Will EU lifeline sink Iceland's fishing industry?

The government collapsed this week and banks are on life support. Icelanders are now giving the European Union another look.

By , Correspondent

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    Hafnarfjordur's port: Fishermen fear that Iceland's economy could face even deeper challenges if the country cedes control of its oceans to the European Union.
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The fishing trawlers are tied up four-deep at the pier, their crews unloading from – or stocking for – long, nearly sunless days spent plying the banks of the frigid North Atlantic.

Fishing has long been the backbone of the Icelandic economy, a resource so important to this island nation's survival that it fought three bloodless "Cod Wars" against Britain in the 1950s and '70s to assert exclusive control over its traditional grounds.

Fishermen now fear that their nation's financial meltdown will bring about their worst nightmare: that Iceland will join the European Union, surrendering management of its oceans to a distant bureaucracy with a poor conservation record.

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"The Icelandic fishing industry has been booming for years, and we're not subsidized like the EU," says Sigurdur Sverrisson of the Federation of Icelandic Fishing Vessel Owners. "If we joined there is no way we could keep all of our fisheries policies intact."

Iceland's rulers have long resisted EU membership in an effort to protect this vital industry, which accounts for the majority of the country's export income. This week, everything changed with the collapse of the center-right government Monday in the face of violent protests. The Social Democrats, who generally support joining the EU, are expected to lead the interim government.

On Tuesday, the Social Democrats announced their wish to hold a nationwide referendum on joining the EU to be held concurrent with May elections. Public opinion polls suggest two-thirds of Icelanders will vote yes, up from a little over half before October's banking sector collapse.

For Iceland, the real goal is to adopt the euro and retire their currency, the kronur, which is widely viewed as irreparably tarnished by the failure of Iceland's banking system. Until the meltdown, the kronur had been the world's smallest freely traded currency, supported by an economy of only 300,000 people; when its banks tumbled after the collapse of Lehman Brothers, Iceland's economy turned out to be too small to rescue the institutions.

"We tried the course of an independently floating currency and that has led us into disaster," says Olafur Isleifsson, of the Reykjavik University School of Business and onetime central bank official, who supports adopting the euro. "We have to rebuild our status in the international financial world and return to the world of business as a credible entity."

"It would be very difficult to reestablish the kronur as a strong currency, and the fact that we do most of our business with European countries makes the euro the logical choice," says Gunnar Haraldsson, director of the University of Iceland's Institute of Economic Studies. "But if we engage in entry talks with the EU, we would really have to reach some agreement about our fisheries."

It's hard to overstate the importance Icelanders attach to their fish stocks, which allowed their medieval Norse ancestors to colonize this glacier-laden island in the first place. After independence from Denmark in 1944, their leaders unilaterally extended their territorial waters from three to four miles from shore, then 12, and ultimately to 200 miles. Britain sent destroyers to escort their trawlers; Icelandic policemen harassed them from tiny patrol boats. The cutting tools they towed to sever English nets are today proudly displayed in the local museum in the fishing port of Akranes.

Icelanders won each confrontation – today, 200-mile territorial limits are the norm – securing a resource that would help them create one of the world's wealthiest societies. Their coins bear not the images of kings, presidents, or generals, but of cod, capelin, crabs, and lumpfish.

"We fought for fisheries rights, and those who of us who remember those times perceived it as a continuance of our independence struggle," says fisheries minister Einar Gudfinnsson, who opposes EU membership. "If we do not fare well in the fishing industry, that has a direct impact on the development of living standards in this country."

Iceland has managed its fisheries relatively successfully, in stark contrast to the EU's Common Fisheries Policy, which experts say has often failed to control overfishing and the government subsidies that fuel it. Much of the cod eaten in the US and Europe is now caught by the profitable, unsubsidized Icelandic fleet.

University of Iceland economist Thorolfur Matthiasson says Europe could learn from Iceland, which allows fishermen to buy and sell rights to harvest shares of the total allowed catch in various species. "Very soon Icelandic expertise will be in high demand in Brussels to help them reconstruct the Common Fisheries Policy," he says.

The EU also prohibits whaling, which could be the end for the four black whaling vessels tied up on the Reykjavik waterfront, just across from a whale watching boat. Iceland's resumption of hunting fin whales, an endangered species, in 2006 was condemned by many nations.

Mr. Gudfinnsson, interviewed before his government's resignation, said that joining the EU "would be inconceivable" unless Iceland was able to negotiate permanent exemptions for its fisheries. "Everyone who is calling for EU membership is imagining a situation where we can continue our own fisheries policies," he says.

That will never happen, according to Mr. Sverrisson, of the fishing vessel owners' association, who thinks Iceland should adopt the Swiss franc, Norwegian krone, or US dollar instead. "The EU doesn't give blanket exceptions to its fisheries policies," he says. "I challenge people to show me one example."

While its unclear if the EU would grant such concessions, it appears likely to welcome Iceland, which is already part of its open mark and customs union. EU Enlargement Commissioner Olli Rehn said in October that the EU "could quickly complete the negotiations" if Iceland applied for membership. Even so, the process is time consuming: Full membership would likely be achieved in 2011.

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