Posted by: Dirk | February 24, 2014

Iceland does not want to access EU and euro

Iceland last week officially withdrew its accession bid to the European Union. Joining the EU would have meant joining the euro, as the EU itself says:

Who can join and when?

All Member States of the European Union, except Denmark and the United Kingdom, are required to adopt the euro and join the euro area. To do this they must meet certain conditions known as ‘convergence criteria’.

The question is why they don’t want to join, and I think the answer is pretty straightforward. Here are the rates of unemployment for the countries in crisis inside the euro area:

euroU

And this is the unemployment rate for Iceland:

icelandU
It is obvious that Iceland, which let its ‘too big to fail’ banks go bankrupt, has enjoyed a strong recovery while the euro zone members did not. Therefore, it is better to stay out of the euro zone, where in times of crises the political top (European Commission) forces countries to cut government spending, disproportionately putting the burden on workers, the unemployed and the young especially. While Iceland has 2% unemployment in sight, the Greek government celebrates a positive primary surplus while the Greek people face record unemployment. The European economy faces bleak prospects. Also last weak, the data revealed that German real wages have been falling again in 2013, as Reuters reports:

Real wages in Germany are likely to fall this year for the first time since the height of the financial crisis in 2009, the Federal Statistics Office said on Thursday, basing its prediction on data for the first nine months.

The decline could dampen hopes that domestic consumption will boost Europe’s biggest economy in the coming months as the traditionally export-driven powerhouse suffers from fragile demand from the euro zone and a slowdown in emerging markets.

Take a look at the macroeconomic identity: Y = C + I + G + NX. In Germany, the government does not want to stimulate and instead targets a zero. Consumption can’t rise if real incomes are falling. Net exports are unlikely to go up as the euro area is still weak and more exports to the rest of the world will be stopped by an appreciating euro. The last possibility is to engineer a real estate (or something else) bubble, but with real wages falling and the experiences in Spain and Ireland in fresh memory households will probably not opt for more debt.

It’s the economy, stupid. And economic management in the euro area is a mess. The only institution that worked has been the ECB (much more so under Draghi than under Trichet), but even the ECB can’t make governments spend more or let taxes go down. And don’t forget that the ECB has been a member of the troika and is responsible for the austerity policies that put Europe in a hole. Politically, the situation is probably going to get worse before it gets better, with European far-right parties set to gain momentum in the European elections later this year.


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