurozone, it appears as if Iceland is looking into other solutions and one of which is adopting the Loonie. This idea of Iceland using the Canadian currency, other than the Euro or keeping their own is not as crazy as it may appear to be. Canadian dollar is a stable, liquid currency and it even matches Iceland’s economy that is structured around exporting fish, aluminum, and in the future, energy. Other than stability, the Canadian economy also has a government that is rated triple-A and an outstanding fiscal standing. Another benefit that Iceland would experience from this would be the resolution of the country’s difficult situation in doing business with other countries and foreign investors. Tight currency-controls on the country limit the amount of profit investors can repatriate, and overall the nation has had no reputation since the 2008 bank collapse.
Adopting the Canadian dollar may indeed make the lives of Icelanders fruitful, but how would it impact the hockey-loving nation of Canada? If Iceland were to change its currency to the Canadian dollar, it would have very little impact on our economy and the Bank of Canada’s management of money supply. Iceland has a GDP of approximately $12 billion compared to Canada’s approximate of $1.8 trillion meaning that Iceland wouldn’t even have any say in Canada’s monetary policy. The next thing to look at would be trade. Both countries are export driven, and having the same currency would cause trading between Canada and Iceland to multiply, which is beneficial to both countries. However, the greatest impact this would have on Canada is the increase in its geopolitical influence over a region containing an immense amount of resources, the Arctic. There are 8 countries, including Canada and Iceland, that have influence over the division and use of the Arctic Circle, which is supposed to contain over 20% of the Earth’s remaining oil and gas. Having additional influence on the outcome of the arctic can help maintain Canada’s strong economy for many more years to come.
It’s also good to note that there are some problems that arise with this. Iceland would need to maintain a strong reserve in order to replace the Krona with the Loonie. It would have to be done at the current exchange rate and fully replacing the Krona will take time. Furthermore, since only the Bank of Canada will be producing the Canadian dollar, Iceland will essentially be borrowing the Canadian currency. However, recent events in the Eurozone have shown that this arrangement can become very instable.
All in all, there could be many great benefits to having Iceland switch it’s currency to the Loonie, but there will be bumps here and there from time to time. However, if economics is not your fancy, rest assured, if this indeed does happen, you can just enjoy the beautiful nation of Iceland without having to worry about exchanging money.
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