03/12/2012 10:52 EDT | Updated 03/12/2012 10:53 EDT

Iceland Canadian Dollar: Johanna Sigurdardottir, Icelandic Prime Minister, Keeps Loonie Option Open

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Faced with popular discontent over her country’s talks to join the European Union, Iceland’s prime minister appears to have opened the door to the island nation’s adoption of the Canadian dollar as an alternative.

In a speech at a party convention Saturday, Icelandic Prime Minister Johanna Sigurdardottir sounded the death knell for the Icelandic krona, saying her country faced a choice between “surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country or becom[ing] a member of the EU.”

That is the clearest sign yet that Iceland’s government may be open to ideas other than joining the EU, and taking seriously public opinion polls showing a majority of Icelanders oppose the EU, while many support the idea Iceland should unilaterally adopt the Canadian dollar.

A recent poll found that more than 56 per cent of Icelanders oppose EU accession in the wake of the debt crises that have rocked Greece and other eurozone members. Although entry into the EU does not necessarily mean joining the euro, in practicality most countries are expected to join the common currency.

A consensus is developing among Icelanders that their currency -- which lost about 60 per cent of its value in the wake of a devastating financial crisis that hit the country in 2008 -- needs to be replaced.

Thus far, the Social Democratic Alliance-led government had indicated that it would pursue EU negotiations to that end, while the opposition Progressive Party had proposed adopting the loonie. Sigurdardottir’s comments Saturday suggested the government may also be open to adopting the Canadian currency.

A recent poll found the Canadian dollar is the most popular option among Icelanders in terms of a replacement currency.

Iceland adopting the loonie would likely have little impact on Canada, as Canada’s economy was valued in 2011 at $1.8 trillion, while Iceland’s economy is less than one per cent of that, at $14 billion.

The controversy over the loonie blew open earlier this month when Canada’s ambassador to Iceland, Alan Bones, indicated during a radio interview that Canada was not opposed to Iceland adopting the loonie. But when those comments ignited a firestorm of debate in Canada, the federal government put a halt to a speech Bones was planning to deliver, in which he would reiterate Ottawa’s openness to the idea.

Although the Bank of Canada has previously indicated it, too, doesn’t oppose Iceland using the loonie, its more recent comments have been noncommittal.

And it’s unclear how committed supporters of the idea really are. The Economist reports that Sigmundur Gunnlaugsson, leader of the opposition party championing the loonie idea, suggested that support for the proposal was a ploy meant to get Iceland’s government to consider ideas other than joining the euro.

It’s not like we are fighting for the adoption of the Canadian dollar,” Gunnlaugsson was quoted as saying.

Some economists have questioned whether Iceland adopting the loonie would be good for Iceland -- or Canada.

"The government of Iceland would presumably be issuing Loonie bonds. Given the recent experience of the Eurozone, governments borrowing in a foreign currency -- which they cannot themselves print -- does not look like a very stable arrangement," economist Nick Rowe blogged. "If the Eurozone has very weak fiscal relations, those between Iceland and Canada are non-existent. Would Canada be expected to play Germany to Iceland's Greece?"

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