Iceland seeks EU support amid Arctic rivalry and trade wars

Iceland should join the European Union to strengthen its economy, compete with larger trading partners and withstand Arctic rivalries, the island's finance minister told Reuters, ahead of a public vote on whether to restart talks with Brussels.

Iceland, a NATO member without a standing army and located at one of the most strategically important points of the narrow passage in the North Atlantic, will vote on August 29 on whether to renew EU membership negotiations.

The vote is not a referendum on membership itself, and any eventual agreement would have to be confirmed in a second referendum. Reykjavik walked away from previous negotiations in 2013, when a Eurosceptic government came to power.

"I think membership would serve both our economic and our security interests well," Finance Minister Dadi Mar Kristofferson, whose party is recommending a "yes" vote, told Reuters.

"The core values ​​of a small open economy will always be free trade and a rules-based order, because we do not have the capacity to defend our interests by force."

US a key partner, but Greenland policy raises concerns

Kristofferson said that the 1951 bilateral defense agreement with the United States and NATO membership remain the foundation of Iceland's security.

However, he stated that Trump's threats to take over Greenland have somewhat changed the calculus.

The dispute has sparked one of the sharpest transatlantic conflicts in recent years, and the EU has threatened Washington with broad economic countermeasures.

The US believes its sphere of influence extends beyond Iceland and Greenland, he said. "And that's not going to change."

For Iceland, located between Greenland and Europe, in one of the most monitored ocean areas of the Atlantic, the episode highlighted its strategic importance.

"We are an unsinkable aircraft carrier and we will remain an unsinkable aircraft carrier," he said.

Gylfi Zoega, a professor of economics at the University of Iceland, said changes that could have taken place over a decade under the Trump administration were compressed into 18 months.

"Europe is left to its own devices. And then we have to decide whether we are going to be an American military base important for the defense of American territory or part of Europe. And that is a big question," he said.

With a population of just 400.000, Iceland would be the smallest country in the bloc of 450 million people. For the EU, its strategic location and rich fishing grounds make it an attractive candidate, although Brussels is careful not to give the impression of campaigning ahead of the vote.

Economic issue

Iceland is the most expensive country in the world, according to an analysis by Viska, Iceland's largest academic union, and the central bank's benchmark interest rate is 7,75 percent. The island, whose volcanic landscapes were featured in the HBO series "Game of Thrones," lives off fish, aluminum and tourism.

Central Bank Governor Asgeir Jonsson recently cited lower transaction costs, greater competition and lower interest rates as benefits of adopting the euro, while warning that the transition could be inflationary and that deep labor market reform would certainly be necessary.

Kristofferson said EU membership could lower interest rates.

"Iceland will never become cheap, but... it could become cheaper," he said.

He stated that the Icelandic krona is a very small currency and subject to fluctuation, and that membership would open up three options: to remain completely independent, to be tied to the euro, or to adopt the euro directly.

Opponents argue that Iceland already has access to the single market through the European Economic Area, without the costs and obligations of full membership, and that it would be difficult to obtain a permanent exemption from Brussels for its fisheries. Fishing is crucial to Iceland's economy and national identity, and the industry fears that joining the EU's Common Fisheries Policy could mean opening up Icelandic waters to foreign fleets.