Iceland referendum and EU acession talks is a Perfect Storm

Iceland is gearing up for EU acession talks to begin in March this year. In a case of seriously unfortunate timing, Iceland is holding a referendum on the Icesave Bill on either 27th February or 6th March. In early March the Icelandic Government will also enter formal acession negotataions with the EU.

UK Chancellor, Alastair Darling hinted darkly on 4th January that the British Government would block Icelandic membership if they did not sign the bank repayment deal. Since then, Icelandic President Grimmson declared that he would not sign the bill and instead referred the issue to a national vote. Icelanders are certain to reject the anglo-dutch deal.

Although the British Foreign Office has since given assurances that the UK won't interfere with the Icelandic negotiations on EU membership, the reality is that the UK may beforced to take a stronger line once the Referendum rejects the repayment arrangements - not least because it will not want to be seen as being forced to back down at a time when the UK is in the middle of a febrile election period.

The problems for Iceland's acession plans don't end there. Germany and France have said that they will not make any concessions to Iceland - even if they are generally positive about Icelandic membership. The first two sectors that will be negotiated are fisheries and agriculture. Icelandic waters are rich pickings for European fishermen and fisheries represent a quarter of Icelandic exports. This will be a big test of Iceland's appetite for EU membership. At a time when it is trying to recover from the financial disaster, it is being asked to submit to strict EU quotas. IN adition, the French will be scrutinising very closely the talks on Icelandic membership of the Common Agricultural Policy. Iceland's 3,000 farmers fear that CAP membership will reduce local agricultural production by up to 50%. Nevertheless CAP membership does offer other benefits to Iceland.

The Germans are even more lukewarm about the prospect of Icelandic acession. The CSU - Angela Merckel's sister party has said it is not the EU's duty to "save" countries in trouble.

Despite this, Iceland could still expect a fast-track process. The country already meets 80% of the community acquis. True - there has already been a delay in achieving candidate status. The country had expected to gain candidate status in December but it was only because of internal EU wrangling over Lisbon appointments that delayed the decision. The present European Commission is a caretaker one with no mandat to make new decisions. Iceland must wait until its successor is properly in place. The Council can only confer candidate status after a recommendation from the EU executive. These recommendations need parliamentary approval too.

Iceland is still hopeful of EU membership in two years and membership of the Euro in four years.

One of the biggest attractions of EU membership for Iceland would be to join the Euro, after the virtual destruction of its currency. This, however, requires a preliminary period of two years during which the Icelandic krona would need to be within the narrow band of the Exchange Rate Mechanism. It would be difficult for Iceland to negotiate an exemption from this requirement, which is embedded in the Maastricht treaty

Iceland is a member of the European Economic Area, and participates in many EU programmes, including the Schengen agreement. Understandably it was disappointed that the Union did not mobilize itself quickly to come to the stricken country's aid, forcing it to turn instead to countries such as Russia and Japan, with which it has no formal links.

Despite the widespread disappointment with the EU, many Icelanders appear to have concluded that their best bet for the future would be to join the Union as soon as possible. Membership has never been so popular.

However, the dispute with the UK and the Netherlands over bank bailouts - as well as indignation in Rekjavik that it is forced to beg its Nordic neighbours for IMF support, could mean public support for EU membership could soon wane. Iceland needs to redouble its efforts to improve bilateral relations with key EU member states to ensure there is no further delay to EU acession talks. There is every risk that the country could be blind-sided by adverse developments from IMF loan talks and the Icesave bail-out referendum. Its essential then that it strengthens informal as well as the more formal channels of communications with the EU and its members (the UK in particular). It should demonstrate its European credentials by hosting a major informal EU summit in Rekjavik later this year to draw a line under the banking crisis fall-out and set about finding a pan-European solution to guaranteeing bank deposits. Iceland should regain its confidence after a series of polital and economic blows and set out what it can do to bring something to the European table.