Could Iceland adopt the loonie?

As Icelanders toy with the idea of ditching the tarnished krona, one of the intriguing suggestions being floated there is that it should consider adopting the Canadian loonie.
While still a long shot, one possibility being raised as Iceland considers a replacement for its tarnished krona is Canada's loonie. (Jonathan Hayward/Canadian Press)

Will the loonie soon be flying high in ... Iceland?   

For months, Icelanders have been toying with the idea of ditching the tarnished krona, which has never fully recovered from the collapse of the financial system four years ago.   

But one of the intriguing suggestions floating around the North Atlantic island is that instead of the adopting the euro — a natural fit given that Iceland has taken initial steps to join the European Union — it might cast a furtive eye to the Canadian loonie.   

This is not as outlandish as it sounds. Canada's banking system is something Iceland's is not — sound — and the Canadian economy, with its mooring in much-desired natural resource wealth, is among the most stable and predictable in the advanced world.   

Canada also does not have the massive overhang of sovereign debt that will trouble Europe or even the United States for years.   

While still a long-shot, Iceland's national broadcaster, RUV, reports that Canada's ambassador to the country, Alan Bones, will tell a meeting of the Progressive Party on Saturday that if Icelanders want, they can have the loonie.   

The ambassador will tell the opposition party, which has stirred up the idea of adopting the loonie, that authorities in Ottawa are willing to start talks if that is the will of the Icelandic people, according to RUV.

However, late Friday, the Foreign Affairs Department in Ottawa issued a statement to reporters saying that the ambassador would not be participating in the currency convention in Reykjavik and "will not be speaking on the issue."  

Bank of Montreal economist Douglas Porter says the feat can be accomplished. Iceland would need to buy sufficient Canadian currency to do the trick, which likely will initially put upward pressure on the loonie.   

But the impact on Canada would be small, he said, since Iceland's population is only about 317,000 and the economy is less than one per cent of Canada's.   

There are precedents. El Salvador and Ecuador have both unilaterally adopted the U.S. dollar in the past dozen years, and Kosovo has the euro.

Krona falls   

"Frankly, I think we should take it as a great compliment. I know everybody thinks of Iceland as a basket case, but they are beginning to turn things around," Porter said.   

"It shows you how far we've come in the past 10 years that people are even talking about this."   

It's hard to imagine such a conversation a decade ago, when the loonie was valued at 62 cents U.S. and Canadians were more likely considering their own dumping operation.   

The problem for Iceland is that it will have no influence in the setting of monetary policy, such as interest rates, so any adjustments for economic slack or hyper inflation would need to come at the expense of other levers, such as employment and income, rather than currency adjustment. That's a poor trade-off for many countries.   

With the krona continuing to fall, and currency controls still in place, it's not that Icelanders have any particular love of their currency.   

But economist Olafur Isleifsson of Reykjavik University said in an email interview that the loonie would not be the first option if the krona is jettisoned.   

"There are some entities linked to the business community up here that are voicing adopting the Canadian dollar," he said. "I for one do not see this as a realistic possibility," saying the natural choice is the euro.   

As spokesman for the Finance Department said the government would not speculate on other country's currencies.   

Attempts to reach ambassador Bones or obtain advance copies of his address Saturday were not successful.