6 ms·

People in favor of Iceland joining the EU should be honest and transparent that it's a pro inflation policy. In fact, Icelandic inflation would probably skyrock

by gargan 2y ago

People in favor of Iceland joining the EU should be honest and transparent that it's a pro inflation policy. In fact, Icelandic inflation would probably skyrocket. Why? Iceland's interest rate is 8.5% https://www.cb.is/other/key-interest-rate/ https://www.cb.is/other/key-interest-rate/ EU's interest rate is 3% https://www.ecb.europa.eu/stats/policy_and_exchange_rates/key_ecb_interest_rates/html/index.en.html https://www.ecb.europa.eu/stats/policy_and_exchange_rates/ke... The higher Icelandic rate is set for Icelanders by Icelanders in order to bring their 4.8% inflation rate down to the 2.5% target. If Iceland adopted the EU's interest rate which is mainly set for France and Germany, that would be a 5% interest rate cut which is a massive stimulus. Icelandic inflation would skyrocket and there would be no chance of hitting the 2.5% target. People should also look into Optimal Currency Area theory popularized by Paul Krugman eg https://archive.nytimes.com/krugman.blogs.nytimes.com/2012/06/24/revenge-of-the-optimum-currency-area/ https://archive.nytimes.com/krugman.blogs.nytimes.com/2012/0... The US Dollar works because of massive fiscal transfers from states on the coasts to states in the interior. The US also allows whole areas to deindustrialize like Detroit in order to solve the unavailability of currency adjustments between states. Are Icelanders willing to subsidize Greece? Are they willing to forgo their ability to devalue their currency like in 2008? Without devaluation that means deindustrialization. For all the above reasons, Iceland joining the EU would be the stupidest and most economically illiterate decision in it's history.

chgs 2y ago
Iceland wouldn’t join the euro with inflation like that
- alecco 2y ago
  I'm sure one of the Big 4 accounting firms and Goldman could step up to help "fix" any problem given their experience with Greece.
- hulitu 2y ago
  > Iceland wouldn’t join the euro with inflation like that Nobody cares about inflation. They just need the right "democratic leaders". See Georgia. /s
  - xxs 2y ago
    It's not possible to join the Euro zone unless the inflation in the country is at the bottom side of the Euro zone for consecutive years. The inflation absolutely matters.
  - chgs 2y ago
    Nobody’s taking about Georgia joining the euro
    - rrr_oh_man 2y ago
      You’d be surprised
deleted 2y ago
[deleted]
strken 2y ago
The EU and the eurozone aren't the same. If Denmark hasn't adopted the euro, why would Iceland do so? Edited to remove Sweden because it's obliged to eventually adopt the euro.
- csmpltn 2y ago
  Denmark has pegged their currency to the Euro.
  - iamacyborg 2y ago
    Switzerland pegged the Frank against the US Dollar, until they didn’t.
  - throw5959 2y ago
    Many EU countries have done so and then few years ago many stopped doing it.
- IceDane 2y ago
  Because the Icelandic krona is basically universally agreed by everyone to be garbage monopoly money that only stays because of the oligarchs that are in power. Also, yeah, the Danish Krona is pegged to the euro at ~7.45 so there is little incentive to switch over.
  - woodpanel 2y ago
    interesting to read the Icelandic Version of „oligarchs in power want xyz“. Although it doesn’t make sense, because the influx of cheap money would make joining the EU an obvious boon for that class, wouldn’t it?
  - rrr_oh_man 2y ago
    > money that only stays because of the oligarchs that are in power Can you elaborate?
- franga2000 2y ago
  Being this late to the party and not that powerful of a country, I would be willing to bet the EU would force them into it as a condition to join.
littlestymaar 2y ago
> People in favor of Iceland joining the EU should be honest and transparent that it's a pro inflation policy. In fact, Icelandic inflation would probably skyrocket. It would not, simply because joining the Euro Area isn't a one time thing, but a series of steps, and they wouldn't move forward as long as the inflation is higher than in the rest of the EU. > If Iceland adopted the EU's interest rate which is mainly set for France and Germany, that would be a 5% interest rate cut which is a massive stimulus. Interests rate is only one of the factors involved in controlling inflation, and the fact that Italy has been able to adjust its economic policy in order to align its inflation figures to Maastricht requirements and join the Euro Area is a good proof of that. > People should also look into Optimal Currency Area theory popularized by Paul Krugman It has been popularized by Robert Mundell in the 60s, for which he got the Sveriges Riksank prize (the "Nobel") in 1999, not by Paul Krugman. > For all the above reasons, Iceland joining the EU would be the stupidest and most economically illiterate decision in it's history. The creation of the Euro is IMHO the "most economically illiterate decision in […] history" but moat of your arguments above miss the mark.
- gargan 2y ago
  Inflation will always be higher in Iceland, because they have a very specific pro union setup which guarantees salary increases each year. As a result of the unions, Icelanders work very few hours and earn some of the highest wages in the world - https://en.wikipedia.org/wiki/Icelandic_Confederation_of_Labour#/media/File:Hours_Worked_Compared_to_Earnings_Per_Week.webp https://en.wikipedia.org/wiki/Icelandic_Confederation_of_Lab... It won't (I hope) be following Italy as an economic model. By "popularized" I mean brought to a modern audience in Krugman's New York Times column. It's Mundell's theory of course. Interest rates are the main way to fight inflation. Glad we agree that the Euro is a silly currency union!
  - plextoria 2y ago
    These kind of questions get ironed out during accession negotiations I think.
  - littlestymaar 2y ago
Yizahi 2y ago
EU needs to evolve to become closer to USA (imo). Not be a loose union with a central suggestion organ, but a real federation, with unified laws, army etc, provisions to punish sabotage and collaborators with enemies of such new federation and so on. Then internal monetary transfers would make sense, because Iceland and Greece would just be two internal regions. PS: of course it's ok if that never happens. But then EU can't expect to compete, due to not having good properties of truly decentralized collection of countries and neither of a true federation. Any startup will/is be hobbled by the mandatory EU law framework and structure, but won't benefit from the single law set or single language because those don't exist in EU.
- baxtr 2y ago
  I think I don’t understand which problem this unification would solve? Startups?
  - cabalamat 2y ago
    Putin. It solves the problem of Putin.
  - Yizahi 2y ago
    Startups and bigger companies too, up to international megacorporations. Companies get more workforce and faster time to market for less cost. EU gets better financial regulation (not more, but better). Competitive products means competitive salaries, which slows brain drain and allows for better export to import ratio. It is always better to export as much refined and hitech product as possible.
- fakedang 2y ago
  Will never happen because Germany and France. I wonder in the coming years if we'll see the US actually become more like the EU. I expect there to be significant competition between Texas and California, in terms of industry, polity and philosophy. As the US continues to be internally fragmented politically, we're bound to see states compete actively, sometimes even to the detriment of other states. While we won't see a significant fragmentation like the EU, we will see a country that's so internally divided, there would be saboteurs and collaborators with enemies. We're kind of already seeing this, for example Texas and Florida shipping their illegals into Massachusetts and NY, states being firmly in the control of one party, with no room for switching governments, and the ever present question of states' rights.
deleted 2y ago
[deleted]
derriz 2y ago
There isn't a simple functional causal relationship between interest rates, inflation and currency rates. And in fact, I think you have it exactly backwards in this case. Many countries have dollarized their economies - replacing a local currency supported by high interest rates with the US dollar which has even lower interest rate than EUR - as a tool to tame inflation or kill hyper-inflation. Other - small non-EU countries have adopted the Euro for the same reason. And with the same result - a massive fall in inflation. This isn't just theory, this has been observed to work over and over again.
- gargan 2y ago
  Sorry but you have it backwards. The examples you have in mind are South American and Eastern European countries 20 years ago ie emerging markets struggling to maintain a currency peg. Iceland doesn't suffer from hyperinflation and it's already got an established central bank and trusted institutions. Lowering the interest rate in this environment would 100% lead to more inflation. Plus Iceland relies on currency devaluation to cope with shocks. It would be crazy to give this up.
woodpanel 2y ago
As a German I couldn’t agree more. Whoever is trying to sell you joining the EU is wise, run away from them as fast as you can. Considering its remoteness and population size, where Iceland sits today as country is an absolute success story. Don’t give up your sovereignty.
gwbas1c 2y ago
> massive fiscal transfers from states on the coasts to states in the interior That's because of how US politics work. Less populous states have disproportionately higher political power. It's not a monetary policy thing. It's a core difference between US and European politics. > The US also allows whole areas to deindustrialize That's because Americans are free to live and work where they choose. There's a lot more nuance here, if you look at Obama's memoir, he writes quite frankly about the dilemma of propping up the US auto industry with government dollars. When they (US automakers) asked for bailouts, he found them quite mismanaged, but if they went under a large portion of the US economy would find itself unemployed.

by gargan 2y ago

chgs 2y ago

Iceland wouldn’t join the euro with inflation like that

alecco 2y ago
I'm sure one of the Big 4 accounting firms and Goldman could step up to help "fix" any problem given their experience with Greece.
hulitu 2y ago
> Iceland wouldn’t join the euro with inflation like that Nobody cares about inflation. They just need the right "democratic leaders". See Georgia. /s
- xxs 2y ago
  It's not possible to join the Euro zone unless the inflation in the country is at the bottom side of the Euro zone for consecutive years. The inflation absolutely matters.
- chgs 2y ago
  Nobody’s taking about Georgia joining the euro
  - rrr_oh_man 2y ago
    You’d be surprised

deleted 2y ago

[deleted]

strken 2y ago

The EU and the eurozone aren't the same. If Denmark hasn't adopted the euro, why would Iceland do so? Edited to remove Sweden because it's obliged to eventually adopt the euro.

csmpltn 2y ago
Denmark has pegged their currency to the Euro.
- iamacyborg 2y ago
  Switzerland pegged the Frank against the US Dollar, until they didn’t.
- throw5959 2y ago
  Many EU countries have done so and then few years ago many stopped doing it.
IceDane 2y ago
Because the Icelandic krona is basically universally agreed by everyone to be garbage monopoly money that only stays because of the oligarchs that are in power. Also, yeah, the Danish Krona is pegged to the euro at ~7.45 so there is little incentive to switch over.
- woodpanel 2y ago
  interesting to read the Icelandic Version of „oligarchs in power want xyz“. Although it doesn’t make sense, because the influx of cheap money would make joining the EU an obvious boon for that class, wouldn’t it?
- rrr_oh_man 2y ago
  > money that only stays because of the oligarchs that are in power Can you elaborate?
franga2000 2y ago
Being this late to the party and not that powerful of a country, I would be willing to bet the EU would force them into it as a condition to join.

littlestymaar 2y ago

> People in favor of Iceland joining the EU should be honest and transparent that it's a pro inflation policy. In fact, Icelandic inflation would probably skyrocket. It would not, simply because joining the Euro Area isn't a one time thing, but a series of steps, and they wouldn't move forward as long as the inflation is higher than in the rest of the EU. > If Iceland adopted the EU's interest rate which is mainly set for France and Germany, that would be a 5% interest rate cut which is a massive stimulus. Interests rate is only one of the factors involved in controlling inflation, and the fact that Italy has been able to adjust its economic policy in order to align its inflation figures to Maastricht requirements and join the Euro Area is a good proof of that. > People should also look into Optimal Currency Area theory popularized by Paul Krugman It has been popularized by Robert Mundell in the 60s, for which he got the Sveriges Riksank prize (the "Nobel") in 1999, not by Paul Krugman. > For all the above reasons, Iceland joining the EU would be the stupidest and most economically illiterate decision in it's history. The creation of the Euro is IMHO the "most economically illiterate decision in […] history" but moat of your arguments above miss the mark.

gargan 2y ago
Inflation will always be higher in Iceland, because they have a very specific pro union setup which guarantees salary increases each year. As a result of the unions, Icelanders work very few hours and earn some of the highest wages in the world - https://en.wikipedia.org/wiki/Icelandic_Confederation_of_Labour#/media/File:Hours_Worked_Compared_to_Earnings_Per_Week.webp https://en.wikipedia.org/wiki/Icelandic_Confederation_of_Lab... It won't (I hope) be following Italy as an economic model. By "popularized" I mean brought to a modern audience in Krugman's New York Times column. It's Mundell's theory of course. Interest rates are the main way to fight inflation. Glad we agree that the Euro is a silly currency union!
- plextoria 2y ago
  These kind of questions get ironed out during accession negotiations I think.
- littlestymaar 2y ago

Yizahi 2y ago

EU needs to evolve to become closer to USA (imo). Not be a loose union with a central suggestion organ, but a real federation, with unified laws, army etc, provisions to punish sabotage and collaborators with enemies of such new federation and so on. Then internal monetary transfers would make sense, because Iceland and Greece would just be two internal regions. PS: of course it's ok if that never happens. But then EU can't expect to compete, due to not having good properties of truly decentralized collection of countries and neither of a true federation. Any startup will/is be hobbled by the mandatory EU law framework and structure, but won't benefit from the single law set or single language because those don't exist in EU.

baxtr 2y ago
I think I don’t understand which problem this unification would solve? Startups?
- cabalamat 2y ago
  Putin. It solves the problem of Putin.
- Yizahi 2y ago
  Startups and bigger companies too, up to international megacorporations. Companies get more workforce and faster time to market for less cost. EU gets better financial regulation (not more, but better). Competitive products means competitive salaries, which slows brain drain and allows for better export to import ratio. It is always better to export as much refined and hitech product as possible.
fakedang 2y ago
Will never happen because Germany and France. I wonder in the coming years if we'll see the US actually become more like the EU. I expect there to be significant competition between Texas and California, in terms of industry, polity and philosophy. As the US continues to be internally fragmented politically, we're bound to see states compete actively, sometimes even to the detriment of other states. While we won't see a significant fragmentation like the EU, we will see a country that's so internally divided, there would be saboteurs and collaborators with enemies. We're kind of already seeing this, for example Texas and Florida shipping their illegals into Massachusetts and NY, states being firmly in the control of one party, with no room for switching governments, and the ever present question of states' rights.

deleted 2y ago

[deleted]

derriz 2y ago

There isn't a simple functional causal relationship between interest rates, inflation and currency rates. And in fact, I think you have it exactly backwards in this case. Many countries have dollarized their economies - replacing a local currency supported by high interest rates with the US dollar which has even lower interest rate than EUR - as a tool to tame inflation or kill hyper-inflation. Other - small non-EU countries have adopted the Euro for the same reason. And with the same result - a massive fall in inflation. This isn't just theory, this has been observed to work over and over again.

gargan 2y ago
Sorry but you have it backwards. The examples you have in mind are South American and Eastern European countries 20 years ago ie emerging markets struggling to maintain a currency peg. Iceland doesn't suffer from hyperinflation and it's already got an established central bank and trusted institutions. Lowering the interest rate in this environment would 100% lead to more inflation. Plus Iceland relies on currency devaluation to cope with shocks. It would be crazy to give this up.

woodpanel 2y ago

As a German I couldn’t agree more. Whoever is trying to sell you joining the EU is wise, run away from them as fast as you can. Considering its remoteness and population size, where Iceland sits today as country is an absolute success story. Don’t give up your sovereignty.

gwbas1c 2y ago

> massive fiscal transfers from states on the coasts to states in the interior That's because of how US politics work. Less populous states have disproportionately higher political power. It's not a monetary policy thing. It's a core difference between US and European politics. > The US also allows whole areas to deindustrialize That's because Americans are free to live and work where they choose. There's a lot more nuance here, if you look at Obama's memoir, he writes quite frankly about the dilemma of propping up the US auto industry with government dollars. When they (US automakers) asked for bailouts, he found them quite mismanaged, but if they went under a large portion of the US economy would find itself unemployed.