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There isn't a simple functional causal relationship between interest rates, inflation and currency rates.

And in fact, I think you have it exactly backwards in this case.

Many countries have dollarized their economies - replacing a local currency supported by high interest rates with the US dollar which has even lower interest rate than EUR - as a tool to tame inflation or kill hyper-inflation. Other - small non-EU countries have adopted the Euro for the same reason.

And with the same result - a massive fall in inflation.

This isn't just theory, this has been observed to work over and over again.

Sorry but you have it backwards. The examples you have in mind are South American and Eastern European countries 20 years ago ie emerging markets struggling to maintain a currency peg.

Iceland doesn't suffer from hyperinflation and it's already got an established central bank and trusted institutions. Lowering the interest rate in this environment would 100% lead to more inflation.

Plus Iceland relies on currency devaluation to cope with shocks. It would be crazy to give this up.

> People in favor of Iceland joining the EU should be honest and transparent that it's a pro inflation policy. In fact, Icelandic inflation would probably skyrocket.

It would not, simply because joining the Euro Area isn't a one time thing, but a series of steps, and they wouldn't move forward as long as the inflation is higher than in the rest of the EU.

> If Iceland adopted the EU's interest rate which is mainly set for France and Germany, that would be a 5% interest rate cut which is a massive stimulus.

Interests rate is only one of the factors involved in controlling inflation, and the fact that Italy has been able to adjust its economic policy in order to align its inflation figures to Maastricht requirements and join the Euro Area is a good proof of that.

> People should also look into Optimal Currency Area theory popularized by Paul Krugman

It has been popularized by Robert Mundell in the 60s, for which he got the Sveriges Riksank prize (the "Nobel") in 1999, not by Paul Krugman.

> For all the above reasons, Iceland joining the EU would be the stupidest and most economically illiterate decision in it's history.

The creation of the Euro is IMHO the "most economically illiterate decision in […] history" but moat of your arguments above miss the mark.

Inflation will always be higher in Iceland, because they have a very specific pro union setup which guarantees salary increases each year. As a result of the unions, Icelanders work very few hours and earn some of the highest wages in the world - https://en.wikipedia.org/wiki/Icelandic_Confederation_of_Lab... It won't (I hope) be following Italy as an economic model.

By "popularized" I mean brought to a modern audience in Krugman's New York Times column. It's Mundell's theory of course.

Interest rates are the main way to fight inflation. Glad we agree that the Euro is a silly currency union!

> Inflation will always be higher in Iceland, because

They cannot join Euro until inflation stops being higher, because that's simply how it works: countries must achieve “convergence criterias” before they can enter the single currency.

These kind of questions get ironed out during accession negotiations I think.

The EU and the eurozone aren't the same. If Denmark hasn't adopted the euro, why would Iceland do so?

Edited to remove Sweden because it's obliged to eventually adopt the euro.

In theory EU and the Euro area are the same, because the TFEU says so. But in practice it's more complicated than this as Danes negotiated and opt-out clause during the negotiation of the treaty of Maastricht, and even though such clause isn't open to new entrants, in reality nothing prevents negotiations to eventually lead to such an outcome.

The case of Sweden is interesting though, they don't have an opt-out clause so they are obligated to adopt the Euro eventually, but they exploited a loophole by not joining the newest version of European Exchange Rate Mechanism after the 1999, which prevents their entry in the Euro.

Because it's legally required by treaty.

Of course, the EU often ignores its own treaties. So that's not a hard guarantee. But the first rule of the EU is that everyone has to pretend it follows its own rules even when it doesn't, so it's not like Icelandic leaders can just announce they'll join the EU but won't adopt the Euro.

> Since the convergence criteria requires participation in ERM II for a minimum of two years, and non-eurozone member states are responsible for deciding when to join ERM II, they can delay their compliance with the criteria by not joining ERM II.

> Denmark has a treaty opt-out from the obligation to join the eurozone even if it complies with all criteria.

https://en.m.wikipedia.org/wiki/Enlargement_of_the_eurozone

EU countries are not required to join the Euro.

They are required to say they will at some unspecified future date, but that's another matter.

This is angels-on-pins level stuff, though. In normal English lax enforcement of a rule doesn't mean you're not required to obey it. It just means you're gambling that you won't be put under sufficient pressure to crack your resolve.

All EU countries have to publicly commit to joining the Euro and doing the work to do so. They are therefore required to join it, under any reasonable interpretation of the treaty language. The fact that some countries realized they could just not do what they agreed to and/or hack their economy to avoid the entry criteria, without any consequences, is good evidence that the treaties are indeed meaningless. But lax enforcement isn't the same as no requirement. The EU Commission could change their stance at any time.

It is not just down to Commission interpretation.

It has been a while since I last looked at this, but from memory a pre-condition for Euro adoption is spending a certain amount of time within some formal "convergence mechanism", however there is no obligation to join that convergence mechanism.

This could well be ERM-II which I have in mind.

I think you are required to join it, but proceeding to actual Euro rollout requires a currency to be within a certain range for a period of time, and that requires active intervention in currency markets. Governments can just either not do it or claim they can't intervene enough to stay on target.

What a ridiculous policy by itself.

Denmark has pegged their currency to the Euro.

Switzerland pegged the Frank against the US Dollar, until they didn’t.

Many EU countries have done so and then few years ago many stopped doing it.

Because the Icelandic krona is basically universally agreed by everyone to be garbage monopoly money that only stays because of the oligarchs that are in power.

Also, yeah, the Danish Krona is pegged to the euro at ~7.45 so there is little incentive to switch over.

> money that only stays because of the oligarchs that are in power

Can you elaborate?

interesting to read the Icelandic Version of „oligarchs in power want xyz“.

Although it doesn’t make sense, because the influx of cheap money would make joining the EU an obvious boon for that class, wouldn’t it?

Being this late to the party and not that powerful of a country, I would be willing to bet the EU would force them into it as a condition to join.

Why? It’s in the EUs interest to not create horror stories about what happens when a country joins. It makes a lot more sense to make Iceland decide on the timeline for adopting the Euro themselves, so the transition is more likely to be smooth. And this is exactly what the policy for adopting the Euro has been.

A shock therapy Euro adoption is not in the interest of anyone.

Iceland wouldn’t join the euro with inflation like that

I'm sure one of the Big 4 accounting firms and Goldman could step up to help "fix" any problem given their experience with Greece.

> Iceland wouldn’t join the euro with inflation like that

Nobody cares about inflation. They just need the right "democratic leaders". See Georgia. /s

It's not possible to join the Euro zone unless the inflation in the country is at the bottom side of the Euro zone for consecutive years.

The inflation absolutely matters.

Nobody’s taking about Georgia joining the euro

You’d be surprised

> massive fiscal transfers from states on the coasts to states in the interior

That's because of how US politics work. Less populous states have disproportionately higher political power. It's not a monetary policy thing. It's a core difference between US and European politics.

> The US also allows whole areas to deindustrialize

That's because Americans are free to live and work where they choose.

There's a lot more nuance here, if you look at Obama's memoir, he writes quite frankly about the dilemma of propping up the US auto industry with government dollars. When they (US automakers) asked for bailouts, he found them quite mismanaged, but if they went under a large portion of the US economy would find itself unemployed.

As a German I couldn’t agree more. Whoever is trying to sell you joining the EU is wise, run away from them as fast as you can.

Considering its remoteness and population size, where Iceland sits today as country is an absolute success story. Don’t give up your sovereignty.

EU needs to evolve to become closer to USA (imo). Not be a loose union with a central suggestion organ, but a real federation, with unified laws, army etc, provisions to punish sabotage and collaborators with enemies of such new federation and so on. Then internal monetary transfers would make sense, because Iceland and Greece would just be two internal regions. PS: of course it's ok if that never happens. But then EU can't expect to compete, due to not having good properties of truly decentralized collection of countries and neither of a true federation. Any startup will/is be hobbled by the mandatory EU law framework and structure, but won't benefit from the single law set or single language because those don't exist in EU.

Will never happen because Germany and France.

I wonder in the coming years if we'll see the US actually become more like the EU. I expect there to be significant competition between Texas and California, in terms of industry, polity and philosophy. As the US continues to be internally fragmented politically, we're bound to see states compete actively, sometimes even to the detriment of other states. While we won't see a significant fragmentation like the EU, we will see a country that's so internally divided, there would be saboteurs and collaborators with enemies. We're kind of already seeing this, for example Texas and Florida shipping their illegals into Massachusetts and NY, states being firmly in the control of one party, with no room for switching governments, and the ever present question of states' rights.

Fortunately, even if hypothetically Texas and California will diverge even more and implement even more diverging laws, they will still be more similar than two random EU countries. They will have common legal language, they will have common federal law applied to both, they will have the same freedom of personal movement as exists today. All of the more important things for the business. I'm talking about business outlook here, not personal freedoms or other problems applied to individuals.

Let's imagine for a second you want to create a startup making cell phones, or cars, or TVs etc. You base in say Texas for the taxes, but workforce can freely move to the Texas from California. They have zero language barrier, they have zero legal barrier. Legal, highly skilled immigrants in California can freely move to Texas for work. The product you make has to conform with both Cali and Texas laws, bud federal ones are unified. It needs to be localized for 1 single language. And it can be immediately sold to the 350mil market with minimal changes. Now if you do the same in France, you are limited with French workforce, because of the language barrier and legal barriers. Then to sell to the whole EU you need to comply with 24 laws and localize to 21 language. And support all that. EU company is less competitive on this basis alone, plus USA doing brain drain (which they foolishly want to limit now) is not helping.

That's exactly what I meant by the US becoming more fragmented (but not as fragmented as the EU). There's going to be a lot of separation and distinction between states, including some cultural, but also regulatory and policy-wise. The only thing differentiating it from the EU is the language bit (which is now increasingly solvable with AI translations).

> We're kind of already seeing this, for example Texas and Florida shipping their illegals into Massachusetts and NY

Which is a game-theoretically sound choice given the lack of legal authority to prevent unlawful entry to begin with.

Exactly, which is akin to a country self-sabotaging itself and dividing itself internally. It's a very unique problem that frankly doesn't exist elsewhere in the world.

It will never happen because maybe the EU is faaaaar more diverse than the US? Yes there were/are more than one ethnic group, but it's always been massively dominated by Anglo-Americans, culturally as politically.

The US states are a mosaic between themselves, and I would say that they diverge more aggressively than the EU in terms of politics, philosophy and policy.

In the EU, you don't see countries arguing about which bathrooms people should use, or what model of creation they should teach children in schools. Yes, there is linguistic separation, but there is very little political and even cultural distinction between European countries, save for some hot button issues like immigration (which is also seeing alignment now).

Ask any European what European culture is, and you'll get a fair melange of what make Europe European (they might mention elements such as architecture, classical music, heck Roman Empire even). Ask an American about American culture and you'll get definitely different answers between Americans from even two red states.

The US isn't the only possible model for states to cooperate as part of a larger entity. There are many examples of federations with little fiscal transfers - which are also highly successful - Switzerland is an extreme example.

Switzerland is a perfect example, thank you. Even without going deep into laws and nuance, the mere fact that we are referring to it by a single name and consider a mostly single entity at least as far as outside is concerned, tells us all. That's what EU needs to become (again, only in my opinion) - a bigger Switzerland.

I think I don’t understand which problem this unification would solve?

Startups?

Startups and bigger companies too, up to international megacorporations. Companies get more workforce and faster time to market for less cost. EU gets better financial regulation (not more, but better). Competitive products means competitive salaries, which slows brain drain and allows for better export to import ratio. It is always better to export as much refined and hitech product as possible.

Putin. It solves the problem of Putin.