Regional Formation and Development Studies

The Nordic Baltic region (5+3) is now closely interlinked via trade, investment, mobility of people, and banking. All the countries in this group have pursued some form of integration with the European Union (EU). Six of them are EU member states, four of them are members of the euro area, and all of them are within the European Economic Area (EEA) and are Schengen member states. But can these small countries as a group cooperate more closely and perhaps exercise more collective authority in Europe? The Nordic countries and the Baltic States cooperate in the Bretton Woods institutions, the World Bank and the IMF, and six of them are among European NATO member states. When it comes to European integration the lack of common approach complicates their cooperation. Within this group there are internal divisions between the hardcore EU and euro area member states (the Baltics and Finland), EU members (Denmark and Sweden) and EU outsiders (Iceland and Norway). Common pathways for the future cooperation in Europe may be hard to find. Also, the Nordics are high income welfare states, but the Baltics are neoliberal with minimal governments and low-tax regimes. Additionally, external forces continue to challenge the Nordic Baltic region, including revanchist Russian policies threatening Baltic Sovereignty, unpredictable US policies towards NATO as well as reduced military presence in Europe, and dismal EU and euro area post crisis economic performance. All point to a future of uncertainty including both economic and security risks.

Iceland is a small, resource rich country in Europe that is highly dependent on foreign trade. According to the World Bank classifications, Iceland is a high income economy, but with a population of a little bit more than 300 thousand inhabitants, is the smallest economy within the Organization for Economic Co-operation and Development (OECD). Iceland is highly dependent on foreign trade, especially on trade with the European Union, where economic and political integration is evolving and the question about the most feasible level of participation is a future challenge for the country. Iceland is a member of the European Free Trade Association (EFTA), the European Economic Area (EEA) and the Schengen area, and the European Union (EU) candidate country until recently, when its government decided to withdraw its EU membership application. Currently, the EEA agreement ensures Iceland access to the EU common market. The question remains, what is the most feasible arrangement for Iceland’s prosperity in the long term? Should it continue to rely on the current arrangement? Should it seek the EU membership in the future and, perhaps, subsequently become part of the Euro Area? What are the possible benefits and disadvantages for Iceland joining the EU and the Euro Area?

The 2008 global economic and financial crisis hit hard in Iceland. During the crisis its three largest banks all collapsed in just a few days with severe consequences for the economy and the people. Prior to the crisis, Iceland, a high income OECD country, had experienced strong growth and unprecedented expansion in overseas investments and activities, especially in the financial sector. This article focuses on the actions of the international community when the Icelandic authorities, during a period of great uncertainty, sought assistance to protect the Icelandic economy before the banking system fell. The methodology used in this article is the case study method. Compared to other research methods, a case study enables the researcher to examine the issues involved in greater depth. Arguably, the governments of the Netherlands and the UK tried to fake reality by suggesting that the Icelandic government, i.e. Icelandic taxpayers, should be made responsible for paying the debts of private banks. The EFTA Court ruling confirms that Iceland did not have this responsibility. In retrospect one can argue that the EU showed dishonesty by supporting the Netherlands and the UK in demanding a sovereign guarantee for failed private banks. The Icelandic banking expansion exposed weaknesses in EU integration and may also confirm a certain incompetence within the EU in designing an EU-wide banking system.