When discussing the cost of EU membership, it's important to look at the full picture. We need to examine both the direct accounting impact (membership fees paid minus grants received) and the hidden economic cost of standing outside the Union.
What do we pay today, and what would be added?
Through the EEA Agreement, we already pay billions of krónur annually to Europe. We contribute to the EEA Grants (supporting development in less wealthy European countries) and we buy access to programmes like Horizon (research) and Erasmus (education). We pay without having any voting rights over how the funds are allocated.
As a full member state, our contributions would increase, calculated from gross domestic product (GDP) like all other member states. EU membership fees average about 1% of GDP. In return, however, significant funds would flow back to Iceland:
- Structural and regional funds: Grants for infrastructure and economic development in rural areas.
- Agricultural support (direct savings for the treasury): The Icelandic state currently spends tens of billions of krónur annually on agricultural subsidies (farm product agreements). Upon accession, the EU's Common Agricultural Policy (CAP) would take over a large share of this funding. In this sense, EU contributions would not be a pure addition to our regular budget — treasury savings would offset them.
- Research and education: Continued (and expanded) access to the world's largest research funding programmes.
Because Iceland is a wealthy country (high GDP per capita), it is nevertheless rather likely that we would pay more into the common funds than we receive back. We'd then be net contributors, like Denmark and Sweden. The outcome could, however, depend on the precise terms of the accession agreement, for instance regarding agriculture and regional policy.
The hidden cost of the króna
But direct membership fees only tell half the story. The biggest benefit of membership — and the biggest cost of staying outside the EU today — lies in maintaining an independent currency in a micro-market. We pay a high price for the króna every year:
- Expensive foreign reserves: To defend the króna against collapse, the Central Bank must maintain an enormous foreign currency reserve, currently worth close to 1,000 billion krónur. The Bank holds this foreign currency at low interest rates (abroad) but owes Icelandic krónur at high interest rates (domestically). This interest rate differential causes significant accounting losses for the Bank every year, which must sooner or later be balanced out. With euro adoption, this massive reserve and its associated costs would become unnecessary.
- Central Bank operating costs: The cost of running a full-scale central bank managing monetary policy for 380,000 people is proportionally high. With euro adoption, operations would become much simpler and cheaper, as the European Central Bank would take over monetary policy oversight.
- Interest costs for the public: Because of the króna, Icelandic households and businesses pay many times higher interest rates on their loans than our neighbours in Europe.
- Oligopoly and tariffs: We pay an indirect cost through higher prices on goods, due to tariffs and limited competition in a small, closed market — which the customs union and the euro would dismantle.
In short:
Direct membership fees would increase compared to current EEA contributions. But that additional cost would in all likelihood pale quickly in comparison with the enormous savings that the state, businesses, and households would enjoy from eliminating the cost of the foreign currency reserve, tariffs, and the sky-high interest rates of the Icelandic króna.
Sources and further reading:
- Central Bank of Iceland: Foreign reserves and related items — information on the size of the foreign currency reserve the Central Bank must maintain to support the króna.
- Government of Iceland: The EEA Agreement — information on the EEA Agreement and Iceland's current participation in cooperation programmes.
- European Union: EU budget — overview of how the EU budget works and how contributions are calculated from GDP.
- Central Bank of Iceland: Currency policy options (2012) — analysis of the opportunity cost and benefits of independent monetary policy and the króna versus the euro.