# EUR-Lex - 52011SC1202 - EN

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# 52011SC1202

**COMMISSION STAFF WORKING PAPER ICELAND 2011 PROGRESS REPORT /* SEC/2011/1202 final */**

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TABLE OF CONTENTS

1........... Introduction.................................................................................................................... 3

1.1........ Preface........................................................................................................................... 3

1.2........ Context.......................................................................................................................... 3

1.3........ Relations
between the EU and Iceland............................................................................. 4

2........... Political
criteria............................................................................................................... 5

2.1........ Democracy and
the rule of law........................................................................................ 5

2.2........ Human rights
and the protection of minorities................................................................... 8

3........... Economic
criteria............................................................................................................ 8

3.1........ The existence
of a functioning market economy................................................................ 8

3.2........ The capacity
to cope with competitive pressure and market forces within the Union........ 13

4........... Ability to
assume the obligations of membership............................................................. 17

4.1........ Chapter 1:
Free movement of goods............................................................................. 18

4.2........ Chapter 2:
Freedom of movement for workers.............................................................. 18

4.3........ Chapter 3:
Right of establishment and freedom to provide services................................. 19

4.4........ Chapter 4:
Free movement of capital............................................................................. 19

4.5........ Chapter 5:
Public procurement...................................................................................... 20

4.6........ Chapter 6:
Company law.............................................................................................. 21

4.7........ Chapter 7:
Intellectual property law............................................................................... 21

4.8........ Chapter 8:
Competition policy....................................................................................... 22

4.9........ Chapter 9:
Financial Services........................................................................................ 23

4.10...... Chapter 10:
Information society and media.................................................................... 24

4.11...... Chapter 11:
Agriculture and rural development.............................................................. 25

4.12...... Chapter 12:
Food safety, veterinary and phytosanitary policy......................................... 26

4.13...... Chapter 13:
Fisheries.................................................................................................... 27

4.14...... Chapter 14:
Transport policy........................................................................................ 27

4.15...... Chapter 15:
Energy....................................................................................................... 28

4.16...... Chapter 16:
Taxation.................................................................................................... 29

4.17...... Chapter 17:
Economic and Monetary policy.................................................................. 30

4.18...... Chapter 18:
Statistics.................................................................................................... 31

4.19...... Chapter 19:
Social policy and employment.................................................................... 32

4.20...... Chapter 20:
Enterprise and industrial policy................................................................... 33

4.21...... Chapter 21:
Trans European Networks......................................................................... 34

4.22...... Chapter 22:
Regional policy and coordination of structural instruments........................... 34

4.23...... Chapter 23:
Judiciary and fundamental rights................................................................. 35

4.24...... Chapter 24:
Justice, freedom and security...................................................................... 37

4.25...... Chapter 25:
Science and research................................................................................. 38

4.26...... Chapter 26:
Education and culture................................................................................. 39

4.27...... Chapter 27:
Environment.............................................................................................. 40

4.28...... Chapter 28:
Consumer and health protection................................................................. 42

4.29...... Chapter 29:
Customs Union.......................................................................................... 43

4.30...... Chapter 30:
External relations....................................................................................... 43

4.31...... Chapter 31:
Foreign, Security and Defence Policy......................................................... 44

4.32...... Chapter 32:
Financial control........................................................................................ 46

4.33...... Chapter 33:
Financial and budgetary provisions............................................................. 46

Statistical Annex......................................................................................................................... 48

1. 
Introduction
1.1. 
Preface

This is the Commission's
second report to the Council and Parliament on progress made by Iceland since
the Council's decision to open accession negotiations.

This report:

– briefly describes the
relations between Iceland and the Union;

– analyses the
situation in Iceland in terms of the political criteria for membership;

– analyses the
situation in Iceland on the basis of the economic criteria for membership;

– reviews Iceland's
capacity to assume the obligations of membership, that is, the acquis
expressed in the Treaties, the secondary legislation, and the policies of the
Union.

The period covered by
this report is from October 2010 to September 2011. Progress is measured on the
basis of decisions taken, legislation adopted and measures implemented. As a
rule, legislation or measures that are under preparation or are awaiting
parliamentary approval have not been taken into account. This approach ensures
equal treatment across all reports and enables an objective assessment.

The report is based on
information gathered and analysed by the Commission. In addition, many sources
have been used, including contributions from the government of Iceland, the EU
Member States, European Parliament reports[1]
and information from various international and non-governmental organisations.

The Commission draws
detailed conclusions regarding Iceland in its separate communication on
enlargement[2],
based on the technical analysis contained in this report.

1.2. 
Context

Further to the
Commission's Opinion, the June 2010 European Council decided to open accession
negotiations with Iceland. Negotiations were officially opened in July 2010
and the screening exercise subsequently started in November 2010.

Iceland has been a
party to the Agreement on the European Economic Area (EEA) since its
entry into force in 1994.

Iceland has been
associated with the developments of the Schengen Agreements since 1996 and has
applied their provisions since 2001.

1.3. 
Relations between the EU and
Iceland

As a member of the EEA,
Iceland regularly transposes and implements the acquis adopted in this
framework. It also participates in EEA meetings on a regular basis. The EFTA
Surveillance Authority (ESA) continues to monitor Iceland's performance under
the EEA. Overall, Iceland's track record in implementing its EEA obligation
remains satisfactory. Some shortfalls are still to be noted in areas such as
financial services, food safety and free movement of capital. Temporary
safeguards adopted on some restrictions of capital flows in the aftermath of
the financial crisis remain in place.

Iceland participated in
the multilateral economic dialogue between the Commission, EU Member States and
Candidate Countries in the context of the pre-accession fiscal surveillance.
The exercise included a meeting at Ministerial level in May in Brussels. These
meetings focused on the main challenges posed to Iceland by the Copenhagen
economic criteria.

Bilateral meetings
between Icelandic parliamentarians and Members of the European Parliament
continue to take place on a regular basis. The second EU-Iceland Joint
Parliamentary Committee met in Reykjavik in April 2011 and the third in
Brussels in October 2011.

Iceland's ability to
assume the obligations of membership has also been assessed in the light of its
participation in the European Economic Area (EEA) and taking into account
exemptions granted under the EEA.

The Commission carried
out its assessment of Iceland's
compliance with the acquis, i.e. the screening exercise, from November 2010 to June 2011.

This screening exercise
represents the first step of the accession negotiations. It led to the opening
of the first four chapters of negotiation at the Accession Conference of June
2011. Two of these four chapters, namely science and research and education
and culture, have been provisionally closed.

Financial assistance is provided to Iceland under the Instrument for
Pre-Accession Assistance (IPA), since Iceland was included as a beneficiary
country in July 2010. The strategic
priorities for Iceland under IPA were defined in a Multi-Annual Indicative
Planning Document (MIPD) for the period 2011 to 2013 with a budget of €28
million. The strategy identifies two objectives: (a) to further enhance Iceland's
ability to assume the obligations of membership, by supporting the
institutional capacity building for transposition and implementation of the acquis
and (b) to reinforce Iceland's institutional capacity in its preparations for
participation in and implementation of the Structural Funds and other EU funds.
The first National IPA Programme for Iceland was adopted in October 2011 with a
budget of € 12 million.

Iceland continued to
benefit from the Technical Assistance and Information Exchange Instrument
(TAIEX), targeted on chapters which are not or only partially covered by the
EEA and where there are significant divergences with the acquis.

2. 
Political criteria

This chapter assesses
the political criteria, focusing on the progress made by Iceland in addressing
the shortcomings identified last year, in particular as regards reinforcing the independence of the judiciary
and the anti-corruption policy framework.

As a deeply rooted and
well-functioning democracy, Iceland continues to meet the political criteria as
stated in the Commission's Opinion of February 2010 and the November 2010
Progress Report on Iceland.

2.1. 
Democracy and the rule of
law

Icelandic institutions
are stable and the rule of law is guaranteed. The judicial system is well
established and the judiciary is of a high standard. The governance at national
and local levels is effective and transparent. The public administration
continues to be generally efficient and free of political interference. Human
rights and the protection of minorities are legally guaranteed and respected in
practice.

The elections for an advisory constitutional
assembly held in November 2010 were annulled in January 2011 by the Supreme
Court, due to flaws mainly relating to insufficient secrecy of the ballot. The
parliament decided to appoint the 25 persons that came first in the elections as
members of a constitutional council, which held its first formal meeting
in April 2011. The constitutional council has an identical role and mandate to
that of the constitutional assembly: to review the Constitution and propose
changes to parliament on issues that cover, inter alia, the division of
powers between legislative and executive, the presidential office and the
democratic participation of the population, the independence of the judiciary,
environmental issues including the ownership of and the right to harness
natural resources, the status of the State church and the delegation of powers
by the State to international organisations.

Legislative business
has been completed or initiated, with a view to strengthening the role and
efficiency of parliament. A law amending the parliament's rules of
procedure was adopted by the Icelandic parliament, the Althingi, in June 2011.
Its aims are to strengthen the parliament's oversight role, increase the rights
and responsibilities of the opposition and establish a special constitutional
and surveillance committee. The law is based on the recommendations of the
Special Investigation Committee (SIC)[3]
and reflects the procedural guidelines of the Council of Europe on the rights
and responsibilities of the opposition in parliament. In October 2010 new rules
on the parliamentary procedure on EEA matters came into force. They stipulate inter
alia that the parliament should be involved in the preparation process for
the transposition into Icelandic legislation of new EU acts incorporated into
the EEA Agreement.

The unity of the coalition government was tested on
several occasions during the reporting period, most significantly in the vote
on the 2011 budget. In the wake of the April 2011 referendum, where 60% of the
electorate rejected the Icesave agreement reached in December 2010 (See also
chapter 9 - financial services), the government faced a no-confidence vote
in Parliament.

There continue to be diverging views on the prospect of EU
accession among the Icelandic political forces and population, which are
reflected in intensive debate. Opinion polls continued to show a mixed picture
as regards EU membership. Support for continuing the accession negotiations
process remained high during the reporting period. As part of
the parliament's EU information strategy, a dedicated website was launched in
June 2011, to serve as a forum for objective and factual information about
Iceland's EU accession process.

As regards internal preparations for accession, the Chief
Negotiating Committee and the ten negotiating groups were actively involved in
the screening meetings (November 2010 - June 2011). Translation resources, in terms of funding and manpower,
have been increased extensively, including through EU financial assistance, in
order to make progress on the task of translating the acquis by the date
of accession.

Good progress can be
reported in further implementing the recommendations of the Special
Investigation Committee (SIC) and improving the already generally efficient public
administration. The number of ministries was reduced from 12 to 10 in
January 2011, following the merger of four ministries (ministries of health,
social affairs, justice and transport) into two, namely the Ministry of Welfare
and the Ministry of Interior. Further consolidation of the ministries is
planned, with the overall objective of enhancing administrative capacity and
coordination.

In September 2011, a
bill, amending the legal framework of the central government, was adopted in
order to increase flexibility in restructuring the ministries, strengthen the
coordinating role of the Prime Minister, clarify the supervisory functions of
ministries vis-à-vis agencies, ensure access to the civil service on a
non-discriminatory basis and a transparent procedure for higher administrative
positions to be filled, and strengthen the policy making capacity of
ministries. According to the new law, the restructuring of ministries has to be
approved by the parliament through a parliamentary resolution, instead of
adopting a new law, as was the case in the past.

Overall, the state of
local democracy is in compliance with the European Charter on Local
Self-Government. The Additional Protocol to the Charter of Local
Self-Government on the right to participate in the affairs of a local authority
remains to be ratified.

Legislative work is
also ongoing to improve regulatory practice, simplify administrative procedures
and improve access to official documents. In February 2011, a working group was
set up by the Prime Minister in order to review whether non-discrimination and
transparency are sufficiently ensured in the process of partial or full
privatisation of state enterprises. The working group issued its proposals in
September 2011. A committee has been set up to prepare a report on reducing the
number of independent complaints bodies, to be issued by October 2011.

A programme of
specialised training for civil servants, the Administrative School, was
established in September 2010. The School is carrying out inter alia
courses on administration law, information law, the role and operation of
ministries and project management.

The independence
of the judiciary was strengthened. In May 2011, the process of
appointing three judges in the Supreme Court took place according to the rules
of the amended Judiciary Act. However, the implementation of the new rules on
appointing judges and prosecutors still requires further monitoring. The
limited tenure of only five years for prosecutors other than the Public
Prosecutor and the Deputy Public Prosecutor needs to be addressed.

In order to strengthen
the efficiency of the judiciary, the number of judges of district courts
was temporarily increased from 38 to 43 and the number of Supreme Court judges
from 9 to 12 in order to deal with the additional case-load following the
financial crisis. (See also Chapter 23 — Judiciary and fundamental rights).

In March 2011, in line
with the SIC recommendations, the Court of Impeachment convened to rule on
issues relating to the investigation by the Parliament prosecutor in the case
against the former Prime Minister at the time of the financial crisis. In May
2011, the parliament's prosecutor issued an indictment against the former Prime
Minister.

The Office of the
Special Prosecutor continued to carry out raids leading to the arrest of
several former employees of the old Landsbanki for alleged fraudulent business
practices in the bank. Currently, 88 cases relating to the collapse of the
Icelandic banks are being dealt with, in which 216 individuals have the legal
status of accused persons. A total of three cases concerning the collapse of
the banks have been referred to the Courts. Investigations conducted by the
Financial Supervisory Authority on possible offences in financial undertakings
have been referred to the Special Prosecutor for further investigation in 54
cases. The Office was merged into a single agency with the Economic Crime
Department of the National Commissioner of Policy in September 2011.

Good progress can be
reported in the further reinforcement of the anti-corruption policy
framework.

As regards conflict of
interests, the law adopted in June 2010 lays down an obligation to establish a
series of codes of conduct for ministers, ministerial staff, political advisors
and civil servants in general. The first code of conduct applicable to
ministers was established in March 2011. Iceland ratified the UN Convention
against corruption in February 2011 (See also Chapter 23 — Judiciary and
fundamental rights).

Iceland's General Penal
Code has still to be amended following the December 2010 Interim Compliance
Report of the Council of Europe's Group of States against Corruption (GRECO) on
incrimination of corruption offences.

The State Auditor
monitors the implementation of the September 2010 amended law on the finances
of political parties.

2.2. 
Human rights and the
protection of minorities (see also chapter 23 - Judiciary & fundamental rights)

As regards human
rights and protection of minorities, Iceland continued to safeguard
fundamental rights, including economic and social rights, and to strengthen
their protection. In September 2011, 4 allocated to a decision body
applications against Iceland were pending before the European Court of Human
Rights (ECtHR).

A new media act, which
includes provisions on freedom of expression and sets up a media regulatory
authority, was adopted by the Parliament in April 2011. Issues regarding
ownership concentration on the Icelandic media market and the role of the
Icelandic State Broadcasting in the advertising market remain to be addressed.
In order to further develop the legislative framework in these areas, two
committees were appointed and started to work in summer 2011.

The amendment to the
law on Child Protection was adopted in June 2011. It includes provisions on the
division of responsibilities between the state and the municipalities regarding
children who are considered best off placed outside their home, in another home
or in an institution.

The UN Convention on
the Rights of Persons with Disabilities and the Council of Europe Framework
Convention for the Protection of National Minorities remain to be ratified.

3. 
Economic criteria

In
examining economic developments in Iceland, the Commission's approach has been
guided by the conclusions of the European Council in Copenhagen in June 1993,
which stated that membership of the Union requires the existence of a
functioning market economy and the capacity to cope with competitive pressure
and market forces within the Union.

3.1. 
The existence of a
functioning market economy

Economic policy
essentials

Economic policy has
continued to be oriented towards stabilising the economy from the severe
recession that the country experienced following the collapse of the banking
sector. Cooperation with the IMF provided an important anchor for economic
stabilisation. The authorities managed to deliver key policies laid down in the
IMF programme leading to its successful completion in August 2011. The country
also managed to re-enter international capital markets with a successful US$ 1
billion bond issue in mid-2011. Broad political consensus on the key essentials
of a market economy and the preservation of the welfare state continues to be
strongly embedded in Iceland's society. A three-year collective wage bargaining
agreement for the private sector was concluded in the spring, which reduces
uncertainty for businesses and consumers, but the ensuing wage increases put
additional strain on the economy, in particular the non-tradable sector, and on
public finances. The previous political cohesiveness within Iceland remains
stretched by the negative effects of the crisis. The country was included in
the EU's multilateral pre-accession fiscal surveillance procedure and submitted
its first Pre-Accession Economic Programme (PEP) in January 2011. It sets out
an ambitious medium-term fiscal framework which, however, is based on a
somewhat optimistic macroeconomic scenario and not fully underpinned by
comprehensive supporting structural reform measures.

Macroeconomic
stability

Following the collapse
of its financial sector in October 2008, the Icelandic economy went into a deep
and long recession. Real GDP continued to fall in 2010, by 4%, which was larger
than expected decline, following a 6.8% drop in 2009. The recession bottomed
out in the second half of 2010, when the economy started to recover mildly,
based on stronger private consumption and a stronger export performance by
non-aluminium and non-maritime products. In the first half of 2011, the
recovery continued with a real GDP increase of 2.5% backed by consumption and
investment growth, whereas real exports declined. However, the recovery is
tentative. Annual growth decelerated in the second quarter compared to the
first quarter. Moreover, stronger consumption growth has been largely driven by
transitory measures, such as one-off pay increases, pension withdrawals, temporary
subsidies and transfers, and debt relief measures provided to households.
Balance sheet vulnerabilities remain in both the corporate and household
sectors and continue to impede a stronger resumption of growth. As a result of
the crisis, average per capita income (in Purchasing Power Standards) fell to
110% of the EU-27 average in 2010, from 117% a year before. Overall, the
economy continued to recover, however, at an uneven and moderate pace, and
risks and uncertainties persist with respect to the sustainability of growth.

External deficits have
shrunk markedly following the recession. The sharp contraction in domestic
demand and depreciation of the exchange rate (around 50% in 2008/09)
contributed to a further improvement in the balance of goods and services,
which recorded a surplus of 10% of GDP in 2010, after 8.4% in 2009. The current
account deficit in 2010 stood at 11.2% of GDP, down from 11.7% in 2009,
reflecting mainly the improvements in trade in goods and services. However, the
reported current account balance remains heavily influenced by accrued interest
of banks in winding-up proceedings which do not reflect any current (or future)
outflow of funds. Corrected for these factors, the current account recorded a
much lower deficit of 2.4% of GDP in 2010, according to the Central Bank's
estimates. In the first half of 2011, the annualised current account[4] slightly widened to
11.6% as a lower merchandise trade surplus was only partly compensated for by a
stronger services and net factor income balance. Merchandise trade data for
July and August point to stronger export growth of around 25 and 33%
year-on-year, respectively. However, cumulative export growth in 2011 has been
weaker than the growth of imports, reversing the trend seen in 2010 which supported
a strengthening of the current account. Overall, the current account
deficit fell in 2010, but developments in 2011 so far point to a smaller trade
surplus as compared to the previous year.

Total net capital
inflows in 2010 and in the first half of 2011 were larger than the amounts
needed to finance the current account deficit. As a result, gross official
foreign exchange reserves held at the Central Bank increased by an amount
equivalent to 20% of GDP in the twelve months to July, reaching 57% of GDP. The
increase in reserves partly reflects official financing provided in the context
of the IMF programme and through bilateral loans as well as foreign exchange
interventions to bolster non-borrowed reserves. A very high level of external
debt continues to pose a key challenge to the Icelandic economy. Official debt
statistics report the stock of gross foreign debt at 867% of GDP (end-2010).
However, corrected for foreign debt of banks and holding companies in winding
up proceedings and of one single international company (the pharmaceutical
company Actavis) headquartered in Iceland but with most of its operations
abroad, Iceland's total external debt appears to be considerably lower. The
Central Bank estimates the 'corrected' external debt stock at around 200% of
GDP and Iceland's net international investment position at a negative 23% of
GDP. This compares favourably with a pre-crisis external debt of around 570% of
GDP. Overall, foreign exchange reserves strengthened, partly backed by
official external financing, and recent estimates of Iceland's net
international investment position suggest a much lower external indebtedness
compared to the pre-crisis period.

The labour market
remains weak with unemployment close to historically high levels at 7.5% in
2010 and the number of employed significantly lower compared to pre-crisis
levels. These crisis-related effects continued to be felt in the first half of
2011 as unemployment reached 8.5% in the second quarter of 2011, only slightly
lower than in the same period of 2010. The level of total employment fell by 1%
year-on-year in the first quarter and rose marginally in the second quarter
(0.3%). Data on registered unemployment point to a fall in the average
unemployment rate in the first eight months of 2011, to 7.7% as compared to
8.4% in the same period a year before. Elements of labour market flexibility
seem to have provided a degree of cushion, such as a reduction in the number of
hours worked (which remain 6.5% below pre-crisis levels), increased part-time
work net migration and labour market measures prevented an even larger increase
in unemployment. At the same time, weak labour market conditions continued to
have a serious effect on long-term unemployment which increased to around 25%
of total unemployment in the second quarter of 2011, around 8 percentage points
higher than the same period a year ago. Also, the youth unemployment rate as a
share of total unemployment remained high at nearly 19%.[5] Despite high
unemployment, the annual average growth of gross wages continued to accelerate
in 2011 to 7.1% in June. Thus, average wage growth in the first half of 2011
reached 5%, compared to around 4% in the first half of 2010. The dis-inflation
process has pushed real wage growth into positive territory since the second
half of 2010, leading to average real wage increases of around 2% in the first
half of 2011, but the recent rise in inflation will lead to a decline in
average real wages. Overall, the labour market remains seriously
affected by the deep post-crisis recession with high unemployment rates,
particularly among the youth and long-term unemployed.

The monetary policy
easing implemented since March 2009 came to an end in late 2010 when policy
rates had reached historically low levels (4% compared to the peak of 18% in
March 2009) and the policy focus moved increasingly towards the preparation for
a gradual lifting of capital controls. In August 2011, policy rates were raised
for the first time since March 2009, by 0.25 percentage points to 4.25%, in
reaction to rising inflationary pressures. After annual inflation had fallen
below the Central Bank's official 2.5% inflation target in early 2011,
inflation accelerated markedly to 5% in July and August as a result of a weaker
exchange rate, rising oil-, house- and food prices and strong pass-through
effects from unexpectedly high wage increases negotiated in the collective wage
agreements of May. These factors have worsened the inflation outlook, and
inflation expectations have risen markedly. Overall, monetary policy has
been tightened slightly as a result of a significantly worsened inflation
outlook.

The Central Bank has
followed and intends to continue a strategy of exchange rate stabilisation
supported for the time being by a system of capital controls. The underlying
trade surplus, improved terms of trade, and the declining risk premium have
supported a strengthening the Icelandic króna by over 16% vis-à-vis the euro in
2010. However, in early 2011 the króna started to weaken, partly due to large purchases
of foreign exchange by the Central Bank at end2010. In the first half of 2011,
the króna lost some 8.3% of its value vis-à-vis the euro, but again slightly
appreciated since then. The Central Bank continued to abstain from intervening
in the foreign exchange market to support the króna since December 2009 but it
purchased foreign exchange through auctions to bolster non-borrowed reserves.
Under the current policy framework, while exchange rate risks appear limited
over the short term, they could become more prominent in view of the need to
gradually liberalise capital movements.

The first step towards
lifting capital controls was taken in October 2009 when restrictions on inflows
of new capital were abolished. A revised strategy for lifting capital controls
was approved by the government in March 2011 following a proposal from the
Central Bank. The revised strategy was devised in consultation with the IMF. In
a first step, it focuses mainly on reducing the risk of outflows from large
holdings of króna by non-residents. These holdings are estimated at around 30%
of GDP. The second step of the strategy foresees a liberalisation of on-shore
króna holdings. First steps of the revised strategy were taken in mid-2011,
whereby the Central Bank bought foreign króna holdings in two auctions to
re-sell them to domestic pension funds. While the first auction was entirely
successful, pension funds proved to be reluctant to purchase króna holdings in
the second auction, probably as a result of increased risk aversion in
international capital markets. The authorities aim to lift the controls
gradually as conditions permit; nevertheless, this could still entail potential
risks.

Following a marked
deterioration of public finances in the wake of the crisis, the authorities
took a series of fiscal consolidation measures to reduce the fiscal deficit by
around 3 percentage points in 2010, from 10% of GDP in 2009. While the measures
were successful in reining in spending and strengthening the revenues, the
revised general government deficit in 2010 remained at virtually the same level
as in 2009, as measured in % of GDP, as the overall budget spending was
affected by called guarantees for the Housing Financing Fund and the
Agricultural Fund. The 2011 budget framework adopted in late 2010 initially
foresaw new fiscal measures amounting to around 2.7% of GDP with most of the
adjustment on the expenditure side (2% of GDP). This was a change to the
structure of fiscal adjustment in 2009 and 2010 which was largely based on revenue
measures. The first half of the year showed strong revenue performance and
spending below projections. Total general government revenues increased by 3.9%
and total spending by 0.9% year-on-year. The general government balance
recorded a deficit of 2.5% of (annual) GDP, compared to a deficit of 3.1% in
the first half of 2010. However, in the context of the three-year collective
wage agreement adopted in Spring, the government took additional spending
commitments, comprising additional public investment as well as social
protection, active labour market policy and education measures. As a result,
expenditure measures in 2011 are expected to account for 1% of GDP instead of
2% as initially foreseen. Moreover, the government decided to moderate the
medium-term fiscal adjustment path by postponing the achievement of a sizeable
fiscal surplus by one year from 2013 to 2014. Fiscal risks remain significant
as growth could turn out to be lower than expected. Risks could also arise also
from contingent liabilities related to government guarantees for public
companies and a possible further need to recapitalise the State Housing
Financing Fund, which suffers from uncertain asset quality and low capital
ratios. Finally, litigation risks are related to the still unsettled
Icesave-dispute and the Supreme Court's ruling on the Emergency Law. A decision
overturning the Law would have significant implications for Iceland's public
finances. Overall, expenditure-based fiscal consolidation remains
challenging and possible risks arise from contingent liabilities.

Gross general
government debt increased from 88% of GDP in 2009 to 93% at end-2010 and debt
levels remain high compared to pre-crisis levels of around 30%. Further
progress has been made in establishing a medium-term public debt management
framework. A medium-term debt management strategy was published in February
2011 and the positive reception by market participants bodes well for the
implementation of the 2011 annual borrowing plan which foresees accessing
international markets in the course of the year. In June, Iceland issued
international bonds in the amount of US $1 billion with a 5-year maturity at an
interest rate of 4.99%. This was the first international issue after the onset
of the crisis two and a half years ago. The transaction was well-received by
global investors and the amount was two times oversubscribed. The average
maturity profile of the public debt portfolio has been extended to over 4
years, including through debt buy-back operations. Finally, a comprehensive
legislation to strengthen local government fiscal frameworks and finances has
been submitted to Parliament. It foresees strict limits on municipal borrowing,
a rolling three-year balanced budget and the introduction of a new data- based
and more effective monitoring system. The new framework is set to become fully
operational in budget year 2012. Overall, in view of the high level of
public debt, the authorities have taken further measures to reduce refinancing
risks and to strengthen local government finances.

The policy mix, with a
strong focus on exchange rate stabilisation and fiscal consolidation, has been
supportive in re-establishing a higher degree of macroeconomic stability, but
the recent fiscal easing and a worsened inflation outlook require a
continuation of a tight policy mix. In this respect, the 2012 budget and
medium-term fiscal plans will be a test for the government's commitment to
continued fiscal adjustment. Finally, macroeconomic stabilisation occurred in a
situation of temporary protection through capital account restrictions. Looking
forward, their gradual removal will remain a key policy challenge.

Interplay of market
forces

Prices of goods and
services continued to be determined by supply and demand conditions. As a
member of the EEA, Iceland has already removed special government protection in
most sectors. In the context of the crisis, the government took over the
domestic operations of the three major banks that had collapsed. Following
recapitalisation and restructuring, the banks' equity was transferred to their
foreign creditors as a compensation for net domestic assets transferred to the
new banks. The government at this time still retains majority ownership (81%)
of one of the three banks (NBI) and minority stakes in the other two banks. The
government has also become a large investor in the remaining savings banks
system. The system has, however, been reduced substantially with the exit of
the two largest savings banks. The government's stake in the financial firms is
held at arm's length from the political process via a special agency.

The private sector
accounts for around 75% of GDP. Some sectors remain in government ownership,
such as the postal services, broadcasting, and parts of the financial sector
(including the state-owned Housing Financing Fund). Moreover, the energy sector
remained predominantly publicly owned (by the central and local governments),
offering attractive wholesale contracts to industry, mostly aluminium
companies. Overall, market mechanisms are to a large extent driven by
free prices, but public ownership remains significant in some sectors, partly
as a result of the crisis.

Market entry and
exit

Starting a business is
facilitated by a generally low administrative burden and a supportive regulatory
framework. The business environment remained characterised by low bureaucratic
hurdles and, in general, efficient administration. However, high barriers to
entry exist in the fishing, agriculture and energy sectors, which are not
covered by the EEA. Icelandic legislation contains prohibitions on foreign
ownership in the fisheries, energy, air transport and real estate sectors. Of
these, restrictions on investment in fisheries are the only ones that apply to
EEA nationals. The recession has significantly affected company start-ups.
Despite some pick-up in March, the number of newly registered private limited
companies declined by 6.5% year-on-year in the first half of 2011 and remained
at around 60% of pre-crisis levels. Bankruptcy proceedings are generally
straightforward. However, the financial crisis has put a large part of the
corporate sector under severe financial distress. Actions have been taken to
address this problem, including expediting out-of court procedures and by
increasing the number of judges and their assistants. The number of insolvent
companies increased rapidly by some 50% in the first half of 2011, compared to
the same period in 2010. Overall, high barriers to market entry for
non-residents remain in key strategic sectors and market exit is complicated by
large corporate sector indebtedness.

Legal system

The legal system
continued to support a business-friendly investment climate. It offers good
protection and enforcement of property rights and provides a clear and stable
framework for agents to take economic decisions in a situation of legal
certainty.

Financial sector
development

The
restructuring of the banking sector has been largely completed even though
further operational and financial restructuring is required to allow for the
resumption of bank lending and the required consolidation in the sector. The
market remains dominated by the three 'new' banks that emerged from the
financial collapse in autumn 2008. They have been recapitalised and are now
much smaller in size compared to pre-crisis levels, focusing on domestic
operations. Domestic banking sector credit to the private sector is estimated
at 90% of GDP at the end of 2010, somewhat lower than the year before and only
a fraction of the pre-crisis level. The government retains majority ownership
in one of the banks, and minority stakes in the other two banks; with the
majority stakes (indirectly) owned by non-residents.

However, the banks are
faced with significant vulnerabilities as asset quality is subject to
considerable uncertainty and financial imbalances are likely to persist for
some time. Assets are largely denominated in or indexed to foreign exchange[6] whereas liabilities are in domestic currency
and at variable interest rates. Balance sheet imbalances pose a significant
challenge to financial sector stability, in spite of banks' currently high
capital adequacy ratios, reported well above 12% of tier 1 capital. Private
households and businesses are faced with significant operational problems and
nonperforming loans are exceptionally high (at about 40% of total loans). In
reaction, the government has put private sector debt restructuring at the
forefront of its economic policy. Various programmes, including debt relief
programmes for household's mortgages and a voluntary framework for SMEs have
gained pace. In addition, the use of the Financial Supervisory Authorities
prudential powers is meant to support this process. The banking sector seems
sufficiently strong to bear the burden of debt restructuring, as the difference
between loan and book value implies a high level of buffers to offset potential
losses after restructuring.

On the funding side,
banks are currently relying to a large extent on domestic deposits. The banks'
exceptional liquidity experienced in early 2010 has been reduced as investors
seek higher returns and the lower policy rate has led to falling deposit rates
in the banks. The blanket guarantee on deposits remains in place and the
government has put before parliament a draft law establishing a new deposit
guarantee scheme fully in line with EU regulations and a €100,000 deposit
guarantee. At the same time, foreign direct investment and access to foreign
credit still remains limited. The operational restructuring of the savings
banks has further progressed, but there remains scope for a further
consolidation of the sector. Overall, banking sector restructuring has
further progressed, but significant vulnerabilities remain with respect to
banks' asset quality.

Progress has been made
in strengthening bank regulatory and supervisory practices, but supervision
needs to be strengthened further to bring it in line with international best
practice. A Basel Core Principles Assessment of Effective Bank Supervision was
concluded in mid-April 2011. On this basis, the FME has developed a 2-year
action plan to address remaining supervisory gaps.

The non-banking
financial sector comprises the government-owned Housing Finance Fund,
investment banks, leasing companies, payment card companies, investment credit
funds and insurance companies. The government injected €206 million into the
Housing Financing Fund to raise its capital to about 2% of risk-weighted
assets, still far below the 5% pre-crisis level. The government is currently
working on a comprehensive review of the Fund's operations and its position
within the restored financial system, expected to be completed by end-2011.
Leasing companies and payment card companies were fully recapitalised in early
2011 without public support. Total credit provided by the sector fell by 8.5%
in the first half of 2011 compared to the same period in 2010 as leasing
companies wrote down foreign indexed loans in accordance with the 2010 court
rulings and a related law passed in late 2011. The market of both non-life and
life insurances expanded through 2010 with total assets increasing by around
6%. Insurance firms also strengthened their equity base. Profits were lower
than a year before, partly due asset revaluation needs. Overall, a
number of steps have been taken to restore the non-banking financial sector but
an overhaul of the Housing Financing Fund's operations remains a challenge in
view of reducing the government's contingent liabilities.

Domestic equity markets
continue to play a much smaller role in financial intermediation than before
the crisis in late 2008. Turnover in the equity market in 2010 remained muted
at only 2% of the 2008 pre-crisis turnover. Despite an annual increase of 28%,
the total market value of all listed shares remains at only 17% of GDP compared
with the pre-crisis level of 120% of GDP (end-March 2011). The bond market, on
the other hand, continues to be rather strong even though turnover remains at
only 50% of the 2008 level and is dominated by government- and
government-guaranteed bonds. Overall, domestic financial markets have
somewhat recovered on the back of a more lively bond market while confidence in
equity markets remains weak.

3.2. 
The capacity to cope with
competitive pressure and market forces within the Union

Existence of a
functioning market economy

Given the serious
impact of the banking crisis, the country's economy is slowly recovering levels
of macro-financial stability allowing for an efficient allocation of economic
resources. The balance sheets of private households and non-financial firms
have been seriously damaged and a large number of firms are in the process of
or about to enter into debt restructuring. Under these circumstances and
despite some progress in private debt restructuring, consumption and investment
activity remain markedly restrained, holding back the recovery process. An efficient allocation of resources remains
limited in parts of the economy, also due to financial sector weaknesses and
capital restrictions. Overall, challenges remain for
improving the functioning of markets.

Human and physical
capital

The economic crisis
severely affected the labour market situation. The labour participation rate
has been reduced somewhat to 81.1% in 2010 from the 2007 pre crisis level of
83.3%, but remains nonetheless high in international comparison. The share of
people in part-time work has increased (to 27% from 23% prior to the crisis)
and total hours worked have been reduced by around two hours to 39 hours a week
in 2010. Outward migration may have prevented the unemployment rate from rising
even faster, but net migration could be associated with a loss of needed
skills, even though the total number halved in 2010 compared to 2009. The
structure of unemployment remains problematic with youth and low-skilled
workers representing large shares of the unemployed. The rising share of those
youths neither in education nor in the labour force has been pronounced. Under
these circumstances, efforts to offer re-training and education are essential
to reduce skills mismatches. Active labour market initiatives and life-long
learning approaches continued to be carried out aimed at retraining and
upgrading skills of the labour force. Moreover, the government introduced
measures to grant all persons under the age of 25 years access to free secondary
education. Total education spending has remained at around 7.8% of GDP in 2010,
but is foreseen to drop in 2011. Overall, with unemployment still very
high, human capital remains significantly underutilised.

Abundant geothermal
sources have attracted substantial foreign investment in the aluminium and
hydropower sectors over the past. Even though the financial crisis has slowed
down investment, several new projects are now being prepared as access to
international capital has been gradually restored – as evidenced by the
successful financing by the state power company Landsvirkjun in international
financial markets. The share of investment spending in GDP reached only a low
13%, even slightly lower than a year before, and markedly below the 30% pre-crisis
share. Investments in all sectors have been affected. At the same time, the
fall in real estate activities and construction reflects also some
normalisation following the earlier 'boom' years. Public investments have also
fallen, from 4% to under 3% of GDP, with the largest declines in transport
infrastructure. Net FDI inflows turned again positive in 2010, partly due to
new FDI inflows and partly due to residents reducing their outward investments,
raising the total stock of inward FDI to around 85% of GDP, up from 72% a year
before. With respect to future investment potential, Iceland is implementing a
large-scale mapping exercise of its energy resources to categorise them into
areas for conservation and those available for exploitation. Overall,
the country continues to benefit from good basic infrastructure, abundant
natural resources, and an overall well-educated population.

Sector and
enterprise structure

Although some new
segments in manufacturing and services have expanded over the past years, in particular
in high-tech areas such as software production, pharmaceuticals and
biotechnology, the economy's industrial sector continues to be characterised by
a limited degree of diversification. The relatively small industrial sector
(excluding construction), mainly aluminium manufacturing, represents roughly 9%
of output and one-fifth of employment. The share of construction in GDP has
fallen markedly, from 11% in the boom year of 2007 to 4% in 2010, reflecting
adjustments in an over-leveraged sector as well as completion of large
energy-related projects. The share of the services sector in total output
declined somewhat in the context of the crisis, mainly due to reduced economic
activity in the real estate, retail trade and financial sectors. However, services
still account for two thirds of the economy and almost three quarters of
employment. The importance of tourism and transport as a source of foreign
exchange income has been increasing, accounting for a quarter of total export
earnings in the twelve months to June 2011, also as a result of the 20% yearly
increase in foreign tourists in the first half of 2011, which marked a
significant turnaround. The importance of small firms in the economy remains
high, accounting for 99% of the total number of firms and 70% of employment and
output. Overall, the country's industrial sector remains little
diversified and the construction sector continues to deleverage.

State influence on
competitiveness

The level of state
subsidies amounted to 1.8% of GDP in 2010. The relatively small agriculture
sector continued to benefit from government subsidies, import protection, and a
system of production quotas. Certain industries, such as energy, air transport
and fishing, remain protected from foreign competition. The fishing industry,
however, does not receive any kind of state support from the budget but its
future structure and performance is to a large extent contingent upon the
results of the ongoing policy debate as regards the domestic allocation of
fishing quotas. Energy production remained largely in government ownership,
with large consumers being offered relatively favourable electricity prices.
Following its intervention in the banking sector the government retains
majority ownership in one of the three new banks. The savings banks sector has
also been largely restructured with the largest savings bank being merged with
a commercial bank. While the government announced it would give creditors a
chance to hold most of the equity, the process will most likely involve some
additional state support. The Housing Financing Fund remained state-owned and
may require additional public funds to bolster its capital base. Regarding
network industries, energy production is predominantly publicly owned, but
third-party access to transmission and distribution is granted. Non-nationals
are not granted market access to production. The telecommunications sector is
liberalised and privately owned while government interventions remain limited
to infrastructure investments in remote areas. Overall, state
interference remains significant in some areas including the banking sector.

Economic integration
with the EU

Iceland is an open
economy with total trade in goods and services representing around 95% of GDP.
The country's export structure remains little diversified. Marine products and
aluminium account for two thirds of merchandise exports. The share of services,
mainly travel and transport, remained fairly stable in 2010 at around 25% of
total exports, and increased slightly in early 2011. The import structure is
more diversified, reflecting the country's dependence on a wide range of
manufactured goods and some commodities. The EU has continued to be the largest
trading partner. Its share in Icelandic merchandise exports increased to nearly
80% in 2010, up from around 75% a year before, and just over half of the
country's imports originate in the EU. FDI inflows almost exclusively originate
from EU partner countries. Overall, integration with the EU in the areas
of trade and investment remained very high.

Rough estimates point
to a slight deterioration of average labour productivity in 2010. As a result,
unit labour costs are estimated to have increased, as real wage adjustments (a
fall by 0.6% in 2010) could only partly compensate for lower productivity. In
2010, the exchange rate of the króna against the euro appreciated by around 16%
in nominal and by around 13% in real terms (adjusted for different price
developments). According to estimates, the real exchange rate remains around
20% below its long-term average. Overall, despite an appreciation of the
real exchange rate in 2010, Iceland still benefits from strong price
competitiveness vis-à-vis its main trading partners as a result of the marked
depreciation of the króna during the crisis.

4. 
Ability to assume the
obligations of membership

This section examines
Iceland's ability to assume the obligations of membership – that is,
the acquis as expressed in the Treaties, the secondary legislation and
the policies of the Union. It also analyses Iceland's administrative capacity
to implement the acquis. The analysis is structured in accordance with
the list of 33 acquis chapters. In each sector, the Commission's
assessment covers progress achieved during the reporting period and summarises
the country's overall level of preparations.

4.1. 
Chapter 1: Free movement of
goods

Iceland has already
reached a high level of alignment and, with a few exceptions, applies the acquis
in this field due to its EEA membership.

No developments can be
reported in the area of general
principles. The legislation on alcoholic beverages has not been adopted.

On horizontal
measures, there is no update to report on the legislative framework in the
field of conformity assessment.
Internal and external coordination of market surveillance still require further
improvement. The Icelandic Board for Technical Accreditation has not yet been
peer-evaluated.

As regards the 'Old
Approach' product legislation, Iceland's alignment with the acquis
continues to be well advanced. No further developments can be reported in the
automotive sector, where alignment still needs to be reinforced.

Iceland continued in
general to apply satisfactorily the acquis on 'New and Global
Approach' product legislation and procedural measures.

Conclusion

Overall, Iceland
continues to be highly aligned with the acquis in the area of free
movement of goods. Further improvements are needed on horizontal measures and
the old approach product legislation (automotive sector).

4.2. 
Chapter 2: Freedom of
movement for workers

Iceland has already
reached a high level of alignment and, with a few exceptions, applies the acquis
in this field due to its EEA membership.

No additional
developments can be reported on access to the labour market and on full
participation in the EURES (European Employment Services) network.

Progress can be
reported on coordination of social security systems. Preparations for
electronic data exchange within the Electronic Exchange of Social Security
Information (EESSI) system are advancing under the auspices of the dedicated
steering group. Regular meetings took place during the reporting period. Specialists from Icelandic health and
social authorities benefited from training. Work on installation of an access point is advancing.

The European health
insurance card is in use in Iceland.

Conclusion

Overall, Iceland
continues to be highly in line with the acquis on freedom of movement
for workers. The preparations to apply the new regulations on social security
coordination are continuing smoothly.

4.3. 
Chapter 3: Right of
establishment and freedom to provide services

Iceland has already
reached a high level of alignment and applies a substantial part of the acquis
in this field due to its EEA membership.

No further developments
can be reported on the right of establishment.

There has been good
progress on the freedom to provide cross-border services. Iceland
notified the transposition of the Services Directive in July 2011, including
various pieces of amending sector-specific legislation and a Point of Single
Contact has been launched. However, certain parts of Chapter III, Chapter IV,
and Chapter VI of the Services Directive still remain to be transposed.

Some restrictions on
the right of establishment and the freedom to provide services in the fisheries
sector are still in place (see also Chapter 13 - Fisheries).

No progress can be
reported in the area of postal services. The EEA Joint Committee has not yet taken a decision on the
incorporation of the Third Postal Directive into the EEA Agreement, and consequently
has not yet ruled on Iceland's request to postpone the implementation deadline of the Third Postal Directive for two years, e.g. until the end of 2012 at the
latest.

Some progress can be
reported on mutual recognition of professional qualifications. Two outstanding national regulations needed to
complete implementation of the directive on mutual recognition of professional
qualifications, one on the health sector, the other on vocational training,
were published in May and June 2011 respectively. However, the main directive
is still only partially implemented. Articles on application of the general system to professions benefiting
from automatic recognition, automatic recognition on the basis of professional
experience and minimum training conditions are still outstanding.

Conclusion

The overall level of alignment with the acquis on
the right of establishment and freedom to provide services is satisfactory.
However, completion of alignment with the Services directive and the
transposition of the Third Postal directive remain to be achieved. The
administrative capacity for effective implementation and enforcement of EU
rules and policies needs to be strengthened.

4.4. 
Chapter 4: Free movement of
capital

Iceland has already
reached a high level of alignment and applies a substantial part of the acquis
in this field due to its EEA membership.

Some developments can
be reported on capital movements and payments. In March 2011 the
Icelandic government approved a revised strategy for liberalisation of capital accounts.
The strategy was prepared by the Central Bank in cooperation with key
ministries and the Financial Supervisory Authority and in consultation with the
International Monetary Fund. In September 2011, the parliament approved this
strategy and extended the capital controls until 31 December 2013. Iceland
notified the EEA Joint Committee of this decision. The government may lift the controls at an earlier date if
conditions permit this. This
timeframe is deemed necessary to allow a phased and conditional liberalisation
of the capital controls without threatening the financial stability of the
country. The above extension of the capital controls is still not in line with
the EU acquis.

The liberalisation
strategy is divided into two main phases and maintains a gradual,
non-discriminatory approach without setting a timetable. Phase I provides for
measures to reduce distressed investors' offshore króna holdings and to channel
offshore krónur into the Icelandic economy and the Treasury's long-term
funding. To this end, two first foreign currency auctions were held, in May and
July 2011. Once sufficient progress has been made under Phase I, Phase II,
entailing liberalisation of onshore króna holdings, can begin, provided an
assessment of the balance of payments outlook indicates that reserves will be
adequate and other economic preconditions have been met.

No developments can be
reported as regards restrictions on foreign investment in fisheries (see
also Chapter 13 - Fisheries). These provisions are not in line with
the acquis. Some progress can be reported in the area of payment
systems. A bill on
implementation of the directive on payment services was adopted in September
2011. However, work is in progress on transposition of the new EU directive on
settlement finality in payment and security settlement systems and of the new
EU directive on e-money.

Little progress can be
reported in the fight against money laundering. Iceland has addressed some of the technical deficiencies of
its Financial Intelligence Unit. However, in June 2011, the Financial Action Task Force (FATF) placed
Iceland into a process of 'enhanced follow-up' on account of its failure (over
the last five years) to address a number of shortcomings identified in its
evaluation report, including the under-resourcing of its financial intelligence
unit. The third Anti-Money Laundering (AML) directive is thus still not fully
implemented in Iceland.

Conclusion

Overall, Iceland
largely applies the acquis on free movement on capital, although alignment with the acquis remains
incomplete due to extensive capital restrictions still in place. The legislative framework was further
reinforced over the reporting period. The administrative capacity of the
Financial Intelligence Unit still requires further strengthening.

4.5. 
Chapter 5: Public
procurement

The entire acquis in this chapter is covered by the
EEA Agreement, with the exception of one technical directive and the defence procurement directive. Iceland is continuing to implement the main body
of the acquis on public procurement in line with its EEA obligations.

Iceland is fully aligned with the general principles of
the acquis.

Regarding administrative capacity, no further
developments can be reported.

There has been little progress on award of public contracts.
The directive on defence
procurement remains to be transposed into Icelandic legislation. An
e-procurement action plan was discussed at ministerial level during the
reporting period but no such plan has been presented yet. A specific public
procurement advisory council has not yet been established.

Transposition of the remedies directive and the two
related technical directives is still outstanding.

Conclusion

Overall, the level of alignment and
implementation in the field of public procurement remains satisfactory, with
the exception of the remedies and defence procurement directives.

4.6. 
Chapter 6: Company law

Iceland has already reached a high level of alignment and
applies a substantial part of the acquis in the field of company law due
to its EEA membership.

Little progress was
made in the area of company law. Legislation on reporting and documentation requirements in
the case of mergers and divisions was submitted to parliament in March 2011 and
has yet to be adopted. It aims at completing alignment with the Second, Third
and Sixth Company Law Directives and with the directive on cross-border mergers
of limited liability companies. Alignment with the directive on shareholders'
rights remains to be completed.

Little progress was
made on corporate accounting.
Draft legislation implementing parts of the directive amending certain
provisions on annual and consolidated accounts along with the regulation on
equivalence of accounting standards was adopted in September 2011. The infringement case
initiated following the reasoned opinion issued by the EFTA Surveillance
Authority in November 2010 was subsequently closed.

Iceland continued to
apply the acquis on auditing. A new regulation on quality control
of auditors' work was adopted in October 2010. Two new regulations were adopted
in 2011, one covering the continuous education of auditors, the other the
listing of auditors and audit firms. Alignment with the international standards
on audits remains to be achieved.

Conclusion

Overall, Iceland has already reached a high level of
alignment and applies a substantial part of the acquis in the field of
company law. However, full alignment with accounting standards and
international standards in audit remains to be achieved.

4.7. 
Chapter 7: Intellectual
property law

Iceland has already
reached a high level of alignment and applies a substantial part of the acquis
in the field of intellectual property law due to its EEA membership.

Progress has been made in the area of copyright and
neighbouring rights. Following the incorporation into Icelandic legislation
of the bulk of the Copyright Act
last year, five new collecting societies obtained legal status during the
reporting period. Iceland continued to cooperate with the European Observatory
on Counterfeiting and Piracy on soft-law issues.

No development can be reported on industrial
property rights.

Some progress can be reported on enforcement. The working group, made up of representatives
from two ministries and three agencies, continued to discuss enforcement policy
regularly, to raise awareness of IPR issues amongst consumers in Iceland. The
group is also working on establishing a website providing with information and
possibly details of administrative and judicial proceedings against IPR
infringements and on establishing a warning system based on agreements between
right-holders and telecommunications operators. The enforcement directive
remains to be fully transposed.

Conclusion

Overall, Iceland has
already reached a high level of alignment with the acquis on intellectual
property law and has the administrative capacity necessary to implement it.
Steps have been taken to improve Iceland's enforcement policy.

4.8. 
Chapter 8: Competition
policy

Iceland has already
reached a high level of alignment and applies a substantial part of the acquis
in the field of competition due to its EEA membership.

The institutional
framework was further reinforced with the adoption, in February 2011, of the
Act amending the Competition Law with a view to strengthening the powers of the
Competition Authority. The Authority can take action against any situation or
conduct in the market that prevents, restricts or distorts competition, even in
the absence of a breach of the Competition Law.

Iceland continues to
maintain a high level of alignment in the field of antitrust and mergers and
no developments can be reported.

As regards State aid measures taken in response to
the financial crisis, in December 2010 the EFTA Surveillance Authority (ESA) opened a
formal investigation procedure on the aid measures in favour of the Glitnir,
Kaupthing and Landsbanki banks and their successors. In March 2011 the ESA provisionally approved rescue aid of
ISK 33 billion (approximately € 123.8 million) for the Icelandic Housing
Financing Fund, subject to abolition of the mortgage loan scheme and recovery,
by the end of October 2011 at the latest, of any incompatible and unlawful aid
granted. The ESA also approved an Icelandic scheme for innovation companies
with the aim of improving and fostering research and development.

In February 2011, under the existing aid procedure, the ESA
asked Iceland to bring the financing arrangements for the State radio station
into line with the rules on State aid to public service broadcasting. Iceland
agreed in May to take the necessary steps to eliminate any incompatible aid
resulting from the financing scheme and has until the end of December 2011 to
do so.

Conclusion

Overall, Iceland has
already reached a high level of alignment and applies a substantial part of the
acquis in the field of competition.

4.9. 
Chapter 9: Financial
Services

Iceland has reached a high level of alignment and applies a
substantial part of the acquis in this field due to its EEA membership.

There has been limited progress in the cases of banks
and financial conglomerates. Legislation
on a new deposit guarantee scheme, based on the new EU acquis, including
minimum coverage of € 100,000, was presented to parliament in November
2010. The parliamentary approval procedures are continuing. In the area of
banking supervision, the Central Bank of Iceland and the Financial Supervisory
Authority signed a new cooperation agreement in January 2011 to enhance
financial stability by means of better integration of micro and macro
supervision. The two institutions are currently working on designing a registry
to improve monitoring of large exposures. The directive on the prudential
assessment of acquisitions in the financial sector was implemented in 2010. The
amended Act on Financial Undertakings was adopted in September 2011. It brings
the national legislation further in line with the directive on banks affiliated
to central institutions, certain own funds items, large exposures, supervisory
arrangements, and crisis management.

The Capital Requirements Directive (CRD II) has not yet
been fully transposed. Work is advancing on formulating and implementing rules
concerning: good business practices; loans secured by mortgages on shares or
guarantee capital certificates issued by undertakings; remuneration policies;
calculation of the amount of exposure; what constitutes secure
collateral; evaluation of
connections between parties for the purposes of the rules on large exposures;
exceptions from internal auditing units for financial undertakings; and
qualifying holdings outside the financial sector.

In December 2010 a new agreement on Icesave was reached
between the governments of Iceland, the United Kingdom and the Netherlands and
was eventually adopted in February 2011 by the parliament. The Icelandic
President declined to sign the Icesave bill into law, thereby creating the
conditions for a referendum in April, in which almost 60% of Icelandic voters
rejected the bill.

The government
confirmed that the outcome of the referendum would not affect the commencement
of the payments to the UK and the Netherlands from winding up the estate of
Landsbanki, due to start later in 2011. Repayments are expected to start before
the end of 2011, subject to a final ruling of the Supreme Court on priority
creditor status of deposit holders. In May 2011 the government sent its reply
to the letter of formal notice of
May 2010 from the EFTA Surveillance Authority (ESA). In June 2011 the ESA decided to proceed with the second
step of the infringement procedure, i.e. to issue its reasoned opinion, which
reiterates the findings set out in the letter of formal notice. This legal
analysis is shared by the European Commission. Iceland's government provided
the answer to the EFTA Surveillance Authority's reasoned opinion at the end of
September. The Authority is now examining the response in detail before
deciding on further action in this case. At this stage, the Icesave dispute
remains unresolved.

Good progress can be reported in the fields of insurance
and occupational pensions: the
outstanding issues regarding implementation of the reinsurance directive, the life insurance directive, the insurance groups directive
and the financial conglomerates directive were fully addressed over the
reporting period.

In March 2011 the Ministry of Economic Affairs published a
new Regulation regarding assets covering technical provisions of insurance
companies.

In January 2011 the Financial Supervisory Authority published new guidance on
risk management for insurance undertakings. This guidance is partly based on
future solvency II requirements. A committee is working on a bill on
implementation of the solvency II Directive. The Financial Supervisory
Authority started work on new rules regarding calculation of the adjusted
solvency of insurance groups in order to align them with the calculation of the
solvency of financial conglomerates. These new rules will change the method for
implementing the insurance groups directive. Work also continued on other rules
such as on financial independence, assessment of qualifications and
remuneration of board members and chief executive officers.

No developments can be reported in the areas of financial
market infrastructure, securities
markets and investment services.

Some progress can be reported on the administrative
capacity. The staff of the Financial
Supervisory Authority had been
increased to nearly 100 by the end of 2010. The number of full-time equivalent
posts is expected to increase to 117 by the end of 2011, of which 17 will be
temporary jobs to respond to the large scale of the investigative tasks
entailed by the banking collapse.

Conclusion

Overall, alignment in the area of financial services is
good, although the reforms introduced remain partial. Implementation is not
complete in some key areas, notably insurance and securities, and the
supervisory capacity needs further improvement. The Icesave dispute remains
unresolved.

4.10. 
Chapter 10: Information
society and media

Iceland has already
reached a high level of alignment and applies a substantial part of the acquis
in the field of on the information society and media due to its EEA membership.

No progress can be reported in the areas of electronic
communications and information technologies. The 2009 EU electronic
communications reform package (revised regulatory framework) has not been
incorporated into the EEA Agreement and, therefore, has not been transposed
into national law. The EU directive on data retention and the regulation on the
.eu top-level domain have not been transposed. No developments can be
reported on strengthening the independence of the national regulatory
authorities.

No further progress can be reported in information
society services, where legal protection for conditional access devices
needs to be extended to decoders for purposes other than broadcasting services.
Furthermore, the e-commerce
directive remains to be fully transposed. Iceland continued to participate
in the Information and Communication Technologies (ICT) Policy Support
component of the EU Competitiveness and Innovation Programme.

Good progress was achieved regarding audiovisual policy,
where Iceland passed a new law on media and broadcasting in April 2011 with the
aim of transposing the EU's Audiovisual Media Services (AVMS) directive. However, the new legislation
fails fully to transpose the AVMS directive and several gaps still remain.
Apart from not fully transposing a number of articles of the AVMS directive,
the Icelandic Media Act also introduced provisions that could create an
unjustified restriction of the rules on freedom of expression. Other provisions
are contrary to the principle of freedom of reception and retransmission laid
down in the AVMS directive.

The digital
switchover is planned for the end of 2012, but the method remains to be
decided.

Iceland continued to participate in the MEDIA 2007
Programme.

Conclusion

Overall, Iceland has already reached a high level of
alignment and applies a substantial part of the acquis in the field of
the information society and media. However, the revised communications
regulatory framework remains to be transposed and several gaps in transposition
in the field of audiovisual policy and information society services need to be
closed.

4.11. 
Chapter 11: Agriculture and
rural development

As regards horizontal issues, no new legislative developments can be reported. The
administration continued to study the acquis and the structures
necessary to implement it in order to prepare for future membership. The
limited administrative capacity remains to be addressed.

The Farmers' Association and the Minister of Fisheries and
Agriculture signed an agreement in October 2010. It covers, in particular, the
rural development measures for 2011 and 2012 and includes significant budget
cuts in this sector. Due to the economic situation, the agreement is valid for
two years, instead of the usual four-year period,.

Working groups were set up in March 2011 to analyse and prepare
for institutional issues within the EU framework and on the market and support
system. They include both civil servants and stakeholders. Iceland continued
analysing the current land registration system. It also started a pilot project
in connection with the Land Parcel Identification System (LPIS) with the aim of
providing maps and technical support.

No progress can be reported with the single common
market organisation.

A working group on rural development was set up in
March 2011 to analyse and prepare a plan to set out how Iceland could
coordinate its rural development strategies within the EU framework.

No developments can be reported in quality policy
and organic farming, although the latter is covered by the EEA Agreement
and is largely in line with the acquis.

Conclusion

Overall, Iceland's
agricultural policy is not in line with the acquis and no new
legislative alignment has been undertaken. The appropriate administrative
structures in this area will need to be set up.

4.12. 
Chapter 12: Food safety,
veterinary and phytosanitary policy

Iceland partially
applies the acquis on food safety, veterinary and phytosanitary policy due
to its EEA membership.

No progress can be
reported on general food safety since adoption of the Food Law aiming at
harmonisation with the EU hygiene package. Full implementation of these
provisions is expected to start in November 2011. Official controls related to
production and placing on the market of fishery products are not carried out in
line with the legislation in force within the European Economic Area (EEA).
Some developments can be reported towards clarifying the distribution of
control tasks between central and public health authorities with the
finalisation, over the reporting period, of a number of cooperation agreements
at municipal level. The central food and veterinary authority still has to sign
inspection contracts with all reference laboratories.

In March 2011, Iceland
supplemented its legislation in the veterinary sector with the adoption
of a Law on exports of horses. Iceland continued to benefit, under the EEA
Agreement, from an exemption from EU rules on trade in live animals and germ
plasm enabling it to prohibit all imports of live animals except fish and fish
germ plasm. No developments can be reported in this area. Iceland's legislation
on imports of live animals and animal health is not in line with the acquis.

Limited progress can be
reported as regards the placing on the market of food and feed with the
start, over the reporting period, of work on a national upgrading plan to bring
food establishments into line with the hygiene rules. However, the hygiene
package is expected to be fully implemented in November 2011. On animal
by-products, no developments can be reported on setting up collection systems
and incineration facilities for carcasses potentially infected with
transmissible spongiform encephalopathy (TSE).

As regards food
safety rules, some developments can be reported on genetically modified
foods with the adoption, in December 2010, of legislation on the labelling
and traceability of genetically modified food and feed. The part of the
legislation dealing with feed entered into force in September 2011. However,
Iceland's legislation on novel foods and specific rules for feed are not
in line with the acquis. A new regulation on release into the
environment of genetically modified organisms was adopted in July 2011.

Some progress can be
reported on phytosanitary policy, as Iceland started preparing
legislation on plant protection products. However, Icelandic legislation does
not comply with EU rules on plant protection products and plant health. The
capacity of accredited laboratories remains to be enhanced.

Conclusion

Overall, Iceland is
partially in line with the acquis on food safety, veterinary and
phytosanitary policy. Iceland's legislation on live animals is not in line with
the acquis and no new development can be reported in this area. The
hygiene package remains to be fully implemented in November 2011. Further
developments are needed in the legislation on plant protection products and
novel food and overall administrative and laboratory capacity requires further
strengthening.

4.13. 
Chapter 13: Fisheries

No new developments can be reported in a number of areas
such as structural action, market policy and State aid.

As regards resource and fleet management, no
development can be reported. The restrictions on the internal market acquis
regarding the right of establishment and the freedom to provide services and on
the free movement of capital in fisheries production and processing remain in
place.

In the areas of inspections and control, no new developments can be reported. However,
preparations for ratification of the 2009 FAO Agreement on port State measures
to prevent, deter and eliminate illegal, unreported and unregulated fisheries continued.

When it comes to international agreements, Iceland
continued its preparations to ratify the 1993 FAO Agreement to promote
compliance with international conservation and management measures by fishing
vessels on the high seas.

It was not possible, over the reporting period, to reach an
agreement on the management of the mackerel stocks for 2011 between the coastal
States of the North-East Atlantic. Iceland's continued expansion of mackerel
fisheries, through the unilateral
setting of total allowable catches,
continues to cause widespread concern within the EU, also with regard to the
principles of sustainable resource management.

Conclusion

Overall, Iceland continues to apply a fisheries policy
which has similar objectives to those pursued in the EU, but some rules differ
substantially. No developments can be reported. The Icelandic legislation is
not in line with the acquis. Mechanisms to implement and monitor EU
support measures remains to be set up. The existing restrictions on foreign investment in
fisheries and services are not in line with the acquis.

4.14. 
Chapter 14: Transport policy

Iceland partly applies
the acquis on transport policy due to its EEA membership.

In January 2011 the
Ministry of Justice and Human Rights was merged with the Ministry of Transport,
Communications and Local Government to form the Ministry of the Interior.

Some progress can be reported in the area of road
transport. Iceland acceded to
the European Agreement on the international carriage of dangerous goods by road
(ADR) in February 2011. However, the acquis regarding driving licences,
roadworthiness tests for motor vehicles, road side check lists for inspections
in the transport of dangerous goods, and road infrastructure safety management
remains to be fully implemented. Over the reporting period the EFTA
Surveillance Authority (ESA) sent Iceland letters of formal notice regarding
the outstanding transposition of the acquis on driving licences.

There is no rail transport sector or inland waterways transport sector
in Iceland.

No further developments can be reported in the area of
combined transport. In the absence of railway systems and inland waterways,
combined transport in Iceland consists mainly of road transport.

In the field of air transport there has been good
progress. The National Supervisory Authority within the Icelandic Civil
Aviation Administration, as the independent body ensuring the application and
monitoring of the acquis in this field, is improving its security surveillance
capacity and a new aviation security plan is being finalised. In June 2011, the second phase of the Open
Skies Agreement with the USA was signed, putting Icelandic operators on equal
footing with other operators in the EU with regard to flights to the USA. Several
other areas of the acquis remain to be transposed, including public
services obligations, computerised reservation system, single European Sky II,
safety and airworthiness of aircraft and aeronautical products.

Progress can be
reported in the area of maritime transport, particularly in the area of
security, where the Maritime Administration actively participated in the
corresponding committees. The outstanding acquis on marine equipment,
training and safety rules has been transposed. However, the acquis on
rights of passengers travelling by sea, port reception facilities for
ship-generated waste and port State control remains to be transposed.

No developments can be
reported in the area of satellite navigation.

Conclusion

Overall, Iceland has a
good level of alignment with the acquis on transport policy. However,
the country still needs to transpose the relevant EU legislation on road and
air transport.

4.15. 
Chapter 15: Energy

Iceland partly applies
the acquis on eergy due to its EEA membership.

There has been some progress in the area of security of
supply. The steering group in charge of developing a comprehensive energy
policy for Iceland delivered a final draft report in January 2011. The draft
report, which was open to public consultation until April 2011, focuses on an
energy strategy for the future.
Work has begun on how to implement legislation on oil stocks, in particular
with regard to the alternatives that may exist, administrative aspects and the
obligations of the parties. Meetings with EU national experts in this field
took place in April 2011.

Limited progress can be reported in the area of the
internal energy market. With
regard to the procedure to improve the transparency of gas and electricity
prices, a law has not been adopted yet. In December
2010 a law amending the Electricity Act was adopted, postponing the separation
of competition and franchise operations. Incorporation of the third energy package directive into
the EEA Agreement has not been finalised. The relations between and independence of the Competition
Authority and the National Energy Authority have not been clarified yet.

Little progress can be reported in the field of renewable
energy, where the National
Renewable Energy Action Plan is still in the process of being drafted under the
leadership of the National Energy Authority. Icelandic legislation is still not
in line with the 2009 renewable energy directive, although it has a share of
67% of renewable energy in its final energy consumption. Further measures are
envisaged for increasing the use of renewable energy in the transport sector.
This sector remains the most challenging from the renewable energy perspective.
Some progress can be reported in the area of energy efficiency. Iceland
aligned in 2010 with the directive on the promotion of cogeneration, based on
useful heat demand in the internal energy market. Under the EEA Agreement, Iceland has been exempted from
transposing the directive on energy performance in buildings. Substantial parts
of the energy efficiency acquis remain to be transposed, including the
energy services directive and the new legislation on eco-design and labelling
of end-user products. The National Energy Authority has initiated a project to
raise awareness of the importance of energy efficiency and energy saving, both
for companies and households. However, Iceland has no national energy-saving targets and
implementation of the acquis on energy end-use efficiency is still at an
early stage.

There have been no further developments in the areas of nuclear
energy, nuclear safety and radiation protection.

Conclusion

Overall, Iceland continues to be highly aligned with the acquis
in the field of energy. However, alignment in
the areas of oil stocks, the independence of the regulatory authority and
energy efficiency remains moderately advanced.

4.16. 
Chapter 16: Taxation

The working group on taxation to evaluate the overall
impact of acquis legislation and provide a gap analysis on national
legislation with relevant acquis completed its work in March 2011. In
the area of indirect taxation, few developments can be noted over the
reporting period. Tax legislation
remains only partly in line with the acquis, in particular on VAT -
especially regarding definitions, exemptions, special VAT schemes or reimbursement
- and excise duties, with special reference to rates and product category
definitions, including for alcohol and tobacco, petrol and diesel fuel,
travellers' allowances, warehousing, duty suspension and duty-free goods.

As regards direct taxation, no further developments
can be reported on aligning the legislative framework with the acquis.
An amendment to the Law on income tax, covered by the EEA, was adopted in
December 2010 concerning the income of persons with limited tax liability and
who earn no less than 75% of their income in Iceland. Laws on, inter alia, inheritance tax and wealth tax
were also adopted in December 2010.

Regarding administrative cooperation and mutual
assistance, operational capacity and computerisation, initial steps
have been taken to measure the operational capacity and best practices of
Iceland's tax system against the EU fiscal blueprints and best practices. This
included study trips and training seminars for the working group on taxation with experts on the EU fiscal self
assessment exercise and as part of the regional blueprints exercise on customs
and taxation. The final report was submitted in September 2011. The process of
aligning with the acquis provisions relating to mutual assistance in
indirect and direct taxation matters, including the establishment of a Central
Liaison Office and an Excise Liaison Office, has yet to start. Iceland needs to
decide as soon as possible on a strategy to achieve interconnectivity and
interoperability of its IT systems for taxation with those of the EU.

Conclusion

Overall, some progress
can be reported. Iceland's tax legislation remains partially aligned with the acquis.
Iceland continues to have a good level of administrative capacity in the field
of taxation. Nevertheless, a strategy for achieving IT interconnectivity and
interoperability with EU IT systems for taxation needs to be defined.

4.17. 
Chapter 17: Economic and
Monetary policy

No progress can be reported on monetary policy,
including in the functional, institutional, personal and financial independence
of the Central Bank, where alignment with the acquis remains incomplete.
National legislation on Central Bank financing of credit institutions other
than in connection with the support of insolvent credit and/or other financial institutions
remains incompatible with the prohibition on monetary financing, unless it is
established that the Central Bank acts only as a fiscal agent of the State.

With respect to economic policy, coordination
between the Ministry of Economic Affairs and the Central Bank has improved,
albeit insufficiently, particularly after a new Ministry of Economic Affairs
was established in October 2010 to enhance coordination of economic policy and
between macroeconomic and financial sector policies. As before, regular and
frequent meetings are held between the Ministry of Economic Affairs and Central
Bank staff.

In December 2010 the Central Bank published a report on
monetary policy in Iceland, discussing possible frameworks for monetary policy,
including changes to the present inflation-targeting framework. Iceland is
included in the pre-accession fiscal surveillance and submitted its first
Pre-Accession Economic Programme in January 2011.

Conclusion

There has been some progress in the area of economic
policy, but further efforts on improving policy coordination remain necessary.
No further developments can be reported in the field of monetary policy and,
overall, alignment with the acquis in this area remains incomplete,
notably on the independence of the Central Bank and the prohibition of monetary
financing of the public sector.

4.18. 
Chapter 18: Statistics

Iceland partly applies
the acquis on statistics due to its EEA membership.

Some progress has been made in the statistical
infrastructure. Cooperation between Statistics Iceland and the Central Bank
of Iceland is good and has been strengthened. Statistics Iceland has started
working on cooperation agreements with the Customs Department, the Environment
Institute and the Energy Authority. Its operational budget has been cut
further. As a result, some measures had to be postponed. Progress in other
areas of capacity-building continued with the aid of study visits, working
groups and training. However, apart from statistics Iceland, the country has a
number of other producers of official statistics and the oversight and
coordination of the entire national system needs to be strengthened.

Some progress can be reported on classifications and
registers. The main statistical classifications are in place and follow the
acquis. Work on upgrading the classification on occupations has started.
The statistical business register is not yet operational. Concerning sector
statistics, Iceland continued to follow its Strategy for Agricultural
Statistics, presented in September 2010. This included Statistics Iceland
hiring an additional three persons to work on Agricultural Statistics.
Statistics Iceland also prepared plans and budget proposals on the production
of Agricultural statistics beyond 2012, but so far no formal decisions on the
budget proposals have been taken. The Farm Structure Survey was launched in
January 2011, data collection from
farmers ended in May and processing is due to start in September 2011. In June
2011 a law was adopted abolishing the Agricultural Statistics Service as of the
beginning of 2012. The responsibility for agricultural statistics and the Farm
Structure Survey has been moved to Statistics Iceland. The housing and
population census started in April 2011 and is partly financed by unused
appropriations from previous years and partly through EU support. Iceland has
started to prepare for Intrastat. Gaps in national accounts, such as supply and
use tables, input-output tables and sector accounts, need to be filled.
Short-term statistics and structural business statistics need further
development. Production of statistics following the new regulation on job
vacancies has not yet begun, at least partly due to budgetary issues. The adult
education survey and the continuing vocational training survey remain to be
carried out. Transmission of available statistical data to Eurostat remains to
be improved. Iceland will need to ensure that resources are available in these
areas. National Accounts are compiled according to European System of Accounts
(ESA 95) but neither do they comprise the required supply and use and
input-output tables, nor a set of full sector accounts. Financial accounts need
to be comprehensively developed. The area of structural business and short-term
statistics needs considerable development which is linked to the necessary
establishment of a business register. As concerns other sector statistics, preparations
in the area of sector statistics are advanced but incomplete.

Conclusion

Progress can be
reported in the area of statistics. Production and provision of statistical
data in line with EU methods, in particular on national accounts, businesses,
the labour market and agriculture, remain to be improved. The implementation
capacity of the statistical office is stretched to its limits. Allocation of
sufficient resources remains a concern.

4.19. 
Chapter 19: Social policy
and employment

Iceland has reached a
high level of alignment and applies a substantial part of the acquis in
this field due to its EEA membership.

In January 2011 the
administration dealing with social policy and employment was reorganised, with
the creation of the Ministry of Welfare.

As a member of the EEA,
Iceland has continued to implement a substantial part of the acquis in
the field of labour law. In the reporting period, the Icelandic
legislation transposing the posting of workers directive was found to be in
breach of EU law by the EFTA Court. The EFTA Surveillance Authority launched in
November 2010 an infringement procedure against Iceland regarding the working
time directive. Subsequently, in April 2011, a bill was introduced in the
parliament set to make changes in order for Iceland to comply with the
directive.

In the area of health
and safety at work, a new legal act was adopted in February 2011 with
the aim of transposing the EU directive on optical radiation.

The social dialogue
continued to function well during the reporting period. In May 2011, after five
months of negotiations, a three-year collective wage agreement for the private
sector was ratified. For most of the
public sector, agreements have been concluded as well. The agreements are expected to ensure stability in the
labour market.

Progress continued as
regards Iceland's employment policy. The new Iceland 2020 Policy
Statement, adopted by the government in January 2011, sets a number of
social policy objectives such as the reducing of long term unemployment to
under 3%. These were formulated in consultation with representatives from trade
unions and the Confederation of Icelandic Employers and place particular
emphasis on the groups at risk of long-term unemployment in the wake of the
financial crisis. The government has continued to implement active labour
market policies focusing on young people. While these policies have been
successful, an overall employment strategy still remains to be established.
Overall, the labour market situation continues to be seriously affected by the
economic crisis with young workers and the low skilled being hit the hardest.

Preparations for
participation in the European Social Fund are still at an early stage.

Iceland has continued
taking appropriate measures for social inclusion of the vulnerable
groups in society. Stakeholder consultations take place regularly under the
umbrella of a steering committee, led by the Ministry of Welfare, to monitor
the welfare system. Financial assistance for poor households remains available
from the municipal authorities, which decide themselves on the amounts to be
paid. Debt mitigation measures and financial advice to indebted households, adopted
in the aftermath of the financial crisis, are still in place. A new law
concerning people with disabilities was adopted in December 2010. Under this
law, services for people with disabilities are now under the responsibility of
the municipal authorities. Iceland is well advanced in terms of social
inclusion and social protection of persons with disabilities.

Iceland continues to
guarantee the quality of social protection services, despite a lower
share of expenditure than in the EU overall and the difficult economic
background. As regards healthcare, pocket payments cover about 10% of primary
healthcare and 30% of specialist consultations. The relatively high effective
retirement age helps to maintain the sustainability of the pension system. Some
of the pension funds affected by the crisis continued to cut pension rights and
payments.

The two anti-discrimination directives remain to be
transposed in Icelandic law. The Ministry of Welfare submitted a proposal for a
new law to implement these directives to parliament in May 2011.

Iceland's standards in the field of equal opportunities
remain high and Iceland continues to be the world leader in gender equality.
However, two equal opportunities directives remain to be transposed, one on
gender equality in social security, the other on access to goods and services.

Conclusion

Overall, Iceland has reached a high level of alignment and
continued to apply a substantial part of the acquis in this chapter due
to its EEA membership. Iceland issued the Iceland 2020 Policy Statement
which sets a number of objectives in the areas of social policy and employment.
Social dialogue mechanisms continue to function well, and a three-year
collective wage agreement for the private sector has been signed. However, a
comprehensive employment strategy has yet to be drafted.

4.20. 
Chapter 20: Enterprise and
industrial policy

Iceland partially
applies the acquis in this field due to its EEA membership.

In the area of enterprise
and industrial policy, the Iceland 2020 Policy Statement sets goals
and targets related to enterprise and industrial policy. In particular, it
includes specific quantitative goals on welfare, knowledge, R&D,
sustainability and economic development by increasing the share of GDP
accounted for by exports of high-tech industrial and eco-innovation products. Iceland
2020 is an outcome of the Moving Iceland Forward initiative which was
prepared in consultation with a wide range of stakeholders. Iceland is already
familiar with the Small Business Act and participates in the SME performance
review.

In the area of enterprise
and industrial policy instruments, Iceland is continuing to participate in
the Enterprise and Innovation Programme and is a member of the Enterprise
Europe Network. The performance of the Icelandic members of the network
improved steadily over the reporting period and has now reached satisfactory
levels. At the same time, there is still room for further improvement, notably
to stimulate enterprises to make fuller use of the services offered with a view
to internationalisation of small and medium-sized enterprises (SMEs). Various
financial support programmes for SMEs are in place. However, access to finance
for SMEs is still affected by the financial crisis.

Concerning sectoral policies, a new policy on creative
industries was presented in August 2011.

Conclusion

Overall, alignment in
the area of enterprise and industrial policy remains at a high level. Measures
have been taken on in industrial and SME policy to address the challenges posed
by the post-crisis environment.

4.21. 
Chapter 21: Trans European
Networks

Iceland has already
reached a good level of alignment and applies a substantial part of the acquis
in this field due to its EEA membership.

In the area of transport networks, Iceland
participated in the TEN-T guidelines committee. TEN-T maps are currently
being prepared in line with the revision of the TEN-T guidelines.

No progress can be reported in the area of energy
networks. A TEN-E-related policy remains to be established.

Conclusion

Overall, Iceland maintains a good level of alignment with
the acquis in this chapter. However, a TEN-E-related policy needs to be
developed.

4.22. 
Chapter 22: Regional policy
and coordination of structural instruments

In relation to the legislative
framework, as a member of the EEA, Iceland is at an advanced stage with
alignment with Union legislation and policies in areas that are a prerequisite
for proper implementation of the EU Cohesion Policy, such as public
procurement, competition, non-discrimination and equality between men and
women. Further efforts are needed in the area of the environment. Iceland's
current budget planning system does not provide sufficient guarantees with a
view to multiannual programme budgeting.

No decision has been
taken concerning setting up the institutional framework for management
of the Structural Funds. However, preparatory work is under way.

As regards administrative
capacity, a comprehensive training action plan has been put in place. It
addresses most of the institutions likely to be involved in implementing
Cohesion Policy and covers areas relating to programme and project preparation
and management. Iceland needs to develop and implement a targeted
capacity-building programme for all future stakeholders involved in EU Cohesion
Policy once programme and institutional choices are made.

Progress was made on programming, in the form of
adoption of the Iceland
2020 Policy Statement in January 2011, a long-term planning document for
social and economic development. It contains a number of policy targets
relevant to regional policy. The statement provides for action plans for each
district. Based on the objectives of the policy statement, long-term regional
action and investment plans for the whole country are to be made. These will
serve as a basis for preparing the strategy and programming documents required
by Cohesion Policy.

No particular developments can be reported on monitoring
and evaluation. Iceland continued to use monitoring systems in relation to
the EU co-funded programmes in which the country is involved due to its EEA
membership. Iceland needs to mobilise adequate resources for proper
establishment of a monitoring and evaluation system for Cohesion Policy
programmes.

No particular development can be reported on financial
management and control. Iceland needs to put in place its financial
management and control system (including internal and external audits) for the
Structural Funds and to pay due attention to separation of functions and the
independence of key bodies such as the certifying authority and the audit
authority.

Conclusion

Overall, some limited progress has been made in the area of
regional policy and coordination of structural instruments. A comprehensive action plan is being prepared with
the aim of enhancing the administrative capacity in the area of Cohesion
Policy. However, Iceland needs to identify the institutions responsible for
implementation of the Cohesion Policy and to develop appropriate management
mechanisms, including financial control, monitoring and evaluation.

4.23. 
Chapter 23: Judiciary and
fundamental rights (see alsoPolitical criteria)

Progress can be
reported in the judiciary. Iceland's judiciary continues to be of a high
standard and the judicial system is well established. In January 2011, the
Ministry of Justice and Human Rights was merged with the Ministry of Transport,
Communications and local Government into the Ministry of Interior. A law
extending the mandate of the president of the Supreme Court board from two to
five years was adopted in February 2011.

Independence has been strengthened. As regards appointments
and dismissals of prosecutors, the State Prosecutor and his Deputy are
appointed by the Minister of Interior for an indefinite period of time, whereas
other prosecutors are appointed by the Minister of Interior for five years. The
limited term of office of prosecutors needs to be addressed. Prosecutors, the
State Prosecutor and his Deputy cannot be dismissed unless a case against them
is brought before the Courts. These are the same conditions that are applied to
Supreme and district court judges. Discussions on merging all eight District
courts into one court and on the possible establishment of a Court of Appeal
are ongoing. The working group set up in December 2010 to look into the establishment
of an Appeal Court for civil and criminal cases delivered its recommendations
in June 2011. Its recommendations are ongoing public consultations.

The implementation of
the new rules on appointing judges and prosecutors requires further monitoring.

As regards accountability,
disciplinary procedures for judges are in place. The Committee on Judicial
Functions acts on an advisory basis and any decision by the Minister of
Interior to remove a judge from the bench has temporary effect. It can only
become permanent if confirmed by a court.

Measures were taken to
improve the efficiency of the judicial system. A temporary increase in
the number of district court judges (38 to 43) and Supreme Court judges (9 to
12) was decided by the parliament in February 2011 to deal with the increased
case-load following the financial crisis. This number will be reduced further
as of January 2013. Three Supreme Court and five district court judges were
appointed during the reporting period according to the rules of the revised Act
of Judiciary.

The Office of the Special
Prosecutor was reinforced in order to continue conducting a number of
criminal investigations in the wake of the financial crisis. The Office was
merged with the Economic Crime Department of the National Commissioner of
Police in September 2011. With this merge, the Office of the Special Prosecutor
will also be in a position to investigate and prosecute serious financial and
economic cases in addition to the criminal actions connected with the
operations of financial undertakings. In June 2011, a law amending the law of
the Special Prosecutor was amended to take into account the merge of the Office
with the Economic Crime Department.

Progress can be
reported on anti-corruption policy with the ratification in February
2011 of the UN Convention against Corruption. In March 2011, a code of conduct
for ministers was adopted in application of the June 2010 law. Codes are being
prepared for Central government staff and for the civil service in general. A
special implementation plan for ethical standards within the administration was
launched in November 2010 under the auspices of the Coordination Committee on
Ethical Standards for the Administration. The plan aims to ensure extensive
consultations before codes of conduct are adopted and makes provision for
training activities. Training activities on investigations of corruption cases
also took place during the reporting period. The General Penal Code remains to
be amended following the December 2010 interim compliance report of the Council
of Europe's Group of States against Corruption (GRECO) on incrimination of
corruption offences.

According to the law on
the financing of political parties amended in September 2010, political parties
have to provide their financial report by the beginning of October 2011, as a
precondition for them to receive State funding. The State Auditor monitored the
implementation of the amended law on financing of political parties. During the
reporting period, 7 out of 8 political parties have delivered their obligatory
financial report for the year 2009. No payments are executed if the information
provided to the National Audit Office by the political party is not submitted
or is not in line with the legal provisions. The impact and effects of the new
legislation need to be monitored. The GRECO recommendation on party funding
regarding the independence of auditors who check the political parties' and
candidates' accounts remains to be addressed.

Some measures were
taken during the reporting period to further strengthen the already high level
of protection of fundamental rights. These concern in particular women's
rights and the fight against domestic violence: in March 2011, the Ministry
of Welfare presented to the Parliament a report with recommendations on various
actions related to both preventive measures and response to domestic violence.
A new law to improve the functioning of restraining orders and the removal from
home of perpetrators of domestic violence was adopted in June 2011.

No progress can be
reported on the protection of personal data. The Law on data protection
is not yet fully in line with the acquis, in particular as regards the
transfer of data to third countries. The independence of the Data Protection
Authority needs further strengthening. The Authority is administratively
subject to the Ministry of Interior, which allocates and supervises the
Authority's yearly budget. The rules on the appointment of the members of the
board of directors by the Minister of Interior need to be reviewed. The
Additional Protocol to the Council of Europe Convention 108 for the Protection
of Individuals with regard to Automatic Processing of Personal Data has not yet
been ratified.

There are no
developments to report on EU citizen's rights.

Conclusion

Overall, Iceland's
judiciary and anti-corruption policy continue to be of a high standard. The limited tenure of prosecutors other than the
Public Prosecutor and the Deputy Public Prosecutor needs to be addressed. Iceland ensures continuous strengthening of its
already high level of protection on fundamental rights. Progress was made in
further reinforcing the independence of the judiciary and the anti-corruption
policy framework. Further monitoring of the implementation of these measures is
needed. The legislation on citizen's rights and data protection is not yet
fully in line with the acquis.

4.24. 
Chapter 24: Justice, freedom
and security

As an associated member of the Schengen Agreement,
Iceland continued to implement a large part of the acquis in the area of
justice, freedom and security, in particular as regards external borders
and visas. Iceland has continued to be actively involved in the
activities of Frontex. Iceland is also participating in the Visa Information
System (VIS).

In January 2011, the amended Law on the restructuring of
the government and its ministries came into force. The Ministry of Justice and
Human Rights merged with the Ministry of Transport, Communications and Local
Government to form the Ministry of the Interior.

Iceland is advanced in the area of migration, but
its legislation on long-term residents, special provisions for researchers and
implementation of the EU Blue Card Directive still needs to be aligned. The
same applies to family reunification.

As regards asylum, the amendments to the Act on
foreigners which entered into force in October 2010 broadened the definition of
refugee to include those eligible for subsidiary protection. It also included
provisions to tighten up the procedures and consolidate the rights of asylum-seekers.
Work has started with a view to
joining the European Asylum Support Office (EASO).

Progress can be reported in the area of judicial
cooperation in civil and criminal matters. Iceland ratified the Lugano
Convention on jurisdiction and the enforcement of judgments in civil and
commercial matters in January 2011 and the Convention entered into force as
regards Iceland in May 2011. No new developments can be reported with regard to
joining the 1996 Child Protection Convention and the 2007 Child Support
Convention and its protocol on applicable law, nor with cooperation in criminal
matters. The good cooperation between Iceland and Eurojust has continued.

As regards police cooperation and the fight against
organised crime, the protocols to the UN Convention against transnational
crime (Palermo Convention) on smuggling of migrants and on illicit
manufacturing and trafficking in firearms remain to be ratified. The specialist
coordination team dealing with human trafficking continued to provide training
for professionals and civil servants. It also provided safe refuges,
protection, legal aid, emergency health services and psychological assistance
for victims of human trafficking and organised activities to build up their
social abilities. Information and guidelines on human trafficking for police
officers are available. They include information on the difference between
human trafficking and smuggling of people, misconceptions and identification of
victims. A law was adopted in June increasing the punishment for trafficking in
human beings to 12 years. Iceland has not ratified the Council of Europe
Convention on trafficking in human beings. Iceland is continuing its good
cooperation with Europol, in particular on investigations in the wake of the
financial crisis. Iceland continues to be advanced in the fight against money
laundering. No new development can be reported.

Iceland remains well advanced in the fight
against terrorism, cooperation in the field of drugs and customs
cooperation, where no further developments can be reported.

As regards counterfeiting of the euro, see
Chapter 32 - Financial control.

Conclusion

Overall, Iceland
continues to apply the Schengen Agreement and is well advanced in aligning with
the acquis in the area of justice, freedom and security. Further efforts
are still needed to ratify and implement international instruments in the field
of child protection, the fight against organised crime and currency
counterfeiting.

4.25. 
Chapter 25: Science and
research

Iceland has already achieved a high level of alignment and
applies a substantial part of the acquis in this field due to its
association with the EU Framework Programmes and its participation in the
European Research Area governance structures under the EEA Agreement.

Iceland's framework for research and innovation policy is
in line with and comparable to those of EU Member States.

Iceland continued to participate in the 7th EU Framework
Programme for research and technological development (FP7) as associated
country. Participation remained successful and was spread over all the thematic
areas and specific programmes covered by FP7.

Regarding the European Research Area (ERA), over the
reporting period Iceland took a number of actions which further facilitate its
integration into the ERA and strengthens the research and innovation capacity
at national level. The Iceland 2020 Policy Statement of January 2011
takes due account of the objectives of the ERA.

Regarding research funding, the Policy Statement contains
actions to increase the level of expenditure in R&D currently at 2.7% of
GDP to reach 4% of GDP by 2020,
with 70% coming from companies and 30% from public funds. To attain this
objective, the government is expected to offer tax incentives to private
companies for R&D spending.

Conclusion

Overall, Iceland has
achieved a high level of alignment in the field of science and research and
continued to participate actively in EU FP7. Furthermore, as a result of its
involvement in European Research Area activities, Iceland is well advanced to
meet the targets and objectives of the ERA and the Innovation Union.

4.26. 
Chapter 26: Education and
culture

Iceland has already
implemented a substantial part of the acquis on education and culture,
due to its EEA membership.

No further developments can be reported in the
fields of education, training, youth, culture and sport.

As regards cooperation on policies, Iceland
continued to participate actively in the open method of coordination on
education. Iceland's share of 30-34 year olds with tertiary education remains
above the EU average and is already above the target set by the EU Education
& Training 2020 framework. The rate of early school-leavers remains above
the EU average. To improve this situation, the government put forward proposals
in April 2011 to reduce the drop-out rate from upper secondary school and
decrease youth unemployment. In the field of lifelong learning, Iceland
remained above the EU average targets for 2020.

Regarding access to education of EU citizens, the
Ministry of Education is working on amending its legislation on access for EEA
citizens to loans from the Icelandic Student Loan Fund. This amendment is
expected to enter into force in autumn 2011 and will introduce a residence
requirement for all beneficiaries.

Iceland continued to participate in several EU
programmes, including Life-long Learning, Youth in Action and Erasmus
Mundus. It also continued to participate in the European Centre for the
Development of Vocational Training and nominated representatives to take part
as observers in the Advisory Committee on Vocational Training. The Ministry of
Education, Science and Culture is working on streamlining procedures and on
achieving full compliance with the programme management requirements for the
Lifelong Learning and Youth in Action Programmes. So far, Iceland is not
participating in the Europe for Citizens Programme.

A comprehensive national qualifications framework based on
learning outcomes is being developed.

Iceland continued to participate in the EU Culture
Programme for 2007-2013 and has reiterated its interest in participating in the
open method of coordination on culture.

Conclusion

Overall, Iceland has achieved a high level of alignment in
the field of education and culture.

4.27. 
Chapter 27: Environment

As regards environment, Iceland's policy is to a
large extent in line with the EU acquis due to its EEA membership.

An integrated
national strategy on environmental issues was introduced with the new Iceland
2020 Policy Statement. It contains several firm environmental targets with
a focus on sustainable development, especially in the context of exploitation
of natural resources and energy. Objectives include to become a pioneer in
testing, producing and using eco-friendly fuels. Some progress has been
achieved in the horizontal legislation. A law set to transpose
the environmental liability directive was presented to the parliament in March
2011. It includes provisions on damage to protected species and nature
conservation areas. However, these are not yet in line with the EU nature
acquis. Legislation set to implement the third pillar of the Aarhus
Convention was adopted by parliament in September. The Aarhus Convention still
has to be ratified. Transposition of the environmental crime directive is still
pending. Legislation transposing the INSPIRE directive was adopted in May 2011.

The Ministry of the Environment is preparing amendments to
the environmental impact assessment legislation which are expected to be
presented to parliament in 2011. The main changes concern the criteria on which
projects will be subject to screening in order to decide whether an
environmental impact assessment is required. No developments can be reported
regarding ratification of the Espoo Convention on environmental impact
assessment in a transboundary context.

Iceland's air quality legislation is largely in line
with the EU acquis. However, a law transposing the National Emissions
Ceilings Directive remains to be adopted.

Good progress was achieved in the field of waste
management. New waste management
legislation was adopted by parliament in May 2011 with the aim of transposing a
whole range of provisions of the EU waste framework directive, batteries
directive and mining and waste directive and packaging waste directive.

In the field of water quality, a significant step
was taken in the form of new framework legislation, adopted in April 2011,
transposing the water framework directive. New staff were recruited in the
Environment Agency over the reporting period to work on water framework issues.
Iceland still needs to take specific steps to transpose the remaining acquis,
notably the marine strategy framework directive, bathing water directive and
floods directive.

As regards nature
protection, the Nature Conservation Act is being reviewed to take into
consideration the birds and habitats directives. Meanwhile, no legislative or
implementing measures can be reported to align with the acquis on
protection of whales or with the trade ban on imports of seal products into the
EU. Work has continued on developing management plans for the national parks. A
management plan for Vatnajökull national park was adopted by the Minister of
the Environment in February 2011.

Iceland is well advanced on aligning with the EU acquis
on industrial pollution, control and risk management. No further
developments can be reported in this area.

Some progress was achieved in the area of chemicals.
Legislation aiming at transposing the EU regulation on classification, labelling and packaging of
chemical was adopted by parliament in May 2011. The amendments to the
Registration, Evaluation, Authorisation and Restrictions of Chemicals (REACH)
remain to be fully transposed and the administrative capacity for its
implementation needs to be strengthened. No developments can be reported as
regards ratification of the Rotterdam Convention.

As regards noise,
in March 2011 the EFTA Surveillance
Authority decided to take Iceland to court for failing to address the problem
of road noise, as required by the Environmental Noise Directive.

As regards civil
protection Iceland continued to participate in the EU Civil Protection
Mechanism and contributed to the work of the EU Civil Protection Committee.

As regards climate
change Iceland's pledge for the post-2012 climate regime is at the level of
-30% in comparison to 1990 with Iceland stating that this pledge requires them
being able to use the provisions of Article 4 of Kyoto Protocol or similar
arrangement and agreement with the European Union. Iceland regularly associated
itself with the EU positions on climate change during the reporting period.

As regards the EU Monitoring Mechanism, Iceland continued
to take steps towards compliance. However, some adjustments are still needed,
especially in the timing of data compilation for both the greenhouse gas (GHG)
inventory and GHG projections.

Regarding emissions
trading, Iceland in June adopted legislation to complete transposition of the
current EU emissions trading (EU ETS) and aviation directives. However, further
steps are needed to complete transposition and prepare to implement the revised
EU ETS directive, in particular in so far as aviation, registries and
auctioning are concerned.

Iceland adopted an
implementation plan for mitigation of greenhouse gas emissions in November 2010
to achieve closer alignment with the EU effort-sharing decision. Further
efforts and capacity-building are, however, needed.

Regarding fuel quality,
Iceland still needs to transpose the directive on specifications for fuels. As regards emissions from road transport, Iceland
still needs to implement the EU regulation on emission standards for new cars
and vans, primarily through setting up a scheme for monitoring and reporting of
CO2 emissions.

Iceland continued to
prepare for transposition of the directive on the geological storage of carbon
dioxide. Iceland needs to take steps to align with some remaining pieces of EU
legislation on ozone-depleting substances and fluorinated gases. It has not yet
associated itself with the Declaration adopted at the 22nd meeting of the
Parties to the Montreal Protocol on the global transition away from HCFCs and
CFCs.

As far as administrative capacity is concerned, the
Environment Agency recruited two new members of staff to deal with the ETS
aviation issues. The inter-ministerial committee was reinforced by adding,
amongst others, a representative of municipalities and by holding consultations
with business and civil society.

Conclusion

Overall, Iceland has reached a high level of alignment and
applies a substantial part of the acquis in this chapter due to its EEA
membership and there has been further progress. Institutional structures are
mostly in place and in operation. Full compliance with the acquis on
nature protection remains to be achieved, in particular in the cases of
protection of whales, seals and wild birds and conservation of natural habitats
and of wild fauna and flora. The same applies to the water sector, in
particular as regards alignment with the Marine Strategy Framework Directive.
Further steps are also needed as regards climate change, in particular in the
areas of aviation, registries and auctioning. There are issues on which Iceland
needs gradually to align with the EU positions in the international
environmental fora. Iceland also needs to ratify outstanding important
multilateral environmental agreements.

4.28. 
Chapter 28: Consumer and
health protection

Iceland partly applies
the acquis on consumer and health protection due to its EEA
membership.Limited progress can be reported in the field of consumer protection.

Regarding product
safety-related issues, Iceland is broadly in line with the General Product
Safety Directive (GPSD) and related measures. However, some amendments are
necessary to the Act on product safety and official market control which
transposes the GPSD. The Commission decision on dimethylfumarate remains to be
transposed. Some further progress can be reported on the processing of RAPEX
notifications in the reporting period.

On
non-safety-related issues, the consumer credit directive remains to be
transposed as well as the acquis on timeshare contracts and injunctions.

Some progress can be
reported in the area of public health.

Legislation on new pictorial health warnings on tobacco
products entered into force in August 2011.

In the area of communicable
diseases, a regulation was adopted in March 2011 to start new routine
vaccinations of babies against pneumococcal ear infections. Alignment with the
list of communicable diseases to be covered by the EU surveillance system
remains to be completed. The colorectal cancer screening programme is
yet to be implemented.

No further progress can be reported in the field of mental
health, where Iceland's measures and activities are similar to those of the
EU Member States.

Conclusion

Iceland has already achieved a good level of alignment and
applies a substantial part of the acquis in the fields of consumer
protection and health. Further efforts to align with the acquis are
necessary, especially regarding consumer protection, where intensified
participation in the RAPEX system is needed.

4.29. 
Chapter 29: Customs Union

The customs legislation of Iceland is partially in line
with the acquis. The working group set up to analyse the overall impact
of aligning with the acquis in this area and provide a gap analysis on
national legislation with relevant acquis completed its work in March
2011.

Concerning customs legislation, the December 2010
amendments to the Customs Act changed provisions on temporary imports of rental
cars. No developments can be reported on addressing the gaps in transposition
of the Combined Nomenclature and on the value of certain customs fees.

There has been little progress on
administrative and operational capacity. Initial steps have been
taken to measure the operational capacity and practices of Iceland's Customs
Directorate against the customs blueprints. This included study trips and
training seminars with experts on
the EU fiscal self assessment exercise and as part of the regional blueprints
exercise on customs and taxation. The final report was submitted in September
2011. Additional efforts are necessary to ensure effective implementation of
the acquis by the Customs Administration upon accession. The interface
to connect the national IT system to EU customs systems (CCN/CSI) is not yet in
place. Iceland needs to decide as soon as possible on a strategy to be followed
in achieving the interoperability and interconnectivity of its IT systems for
customs with those of the EU.

Conclusion

The customs legislation is largely in line with the acquis.
Discrepancies in the legislation,
in particular in the fields of customs rules, procedures with economic impact,
duty free and security aspects still have to be addressed. Iceland's
administrative capacity in the customs field remains adequate. Nevertheless,
preparations for effective implementation of the EU acquis upon
accession still have to be initiated, in particular to develop
interconnectivity with the EU-related IT systems.

4.30. 
Chapter 30: External
relations

With regard to the common commercial policy, Iceland
continued to assess the adaptations required in order to align with the acquis.

In connection with the
World Trade Organisation (WTO), work continued on collecting information
with a view to further alignment of horizontal limitations and sector-specific
commitments under the General Agreement on Trade in Services (GATS). Iceland
has decided to participate as a third party in cases WTO DS400 and DS401
(EU seal cases). In this
context, it took a position opposing the EU. As part of its preparations for
membership, Iceland is expected to coordinate its positions in the WTO with the
EU at an early stage.

No new major developments can be reported on export
credits and dual-use goods. Legislation in this field is already
largely in line with the acquis. As regards dual use, Iceland's
application to join the Wassenaar Arrangement on export controls for
conventional arms and dual-use goods and technologies is being processed. The
implementing regulation for the control of services and items of strategic
significance of July 2011 is in line with the acquis. No new
developments can be reported with regard to the Kimberley process: Iceland is
not associated with this process and its legislation on exports and imports of
rough diamonds is therefore not in line with the acquis.

Work is continuing on a database of all international
agreements in the area of external relations that are relevant to relations
with the EU. Bilateral negotiations between China and Iceland on a free-trade
agreement continued at a technical level. In the context of EFTA, Iceland is
engaged in negotiations with Bosnia and Herzegovina, Montenegro, Hong Kong,
China, India, Indonesia, Russia, Belarus, Kazakhstan, Algeria and Thailand.

Iceland is already a member of the WTO and has most
GATS commitments in line with those of the EU. However, by accession to the EU,
Iceland should bring its WTO commitments in line with the commitments
undertaken by the EU.

As regards development policy, a resolution on a
strategy for Iceland's development cooperation for the years 2011-2014 was
adopted by parliament in June 2011. This is the first time that parliament has
adopted a comprehensive strategy and action plan for development cooperation.
Part of the strategy is to increase the government contribution to development
aid from 0.21% of GNI in 2011 to 0.7% in 2019.

Humanitarian aid is part of the strategy for Iceland's development
cooperation. Iceland spent 11% of its official development assistance on
humanitarian and emergency assistance. Revised guidelines for cooperation and
applications have been issued, including the humanitarian aid sector.

Conclusion

Iceland is already highly aligned with the acquis in
this area and some further progress can be reported in external relations.
Further progress has been made on the work on the need to amend or revoke
Iceland's international agreements. However, Iceland has made no progress on
aligning its positions with the EU in the WTO. Progress has been made in the
fields of development cooperation and humanitarian aid, where the new strategy
aims at increasing Iceland's official development assistance in the medium
term.

4.31. 
Chapter 31: Foreign,
Security and Defence Policy

The regular political dialogue between the EU and Iceland continued to cover foreign policy
issues.

As regards the common foreign and security policy
(CFSP), during the reporting period Iceland aligned itself, when invited,
with 58 out of 67 relevant EU declarations and Council decisions (86 %
alignment). Non alignment is largely due to technical reasons as in several of
the cases implementing regulations are already in place.

Iceland closed its Defence Agency in January 2011.
Responsibility for defence, security and NATO matters remains with the Ministry
for Foreign Affairs, whereas responsibility for managing the tasks of the
former Defence Agency now falls under the Ministry of the Interior.

The Director-General for International and Security Affairs
acts as the Political Director; the post of European Correspondent still has to
be established.

A parliamentary resolution on establishing a new security
policy, based on civilian values, civilian institutions and the fact that
Iceland has no military force, was adopted in September 2011. According to the
resolution, the Minister of Foreign Affairs should appoint a parliamentary
committee to work on a proposal for a national security policy by June 2012.

With regard to sanctions and restrictive measures,
Iceland adopted the relevant decisions to implement most restrictive measures
introduced by the Council Decisions. Iceland needs to implement the Common
Position on specific measures to combat terrorism or the Joint Action
concerning measures protecting against the effects of the extra-territorial
application of legislation adopted by a third country and action based thereon.

No further developments can be reported with regard to conflict
prevention or non-proliferation and the strategy on weapons of mass
destruction/small arms and light weapons (WMD/SALW), as Iceland is already
highly compliant in these areas.

Iceland continued its good cooperation with
international organisations, such as the UN, NATO, the OECD, the OSCE and
the Council of Europe. It participated actively and played a key role in the
Arctic Council, the Conference of Parliamentarians of the Arctic Region (CPAR),
the Barents Euro-Arctic Council (BEAC), the Northern Dimension, the Nordic
Council of Ministers and the West Nordic Council. In March 2011, a Resolution
on an Icelandic "High North Policy" was adopted by parliament.

There have been no developments with regard to security
measures (classified information).

As regards the common security and defence policy (CSDP)
and contributing capacity, no developments can be reported in the field of civil
crisis management. Iceland continued to support EU civilian missions.

Conclusion

Overall, Iceland has reached a high level of alignment in
this area. It has aligned with most EU declarations and Council Decisions when
invited to do so. The adoption of a resolution on an Arctic policy underlines
Iceland's continuous objective to play an active part in regional organisations
in Northern Europe and the Arctic region.

4.32. 
Chapter 32: Financial
control

Limited progress can be
reported on public internal financial control (PIFC). The working group
set up in January 2010 in the Ministry of Finance performed an initial assessment of the possible gaps and
weaknesses in Iceland's PIFC system during the second half of 2010. A detailed
PIFC gap assessment still needs to be carried out and a policy paper to be
prepared.

No developments can be reported in the area of external
audit. No measures have been taken to further strengthen the constitutional
independence of the Icelandic National Audit Office (INAO). Completion of the
separation of internal and external audits by the end of 2011 needs to be
monitored. No progress can be
reported on further aligning Iceland's legislation with the Convention on the protection
of the EU's financial interests and its protocols. Iceland also needs to
designate the entity responsible for coordination and cooperation with the
European Commission in the fight against fraud and on protection of the EU's
financial interests.

With regard to protection of the euro against
counterfeiting, the Geneva Convention for the suppression of counterfeiting
currency is currently being translated into Icelandic in view of being ratified
(see also Chapter 24 - Justice, freedom and security).

Conclusion

Overall, Iceland's financial control system is largely in
line with international standards and EU best practice. Limited legislative
progress can be reported. Targeted action is required, including preparing a
policy paper on public internal financial control and ensuring separation
between internal and external audits. Preparations for protection of the EU's
financial interests still have to be made.

4.33. 
Chapter 33: Financial and
budgetary provisions

The basic principles and institutions for the policy areas
affecting traditional own resources (TOR) continued to function well,
with a significant level of alignment. Appropriate procedures and systems for accounting for TOR
and making them available will have to be put in place, in particular as
regards the so-called 'A' and 'B' accounts. The system for writing off
irrecoverable debts also needs to be amended and post-clearance auditing on
traders' premises further developed.

No particular developments can be reported on VAT resources.
Iceland will need to develop the
capacity to calculate accurately the weighted average rate.

As regards GNI resources,
Iceland already widely applies
the ESA 95 standards. Alignment should continue.

Regarding the administrative infrastructure and
operational management of the own resources system, a working group continued
to analyse the overall impact of aligning with the acquis. The Ministry
of Finance continued to manage and coordinate the preparations in the
pre-accession period. This
coordination structure will need to be strengthened and formally established.
Besides steering and coordinating pre-accession preparations, the coordinating
department will have to establish the organisational and procedural links
between the various institutions involved in own resources.

Conclusion

Overall, Iceland has reached a good level of alignment in
the policy areas underlying and affecting this chapter. It has continued to
identify the required alignment with the acquis. Administrative
preparations and concepts for setting up the own resources system are needed. A
coordination structure remains to be formally established.

Statistical Annex

STATISTICAL DATA (as of 30.09.2011) || || || || || || || || || || || ||

Iceland || || || || || || || || || || ||

|| || || || || || || || || || || ||

Basic data || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Population (thousand) || || 279 || 283 || 287 || 288 || 291 || 294 || 300 || 308 || 315 || 319 || 318

Total area of the country (km2) || || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000 || 103 000

|| || || || || || || || || || || ||

National accounts || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Gross domestic product (GDP) (million national currency) || || 683 747 || 771 894 || 816 450 || 841 490 || 930 141 || 1 025 740 || 1 168 602 || 1 308 530 || 1 481 986 || 1 497 672 || 1 537 106

GDP (million euro) || || 9 421 || 8 830 || 9 474 || 9 711 || 10 674 || 13 112 || 13 316 || 14 932 || 10 304 || 8 674 || 9 495

GDP (euro per capita) || || 33 500 || 31 000 || 32 900 || 33 600 || 36 500 || 44 300 || 43 800 || 48 000 || 32 299 || 27 200 || 29 900

GDP (in Purchasing Power Standards (PPS) per capita) || || 25 100 || 26 100 || 26 600 || 26 000 || 28 400 || 29 300 || 29 200 || 30 200 || 30 500 || 27 700 || 26 900

GDP per capita in PPS (EU-27 = 100) || || 132 || 132 || 130 || 126 || 131 || 130b || 123 || 121 || 122 || 118 || 110

Real GDP growth rate (growth rate of GDP volume, national currency, % change on previous year) || || 4.3 || 3.9 || 0.1 || 2.4 || 7.8 || 7.2 || 4.7 || 6 || 1.3 || -6.7 || -4.0

Employment growth (national accounts, % change on previous year) || || : || : || : || : || : || : || : || : || : || : || :

Labour productivity growth: GDP growth per person employed (% change on previous year) || || 2.3 || 2.2 || 1.6 || 2.3 || 8.3 || 3.8 || -0.4 || 1.4 || 0.5 || -0.7 || -3.7

Real unit labour cost growth (national accounts, % change on previous year) || || : || : || : || : || : || : || : || : || : || : || :

Labour productivity per person employed (GDP in PPS per person employed, EU-27 = 100) || || : || : || : || : || : || : || : || : || : || : || :

Gross value added by main sectors (%) || || || || || || || || || || || ||

Agriculture and fisheries || 1) || 9.0 || 9.2 || 9.3 || 7.9 || 6.8 || 6.3 || 6.3 || 5.7 || 6.2 || 7.1 || :

Industry || 1) || 17.3 || 19.2 || 16.8 || 15.7 || 15.2 || 13.7 || 15.3 || 14.1 || 17.8 || 20.3 || :

Construction || 1) || 8.6 || 7.8 || 7.5 || 7.5 || 8.8 || 10.4 || 11.0 || 11.5 || 9.2 || 5.0 || :

Services || 1) || 65.1 || 63.8 || 66.4 || 68.9 || 69.1 || 69.8 || 67.4 || 68.8 || 67.0 || 67.8 || :

Final consumption expenditure, as a share of GDP (%) || || 84.0 || 79.8 || 80.2 || 83.3 || 82.2 || 84.0 || 82.6 || 81.7 || 78.0 || 77.2 || 76.7

Gross fixed capital formation, as a share of GDP (%) || || 22.9 || 21.5 || 18.2 || 20.0 || 23.5 || 28.4 || 34.0 || 28.5 || 24.5 || 14.1 || 12.9

Changes in inventories, as a share of GDP (%) || || 0.4 || -0.3 || 0.0 || -0.2 || -0.1 || -0.1 || 1.2 || 0.5 || 0.2 || 0.0 || -0.2

Exports of goods and services, relative to GDP (%) || || 33.6 || 38.8 || 37.4 || 34.3 || 34.1 || 31.7 || 32.2 || 34.6 || 44.3 || 52.9 || 56.5

Imports of goods and services, relative to GDP (%) || || 40.9 || 39.9 || 35.9 || 37.4 || 39.7 || 44.0 || 50.0 || 45.3 || 47.1 || 44.3 || 45.9

|| || || || || || || || || || || ||

Industry || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Industrial production volume index (2000=100) || || : || : || : || : || : || : || : || : || : || : || :

|| || || || || || || || || || || ||

Inflation rate || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Annual average inflation rate (CPI, % change on previous year) || || : || : || : || : || : || : || : || : || : || : || :

|| || || || || || || || || || || ||

Balance of payments || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Balance of payments: current account total (million euro) || || -926 || -372 || 149 || -460 || -1050 || -2151 || -3172 || -2347 || -2848 || -923 || -778

Balance of payments current account: trade balance (million euro) || || -518 || -83 || 162 || -179 || -420 || -1202 || -1781 || -1012 || -257 || 525 || 743

Balance of payments current account: net services (million euro) || || -131 || 15 || -7 || -109 || -170 || -418 || -551 || -501 || -213 || 219 || 282

Balance of payments current account: net income (million euro) || || -266 || -292 || -21 || -158 || -448 || -507 || -813 || -791 || -2351 || -1617 || -1749

Balance of payments current account: net current transfers (million euro) || || -11 || -10 || 15 || -13 || -14 || -23 || -28 || -44 || -25 || -52 || -52

of which government transfers (million euro) || || -11 || -14 || -10 || -7 || -16 || -20 || -24 || -40 || -29 || -33 || -33

Net foreign direct investment (FDI) (million euro) || || -237 || -190 || -251 || -39 || -1 481 || -3 225 || -1 304 || -2 402 || -2 298 || -1 619 || -773

Foreign direct investment (FDI) abroad (million euro) || || -422 || -383 || -344 || -333 || -2 066 || -5 700 || -4 379 || -7 392 || -2 932 || 1 675 || -1 041

of which FDI of the reporting economy in EU-27 countries (million euro) || || -240 || -229 || -356 || -301 || -1 930 || -4 480 || -3 670 || -4 729 || -2 050 || -1 698 || :

Foreign direct investment (FDI) in the reporting economy (million euro) || || 185 || 193 || 93 || 294 || 585 || 2 475 || 3 075 || 4 990 || 634 || 56 || 268

of which FDI of EU-27 countries in the reporting economy (million euro) || || 136 || 10 || 113 || 215 || 385 || 2 274 || 2 930 || 6 042 || 305 || 607 || :

|| || || || || || || || || || || ||

Public finance || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

General government deficit/surplus, relative to GDP (%) || || : || : || : || : || : || 4.9 || 6.3 || 5.4 || -13.5 || -10.0 || -10.1

General government debt relative to GDP (%) || || : || : || : || : || : || 26.0 || 27.9 || 28.5 || 70.3 || 87.9 || 92.9

|| || || || || || || || || || || ||

Financial indicators || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Gross foreign debt of the whole economy, relative to GDP (%) || || 107.0 || 123.3 || 110.6 || 139.6 || 179.1 || 285.7 || 444.4 || 567.9 || 997.5 || 1 014.0 || 891.5

Gross foreign debt of the whole economy, relative to total exports (%) || || 318.8 || 318.0 || 295.6 || 407.6 || 525.9 || 908.1 || 1 386.0 || 1 647.4 || 2 266.2 || 1 916.1 || 1 579.0

Money supply: M1 (banknotes, coins, overnight deposits, million euro) || || 920 || 776 || 1 036 || 1 199 || 1 676 || 2 313 || 2 236 || 4 504 || 3 192 || 2 857 || 3 242

Money supply: M2 (M1 plus deposits with maturity up to two years, million euro) || || 1 670 || 1 601 || 1 886 || 2 107 || 2 899 || 4 070 || 3 827 || 7 109 || 6 370 || 5 625 || 6 024

Money supply: M3 (M2 plus marketable instruments, million euro) || || 3 787 || 3 755 || 4 666 || 5 173 || 6 392 || 8 802 || 8 299 || 13 490 || 9 558 || 8 931 || 9 415

Total credit by monetary financial institutions to residents (consolidated) (million euro) || || 7 779 || 7 650 || 8 296 || 9 019 || 13 561 || 22 941 || 25 745 || 35 486 || 11 652 || 9 351 || 11 151

Interest rates: day-to-day money rate, per annum (%) || || 11.0 || 12.3 || 9.3 || 5.1 || 6.1 || 8.9 || 12.0 || 13.8 || 15.6 || 11.4 || 6.9

Lending interest rate (one year), per annum (%) || || 16.7 || 18.0 || 15.4 || 12.0 || 12.2 || 14.8 || 17.8 || 19.3 || 20.5 || 16.4 || 10.4

Deposit interest rate (one year), per annum (%) || || 1.4 || 1.7 || 0.7 || 0.2 || 0.3 || 1.3 || 3.4 || 4.6 || 6.0 || 3.5 || 0.5

euro exchange rates: average of period - 1 euro = ... national currency || || 72.58 || 87.42 || 86.18 || 86.65 || 87.14 || 78.23 || 87.76 || 87.63 || 143.83 || 172.67 || 161.89

Effective exchange rate index (2000=100) || || : || : || : || : || : || : || : || : || : || : || :

Value of reserve assets (including gold) (million euro) || || 438 || 403 || 441 || 647 || 785 || 901 || 1 774 || 1 785 || 2 526 || 2 696 || 4 323

|| || || || || || || || || || || ||

External trade || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Value of imports: all goods, all partners (million euro) || || 2525.8 || 2225.3 || 2409.8 || 2498.0 || 2988.5 || 4024.5 || 4788.2 || 4881.3 || 4167.1 || 2583.1 || 2944.9

Value of exports: all goods, all partners (million euro) || || 2013.4 || 2025.9 || 2369.04 || 2110.9 || 2322.1 || 2487.2 || 2758.0 || 3478.6 || 3650.2 || 2907.5 || 3474.8

Trade balance: all goods, all partners (million euro) || || -512.3 || -199.4 || -40.8 || -387.2 || -666.4 || -1537.3 || -2030.2 || -1402.8 || -516.9 || 324.4 || 529.9

Terms of trade (export price index / import price index) || || 100.0 || 102.5 || 103.7 || 97.2 || 95.1 || 94.7 || 101.2 || 101.0 || 94.8 || 84.3 || 92.4

Share of exports to EU-27 countries in value of total exports (%) || || 68.2 || 69.6 || 72.3 || 73.8 || 75.3 || 74.7 || 71.0 || 74.6 || 76.1 || 77.6 || 77.4

Share of imports from EU-27 countries in value of total imports (%) || || 60.0 || 58.8 || 58.3 || 64.0 || 61.1 || 62.1 || 58.3 || 60.1 || 53.6 || 51.9 || 52.3

|| || || || || || || || || || || ||

Demography || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Natural growth rate: natural change (births minus deaths) (per 1000 inhabitants) || || 8.8 || 8.3 || 7.7 || 8.0 || 8.3 || 8.2 || 8.3 || 8.4 || 9.0 || 9.5 || 9.1

Infant mortality rate: deaths of children under one year of age per 1000 live births || || 3.0 || 2.7 || 2.2 || 2.4 || 2.8 || 2.3 || 1.4 || 2.0 || 2.5 || 1.8 || 2.2

Life expectancy at birth: male (years) || || : || 78.1 || 78.4 || 79.0 || 79.2 || 79.2 || 79.4 || 79.4 || 79.6 || 79.7 || 79.5

Life expectancy at birth: female (years) || || : || 82.2 || 82.6 || 82.4 || 82.7 || 83.1 || 83.0 || 82.9 || 83.0 || 83.3 || 83.5

|| || || || || || || || || || || ||

Labour market || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Economic activity rate (15-64): share of population aged 15-64 that is economically active (%) || || 88.6 || 88.5 || 87.5 || 86.9 || 85.4 || 86.7 || 87.8 || 87.8 || 86.9 || 85.3 || 84.7

Employment rate (15-64): share of population aged 15-64 in employment (%)* || || 86.6 || 86.5 || 84.7 || 83.3 || 82.3 || 83.8 || 84.6 || 85.1 || 83.6 || 78.3 || 78.2

Employment rate male (15-64) (%) || || 90.2 || 89.9 || 87.7 || 86.3 || 85.8 || 86.9 || 88.1 || 89.1 || 87.3 || 80.0 || 80.1

Employment rate female (15-64) (%) || || 82.8 || 82.9 || 81.6 || 80.1 || 78.8 || 80.5 || 80.8 || 80.8 || 79.6 || 76.5 || 76.2

Employment rate of older workers (55-64): share of population aged 55-64 in employment (%) || || 84.2 || 85.6 || 87.2 || 83.0 || 81.8 || 84.3 || 84.3 || 84.7 || 82.9 || 80.2 || 79.8

Employment by main sectors (%) || || || || || || || || || || || ||

Agriculture || 2) || : || : || 7.2 || 6.7 || 6.0 || 6.3 || 6.3 || 5.8 || 4.3b || 4.7 || 5.4

Industry || 2) || : || : || 15.1 || 14.7 || 15.6 || 14.0 || 12.7 || 11.9 || 11.9b || 12.5 || 12.1

Construction || 2) || : || : || 7.4 || 7.0 || 8.3 || 7.8 || 8.8 || 9.0 || 10.0b || 7.0 || 6.2

Services || 2) || : || : || 70.3 || 71.6 || 70.0 || 71.9 || 72.2 || 73.2 || 73.7b || 75.8 || 76.3

Unemployment rate: share of labour force that is unemployed (%) || || 1.9 || 1.9 || 3.0 || 4.0 || 4.0 || 2.5 || 2.8 || 2.3 || 2.9b || 7.2 || 7.6

Share of male labour force that is unemployed (%) || || 1.3 || 1.6 || 3.3 || 4.0 || 5.1 || 2.6 || 2.6 || 2.2 || 3.2b || 8.6 || 8.3

Share of female labour force that is unemployed (%) || || 2.6 || 2.2 || 2.6 || 4.0 || 2.8 || 2.5 || 3.1 || 2.3 || 2.6b || 5.7 || 6.7

Unemployment rate of persons < 25 years: share of labour force aged <25 that is unemployed (%) || || 4.4 || 5.1 || 6.4 || 12.5 || 12.1 || 7.4 || 8.3 || 7.0 || 8.2 || 15.9 || 16.2

Long-term unemployment rate: share of labour force that is unemployed for 12 months and more (%) || || : || : || : || : || : || : || : || : || : || : || 0.7

|| || || || || || || || || || || ||

Social cohesion || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Average nominal monthly wages and salaries (national currency) || || : || : || : || : || : || : || : || : || : || : || :

Index of real wages and salaries (index of nominal wages and salaries divided by the CPI/HICP) (2000=100) || || : || : || : || : || : || : || : || : || : || : || :

Early school leavers - Share of population aged 18-24 with at most lower secondary education and not in further education or training (%)* || || 29.8 || 30.9 || 28.8 || 20.3b || 24.9 || 24.9 || 25.6 || 23.2 || 24.4 || 21.3 || 22.6

|| || || || || || || || || || || ||

Standard of living || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Number of passenger cars per 1000 population || || 569.8 || 564.7 || 565.3 || 578.9 || 602.3e || 637.0e || : || : || : || : || :

Number of subscriptions to cellular mobile telephone services per 1000 population || || 770.5 || 875.2 || 907.3 || 967.2 || 998.0 || 899.3 || 947.0 || 1059.6 || 1068.3 || 1064.6 || :

|| || || || || || || || || || || ||

Infrastructure || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Density of railway network (lines in operation, per 1000 km2) || || : || : || : || : || : || : || : || : || : || : || :

Length of motorways (thousand km) || || - || - || - || - || - || 0.011 || 0.011 || 0.011 || 0.011 || : || :

|| || || || || || || || || || || ||

Innovation and research || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Spending on human resources (public expenditure on education in % of GDP) || || 5.8 || 6.2 || 6.8 || 7.7 || 7.5 || 7.6 || 7.6 || 7.4 || 7.6 || : || :

Gross domestic expenditure on R&D in % of GDP* || || 2.7e || 3.0 || 3.0e || 2.8 || : || 2.8 || 3.0 || 2.7 || 2.7p || 3.1 || :

Percentage of households who have Internet access at home (%) || || : || : || : || : || 81.0 || 84.0 || 83.0 || 84.0 || 88.0 || 90.0 || 92.0

|| || || || || || || || || || || ||

Environment || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Greenhouse gas emissions, CO2 equivalent (tons, 1990=100)* || || 110.3 || 109.4 || 110.1 || 109.2 || 110.6 || 109.1 || 124.9 || 132.0 || 142.9 || 135.2 || :

Energy intensity of the economy (kg of oil equivalent per 1000 euro GDP) || || 343.4 || 342.6 || 345.6 || 336.5 || 322.6 || 311.1 || 357.7 || : || : || : || :

Electricity generated from renewable sources in % of gross electricity consumption || || : || : || : || : || : || : || : || : || : || : || :

Road share of inland freight transport (% of tonne-km) || || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0

|| || || || || || || || || || || ||

Energy || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Primary production of all energy products (thousand TOE) || || 2 306 || 2 451 || 2 462 || 2 457 || 2 519 || 2 636 || 3 259 || 3 946 || 4 397 || 4 819 || :

Primary production of crude oil (thousand TOE) || || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || :

Primary production of hard coal and lignite (thousand TOE) || || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || 0 || :

Primary production of natural gas (thousand TOE) || || : || : || : || : || : || : || : || : || : || : || :

Net imports of all energy products (thousand TOE) || || 1 036 || 947 || 969 || 937 || 1 072 || 1 063 || 1 099 || 1 070 || 976 || 877 || :

Gross inland energy consumption (thousand TOE) || || 3 235 || 3 354 || 3 388 || 3 379 || 3 489 || 3 616 || 4 349 || 5 016 || 5 374 || 5 696 || :

Electricity generation (thousand GWh) || || 7 684 || 8 033 || 8 416 || 8 500 || 8 623 || 8 686 || 9 930 || 11 976 || 16 468 || 16 835 || :

|| || || || || || || || || || || ||

Agriculture || Note || 2000 || 2001 || 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010

Agricultural production volume index of goods and services (producer prices, previous year=100) || || : || : || : || : || : || : || : || : || : || : || :

Total utilised agricultural area (thousand hectare) || || 120e || 120e || 120e || 120e || 120e || 120e || 120e || 120e || 120e || 120e || 120

Livestock: cattle (thousand heads, end of period) || || 72 || 70 || 67 || 66 || 65 || 66 || 69 || 71 || 72 || 73 || :

Livestock: pigs (thousand heads, end of period) || || 4 || 4 || 4 || 5 || 4 || 4 || 4 || 4 || 4 || 4 || :

Livestock: sheep and goats (thousand heads, end of period) || || 466 || 474 || 470 || 463 || 456 || 455 || 456 || 455 || 458 || 470 || :

Production and utilisation of milk on the farm (total whole milk, thousand tonnes) || || : || : || : || : || : || : || : || : || : || : || :

Crop production: cereals (including rice) (thousand tonnes, harvested production) || || 3 || 4 || 5 || 7 || 10 || 10 || 11 || 11 || 15 || 16 || 18

Crop production: sugar beet (thousand tonnes, harvested production) || || : || : || : || : || : || : || : || : || : || : || :

Crop production: vegetables (thousand tonnes, harvested production) || || 14 || 16 || 14 || 12 || 12 || 12 || 20 || 19 || 19 || 20 || 21

: = not available

p = provisional

e = estimated value

b = break in series

- = Europe 2020 indicator

The balance of
payments sign conventions are used for FDI. For FDI abroad a minus sign means
investment abroad by the reporting economy exceeded its disinvestment in the
period, while an entry without sign means disinvestment exceeded investment.
For FDI in the reporting economy an entry without sign means that investment
into the reporting economy exceeded disinvestment, while a minus sign indicates
that disinvestment exceeded investment.

Footnotes:

1)             According to NACE, Rev. 1.1

2)             Data for 2000-2007 based on NACE Rev.1.1, data for
2008-2010 based on NACE Rev.2.

[1]               The European Parliament's rapporteur for Iceland is
Mr Dan Preda.

[2]               Enlargement Strategy and Main Challenges 2011-2012 -
COM(2011) 666.

[3]               The independent Special Investigation Committee was set
up in December 2008 to investigate and analyse the process that led to the
collapse of the banking system. It issued its report in April 2010.

[4]               As measured as a four quarter moving average

[5]               Prior to the crisis, long term unemployment stood at
3.5% and the youth unemployment rate at 6.5% (first quarter of 2008)

[6]               The share of domestic currency assets has increased
following the judgement by the Supreme Court on the illegality of foreign
currency indexation of some loans.