EN    EN EN 
EN    EN  EUROPEAN COMMISSION 
Brussels, 9.11.2010 
SEC(2010) 1328 final 
  
COMMISSION STAFF WORKING DOCUMENT 
 
ICELAND 2010 PROGRESS REPORT  
 
  
accompanying the 
 
COMMUNICATION FROM THE COMMISSION 
TO THE EUROPEAN PARLIA MENT AND THE COUNCIL 
 
Enlargement Strategy and Main Challenges 2010-2011 
{COM(2010) 660 final} 
EN 2   EN TABLE OF CONTENTS 
1. Introduction................................................................................................................ .. 4 
1.1. Preface................................................................................................................... ....... 4 
1.2. Context ................................................................................................................... ...... 4 
1.3. Relations between the EU and Iceland......................................................................... 5 2. Political criteria .......................................................................................................... .. 6 
3. Economic criteria ......................................................................................................... 8 3.1. The existence of a functioning market economy ......................................................... 8 3.2. The capacity to cope with competitive pre ssure and market forces within the Union
............................................................................................................................... ..... 14 
4. Ability to assume the obligations of membership...................................................... 16 4.1. Chapter 1: Free movement of goods .......................................................................... 17 4.2. Chapter 2: Freedom of movement for workers.......................................................... 17 4.3. Chapter 3: Right of establishment and freedom to provide services ......................... 18 4.4. Chapter 4: Free movement of capital......................................................................... 18 4.5. Chapter 5: Public procurement................................................................................... 19 4.6. Chapter 6: Company law............................................................................................ 20 4.7. Chapter 7: Intellect ual property law........................................................................... 20 
4.8. Chapter 8: Competition Policy................................................................................... 21 4.9. Chapter 9: Financial Services..................................................................................... 21 4.10. Chapter 10: Information society and media............................................................... 22 4.11. Chapter 11: Agriculture and rural development......................................................... 23 4.12. Chapter 12: Food safety, veteri nary and phytosanitary policy .................................. 24 
4.13. Chapter 13: Fisheries.................................................................................................. 25  
4.14. Chapter 14: Transport policy ..................................................................................... 26 4.15. Chapter 15: Energy .................................................................................................... 26 4.16. Chapter 16: Taxation.................................................................................................. 27 4.17. Chapter 17: Economic and Monetary Policy ............................................................. 28 4.18. Chapter 18: Statistics.................................................................................................. 2 9 
4.19. Chapter 19: Social Policy and employment............................................................... 29 4.20. Chapter 20: Enterprise and industrial policy.............................................................. 30 
EN 3   EN 4.21. Chapter 21: Trans European Networks...................................................................... 31 
4.22. Chapter 22: Regional policy and coordi nation of structural instruments .................. 31 
4.23. Chapter 23: Judiciary an d fundamental rights ........................................................... 32 
4.24. Chapter 24: Justice, freedom and security ................................................................. 33 4.25. Chapter 25: Science and research .............................................................................. 34 4.26. Chapter 26: Education and Culture............................................................................ 35 4.27. Chapter 27: Environment ........................................................................................... 35 4.28. Chapter 28: Consumer and health protection............................................................. 37 4.29. Chapter 29: Customs Union....................................................................................... 37 4.30. Chapter 30: External relations.................................................................................... 38 4.31. Chapter 31: Foreign, Secur ity and Defence Policy.................................................... 39 
4.32. Chapter 32: Financial Control.................................................................................... 40 4.33. Chapter 33: Financial an d budgetary provisions........................................................ 40 
Statistical annex.............................................................................................................. .......... 41 
EN 4   EN COMMISSION STAFF WORKING DOCUMENT 
2010 Progress Report 
1. INTRODUCTION  
1.1. Preface 
This is the Commission's first report to the Council and Parliament on progress made by 
Iceland since the Council's deci sion to open accession negotiations. 
This report: – briefly describes the relations between Iceland and the Union; 
– analyses the situation in Iceland in term s 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 th e obligations of membership, that is, the acquis  
expressed in the Treaties, the secondary legislation, a nd the policies of the Union. 
The period covered by this report is from  February to early October 2010. Progress is 
measured on the basis of decisions taken, legisl ation adopted and measures implemented. As a 
rule, legislation or measures that are under pr eparation or are awaiti ng parliamentary approval 
have not been taken into account. This approach  ensures equal treatmen t across all reports and 
permits an objective assessment. 
The report is based on information gathered and analysed by the Co mmission. In addition, 
many sources have been used, including contri butions from the govern ment of Iceland, the 
EU Member States, European Parliament reports  and information from various international 
and non-governmental organisations. 
The Commission draws detailed conclusions rega rding Iceland in its separate communication 
on enlargement based on th e technical analysis cont ained in this report. 
1.2. Context 
Iceland presented its application for membership  of the European Union in July 2009. 
Subsequently, the Council of the European Union requested the Commission to submit its 
opinion on this application. 
The Commission concluded in its Opinion of February 2010  that Iceland meets the political 
criteria and can be considered a functioning market economy which should be able to cope 
with competitive pressures and market forces within the Union in the medium term provided that it swiftly implements the necessary pol icy measures and structural reforms.  
The Opinion also noted the good overall level of  preparedness to take on the obligations of 
membership in the medium term due to Icel and's participation in the European Economic 
EN 5   EN Area. It, however, highlighted a number of areas (fisheries, agri culture and rural development, 
environment, free movement of capital and financ ial services) where seri ous efforts would be 
required to take on the obligations of memb ership. Finally, the Opinion concluded that 
Iceland's accession would have a limited overall impact on the European Union and would not 
affect the Union's capacity to maintain  and deepen its own development.  
In light of these cons iderations, the Commission recommende d that negotiations for accession 
to the European Union should be opened with Iceland. The European Council subsequently decided in June in favour of opening negotiations. The first Intergovernmental Conference , 
officially launching accession negotiations, t ook place on 27 July 2010. Preparations for the 
screening exercise are on-going. 
1.3. Relations between the EU and Iceland 
Iceland and the European Union have been co operating extensively ac ross a broad range of 
areas for the last forty years.  
Iceland joined the European Free Trade Association in 1970 and has been a party to the 
Agreement on the European Economic Area (EEA)  since its entry in to force in 1994.  
The first EU-Iceland Joint Parliamentary Committee met in October 2010.
1 
Iceland has been associated with the devel opment of the Schengen agreements since 1996 and 
has applied their provisions since 2001.  
Following Iceland’s membership application, the Commission proposed that Iceland becomes 
eligible for pre-accession financial support under the Instrument for Pre-Accession 
Assistance  (IPA). The amended IPA regulation entered into force in July 2010. A Multi-
annual Indicative Planning Document  is expected to indicate th e priorities for IPA support to 
Iceland for 2011-2013. IPA financial assistance to  Iceland will be channelled through three 
main tools: the Technical Assistance and In formation Exchange (TAIEX) instrument, multi-
beneficiary programmes a nd a National Programme. 
The EU Delegation  in Reykjavík is fully operationa l: it opened in January 2010 and found 
permanent premises where it is expected to move by the end of the year. 
Preparations are on-going for opening an EU information centre in Iceland in 2011. 
Iceland has been included in the EU Pre-Accession Fiscal Surveillance  procedure, and has 
received an invitation to submit its first Pre-Accession Economic Programme with a medium-term macroeconomic and fiscal programme, by January 2011. 
This first progress report assesses the developm ents in Iceland since the publication of the 
Commission's Opinion. The reporting period for Iceland is therefor e shorter than for the other 
countries included in the 2010 enlargement pack age as this report covers the period from 
February 2010 to October 2010. Iceland's ability to  assume the obligations of membership has 
been assessed in light of its participation in the European Economic Area (EEA) and taking 
into account exemptions granted under the EEA.  
                                                
 
1 The European Parliament's rapporteur for Iceland is Mr Dan Preda.  
EN 6   EN 2. POLITICAL CRITERIA  
The first progress report on Icel and confirms the assessment of  the Commission's Opinion of 
February 2010 that Iceland meet s the political criteria. Icel and is a functioning democracy 
with strong institutions and a stab le constitutional and legal orde r. The judicial system is well 
established and the judiciary is of a high standa rd. Iceland's public administration remains, in 
general, efficient and free of political interf erence. As regards human rights and the protection 
of minorities,  Iceland continues to safegua rd fundamental rights.  
This chapter assesses political developments w ith a focus on the measures taken by Iceland to 
address the shortcomings identified in the Op inion, in particular as regards judicial 
appointments and conflict of interests.  
The coalition government  remained stable over the repor ting period. There are diverging 
views on the prospect of EU accession among th e Icelandic political forces and population. A 
number of opposition parties as well as some members of the coalition oppose EU accession. 
Opinion polls show a mixed picture as regards EU membership.  While membership as such 
remains a contested issue, support for the accessi on process has increase d at the end of the 
reporting period with a majority in favour of conducting accession negotiations .  
The domestic political scene in Icela nd changed following the local elections  of May 2010; 
new local parties won over ruling parties in several big municipalities (Kópavogur, Akureyri 
and Reykjavík). The leader of the Best Party wa s elected Mayor of Reykjavík in June and the 
council majorities in Iceland’ s big municipalities changed.  
As regards internal preparations for accessi on, the Chief Negotiator, who reports to the 
Minister of Foreign Affairs, continued to coordinate the EU accession process. The Chief 
Negotiating Committee, established in November  2009, consists of 18 members. In addition, 
there are ten negotiatin g groups (European Economic Agreement I and II, fisheries, foreign 
and security affairs, financial affairs, econom ic and monetary affairs, regional policy and 
coordination of structural in struments, justice and home a ffairs, agriculture and rural 
development, and legal matters).  
Legislation to elect an advisory constitutional a ssembly was adopted in June. The task of the 
assembly is to prepare a proposal to parliame nt for a new constitution. Among the issues to be 
addressed is delegation of powers by the State to international organisations.  
Ensuring translation of the acquis by the date of accession is likely to be a challenge given the 
size of the Icelandic administration and its financial constraints.  
The independent Special Investigation Commission  (SIC) , set up in December 2008 to 
investigate and analyse the processes leading to the collapse of the banking system in Iceland, 
delivered its report in April 2010. The report identified the rapid growth of the banking 
system, as well as the difficulties of the govern ment authorities to respond to and assess the 
excessive risks taken by the banks, as the ma in causes of the economic collapse. The report 
concluded in particular that, shortly before th e collapse, leading banks maximised the benefits 
accruing to the bigger shareholders to the detrim ent of the interests of  all shareholders. The 
report pointed to the responsibility  of key political actors, regul ators and supervisory bodies in 
failing to enact and enforce sufficient regulatory authority over the financial markets in order 
to prevent it from jeopardisi ng the whole economic system.  
EN 7   EN The publication of the SIC report led to a wide  and open debate in Iceland as well as the 
establishment of an ad hoc  parliamentary review committee,  comprising nine MPs from all 
political parties. This committee was set up to analyse minist erial responsibilit ies in the period 
before the crisis and follow up on the SIC pr oposals for new legislation to prevent another 
banking crisis. It is also mandated to examine the role of the media, the supervision of 
financial services, the activities of financial actors as well as ethical aspects of business practices. In September 2010 the committee de livered its opinion. The nine members 
unanimously agreed with the main findings of the SIC and made a numb er of proposals for 
revision and reform. The majority of the memb ers (seven out of ni ne) recommended that 
certain former ministers be charged with gross negligence. The committee's recommendation 
was referred to the parliament that decided to in dict only the former prime minister at the time 
of the banking collapse, thus activating the Cour t of Impeachment for the first time in the 
country's history.  
The recommendations of the Special Investigat ion Commission and their follow-up measures 
have contributed to addressing some of the s hortcomings identified in the Opinion. However, 
implementation of these recommendati ons requires a continuous follow-up. 
The Office of the Special Prosecutor , which was also created af ter the 2008 financial crisis, 
questioned 155 individuals and processed some 74 cases, of which 20 have been dismissed or 
discontinued. The Special Prosecutor mostly i nvestigated cases of ma rket manipulation and 
embezzlement. The Office of the Special Prosecutor  also carried out arrests of individuals and 
filed two indictments in connection with the collapse of the banks.  
As far as the reform of the  public  administration is concerned, a committee of independent 
experts was set up in January 2010 to analys e how the government could address the SIC 
conclusions. The committee delivered its re port in May 2010 and recommended reducing the 
number of ministries with a view to creati ng stronger units and ensuring better coordination 
among government departments. A governmental  reshuffle took place in September 2010, 
reducing the number of mini sters from twelve to ten with immediate effect.  
In accordance with the SIC conclusions, the committee of independent experts recommended 
further strengthening the public administration, in particular th rough better training of civil 
servants and reinforcing the internal proced ures and the monitori ng powers of the public 
administration, including in the financial sect or. A new programme of specialised training 
within the public administrati on was launched in September. 
Iceland also started to addre ss shortcomings identified in the Opinion as regards the 
predominance given to the Minister  of Justice in judicial appointments. Further developments 
can also be noted in tackling pos sible conflicts of interests. 
The Judiciary Act was amended in May 2010 to change the rules on the appointment of 
judges with the aim of strengthening the indepe ndence of the judiciary. The amendments are 
intended to reinforce the powers and compositi on of the evaluation committee. According to 
these changes, the Minister of Justice ma y only deviate from the recommendation of the 
evaluation committee to appoint a judge if parliament approves a motion from the Minister to 
appoint another candidate. The full effect of these amendments requires a continuous follow-
up. 
As regards conflict of interests , parliament adopted in June 2010 a bill laying down the 
obligation to establish codes of conduct for a ll government officials and for members of the 
EN 8   EN Prime Minister’s Office, under the supervision of the parliamentary Ombudsman. It also 
specifies penalties for ministers in  breach of their responsibilities.  (See also Chapter 23 — 
Judiciary and fundamental rights) . 
The amended Act on the finances of political parties,  stipulating obligation of political parties 
and their candidates to provide information a bout their finances, was adopted in September 
2010. This new legislation addresses the GR ECO (Council of Europe's Group of States 
against Corruption) recommendations to the 2006 law of political finance: it provides new 
rules as regards donations to political parties, financing of elections and the allocation of 
public funding to support operational activ ities of political pa rties through annual 
contributions from the state Treasury.  (See also Chapter 23 — Judiciary and fundamental 
rights) . 
As regards human rights and protection of minorities, Iceland continued to safeguard 
fundamental rights (e.g. economic and social righ ts, respect for and prot ection of minorities, 
cultural rights) and to ensure a high level of cooperation with  international mechanisms for 
the protection of human rights. 
In September 2010, 14 cases against Iceland were pending before the European Court of 
Human Rights (ECtHR). A judgement was issued in one case.  
The new media law, providing for limitations on the ownership of media companies, the 
Council of Europe Framework Convention for th e Protection of National Minorities and the 
UN Convention on the Rights of Persons with  Disabilities remain to be ratified. 
3. ECONOMIC CRITERIA  
In examining economic developments in I celand, the Commission’s approach has been 
guided by the conclusions of the European C ouncil in Copenhagen in June 1993, which stated 
that membership of the Union requires the exis tence 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 
Following the collapse of the country’s financ ial sector in October 2008, economic policy has 
been oriented towards stabilising the econom y. Economic policy is formulated by the newly 
established Ministry of Economic Affairs and the Ministry of Finance in cooperation with 
other relevant ministries. The current IMF stand-by programme provides an important anchor 
for economic stabilisation. It has been implemented successfully so far, with some temporary delays. Broad political consensus on the ke y essentials of a market economy and the 
preservation of the welfare state remains. Ho wever, the previous political cohesiveness has 
been stretched by the negative effects of the cr isis and the polarising domestic debates over 
causes of and responsibilities for the crisis. Th e country has been in cluded in the EU Pre-
Accession Fiscal Surveillance procedure, an d has already received an invitation by the 
Commission to submit its firs t Pre-Accession Economic Progr amme with a medium-term 
macroeconomic and fiscal programme, by January 2011.  
Macroeconomic stability 
EN 9   EN Following the banking sector cr isis in October 2 008, economic activity and domestic demand 
started to drop sharply. The d ecline of annual economic growth  rates accelerated during 2009, 
leading to a marked fall in real GDP by 6.8% for the year as a whole. The recession was 
strongly driven by a 50% drop in total investme nts, particularly pronounced in construction 
and the services sector, and a 16% decline in private cons umption. As a result, domestic 
demand made a large negative co ntribution to GDP growth. Shri nking imports as well as 
export growth turned the contribution of net ex ports positive. The economy contracted further 
in the first half of 2010, when real GDP fell by 7.3% year-on- year. Moreover, the quarterly 
growth rate (in seasonall y adjusted terms) deteriorated from -1.2% in the first quarter to -3.1% 
in the second quarter, also indicating that the recession has not yet bottomed out. The rebound 
in private consumption, which started growing in  the second half of 2009, turned out to be 
temporary as growth rates again turned nega tive in the first half of 2010. The speed of 
contraction of investment slowed somewhat but  prospects for a rebound in investment growth 
remain uncertain, partly owing to delays  in energy-intensive projects, reflecting, inter alia,  
financing constraints in the co rporate sector. In the third qua rter of 2010, consumer sentiment 
and expectations have somewhat improved, but high frequency indicators do not yet suggest a 
growth recovery. As a result of the crisis, av erage per capita income (in Purchasing Power 
Standards) fell to 120% of the EU-27 average in 2009. Overall , the crisis led to a deep and 
prolonged recession and economic activit y has not yet started to pick up.   
External deficits have shrunk markedly fo llowing the recession. The sharp contraction in 
domestic demand and depreciati on of the exchange rate (around 50% during the crisis) 
contributed to a substantial improvement in th e balance of goods and services, which recorded 
a surplus of around 9% of GDP in 2009, compared to deficit of 3% a year before. The current 
account deficit fell from more than 20% of GDP  in 2008 to 2.2% last year, also helped by a 
much lower deficit in the income balan ce. Recent developments suggest further 
improvements in external trade.  In the first half of 2010, tha nks to a good export performance, 
the surplus in trade of goods and services increased to ar ound 10% of GDP, compared to 
around 7.5% in the first half of the previous y ear. However, the current account deteriorated 
and its deficit increased to 3.5% (compared to a surplus of 2.8% in th e first half of 2009), 
mainly due to a three-fold increase in the deficit of the income balance. More recent 
merchandise trade data suggest some deterior ation as exports dropped in August by 5% year-
on-year. Overall , external deficits ha ve shrunk and the merchandise trade surplus has 
continued to strengthen.  
Total net capital inflows in 2009 were larger than  the amounts needed to finance the current 
account deficit.2 As a result, gross official foreign exchange reserves held at the central bank 
increased by an amount equivalent to 1.7% of GDP. In 2010, reserves continued to increase 
and stood at around 38% of GDP  in mid-2010, compared to 25% a year before. The increase 
in reserves partly reflects offi cial financing provided in th e context of the IMF programme 
and through bilateral loans, to talling around 6% of GDP. The very  high level of external debt 
continues to represent a key challenge to the Icelandic economy. Estimates of the size of the country’s external debt have been rapidly changing following the financial crisis, due to 
uncertainties about the impact of the collapsed banks on the level of fo reign debt. Excluding 
the latter, the stock of gross foreign debt is now estimated at around 230% of GDP at mid-
2010, compared to a pre-crisis level (end-2007) of around 570% of GDP. The private sector 
                                                
 
2 The magnitude and direction of capital inflows remains largely influenced by ongoing external asset 
recovery and revaluation in the context of the winding-up and liquidation of the ‘old’ banks and by the 
existence of capital controls. Balance of payments statistics are volatile, comprising huge net errors and 
omissions positions. 
EN 10   EN accounts for two thirds of the exte rnal debt stock (the private non-financial sector for about 
55%). Overall , foreign exchange reserves strengthene d, partly backed by official external 
financing, but foreign indebte dness remains considerable.  
The crisis seriously affected developments on the labour market as unemployment increased 
markedly and the number of employed dropped comp ared to pre-crisis levels. Those effects 
were still being felt through 2010, and adjustments in the over-leveraged construction sector 
have particularly contributed to unemployment. Elements of flexibility seem to have provided 
a degree of cushion, such as a reduced level of hours worked, increased part-time work and 
real wage flexibility. Noneth eless, according to the Labour Force Survey, the unemployment 
rate rose to 9% in th e second quarter, from 7.7% in the fi rst quarter, but wa s lower than the 
9.4% in the corresponding period of  the previous year. Total empl oyment levels increased by 
1.2% year-on-year in the second quarter, following a drop of 1% in the first quarter, bringing 
the average employment in the fi rst half of the year to the same level as  in the corresponding 
period of the previous year. In the first ha lf of 2010, nominal gross wages and salaries 
increased by around 4%, similar to the wage grow th rate in 2009. This translates into a real 
wage decline of 3% during the same period. However, since mid-2010, th e growth of nominal 
wages accelerated to 6% in both July and August,  which led to positive real wage growth by 
around 1.2% Overall,  the recession has led to a significant decline in employment and 
increase in unemployment. 
Regarding monetary policy developments, increase d stability of the exchange rate enabled the 
Central Bank to continue to gradually ease th e monetary policy stance. In 2010, the key policy 
rate (i.e. the seven days collateralised lendi ng rate) was cut several times to reach 6.25% by 
September. This compares with a peak rate  of 18% at end-2008 in the aftermath of the 
banking sector collapse. The Cent ral Bank has followed and intends  to continue a strategy of 
exchange rate stabilisation suppor ted for the time being by a regime  of capital controls that 
have been reinforced since last November. Th e underlying trade surplus, improved terms of 
trade, and the declining risk premium have supported the appreci ation of the Icelandic króna 
by around 15% vis-à-vis the euro during the first eight months of the year. This enabled the 
Central Bank to cease intervening on the fore ign exchange market to  support the króna since 
December 2009. Indeed, the Central Bank began foreign exchange purchases in August to bolster non-borrowed reserves. Under the curr ent policy framework, exchange rate risks 
continue to appear rather limited over the short term. However, looking forward, the 
temporary capital account restrictions are to be  gradually lifted in due time as the economy 
stabilises further; nevertheless, this could still entail potential risks. A nnual inflation gradually 
came down to 6.6% in January 2010, from its pe ak of 18.6% in January 2009. It temporarily 
accelerated slightly to 8.5% in March on the back of increases in energy prices, indirect taxes 
and government fees, but continued to decelerate to 3.7% in September. Inflation expectations 
have stabilised and inflation risks appear relatively balanced. Low domestic demand and 
falling house prices would lower the inflation rate, while furthe r tax -and administrative price 
increases and wage pressures in the tradable sectors may exert some upward movements. A 
weaker króna and therefore hi gher import prices would imme diately be felt through higher 
inflation as imported goods account fo r one third of the price index. 
Overall, exchange rate 
stability and lower inflation have allowed some flexibility to reduce interest rates. However, 
capital controls are still in place and their gradual lifting,  albeit necessar y, represents a 
significant challenge. 
Public finances suffered a marked deteriorati on in the wake of the October 2008 crisis with 
the general government deficit increasing to 9.9% of GDP in 2009, prompting the government 
to launch a series of fiscal adjustment meas ures in the context of the IMF programme which 
EN 11   EN continued into 2010. The 2010 budget foresees a reduction of the general government deficit 
by three and a half percentage points to 5.6% of GDP . To that extent, the budget comprises a 
series of additional fiscal measures on the revenue side, such as tax increases (VAT, excise duties, energy tax) and increases in social security contributions , as well as cuts in spending. 
Budget implementation in the first half of 2010 showed an increase in general government 
revenues by close to 10% year-on–year, suppor ted by higher VAT rates, excises and energy 
taxes as well as marked increase in social c ontributions which compensated for shortfalls in 
personal income tax collection. Overall, budget revenue execution was above plan, but some 
downside risks remain in the sec ond half of the year  due to a slower than expected economic 
recovery. The increase in total spending was c ontained at 4%, helped by a reduction in the 
wage bill (-2%), cuts in so cial spending (-7%) and much lo wer capital investments (-27%). 
Some planned expenditure cuts remain still to be implemented during the remainder of the budget year. The general government deficit in the first half of 2010 amounted to 3.5% of 
projected annual GDP, lower than the 4.6% recorded in the first half of 2009.  
Looking forward, fiscal risks remain significa nt. The 2011 budget can be considered as an 
expression of the government's commitment to c ontinued fiscal conso lidation. In order to 
achieve a primary surplus, the budget contains fi scal measures equivalent to around 3% of 
GDP, including freezes on wages and transfers a nd significant cuts in spending, which may 
however be difficult to implement. Moreover, the budget is based on optimistic growth and 
revenue assumptions and necessary  revisions are likely to lead  to a higher budget gap, unless 
the government introduces additional spending cuts or tax increases, posing additional 
challenges. Risks are also related to contingent  liabilities. Additional financing requirements 
will result from government guarantees prov ided for the Housing Financing Fund, which 
indicated the need for recapitalisation. The cost s are currently estimated at 2-3% of GDP. A 
Supreme Court decision of June 16
th 2010 declaring foreign–exchange-indexed loans illegal 
originally introduced considerable uncertainty in  the financial system. Before the crisis, banks 
offered such loans linked to a ba sket of foreign currencies with lower interest rates. However, 
with the collapse of the króna, debt and debt  payments in króna in creased correspondingly. 
Following a second Court ruling on this matter in mid-September, which provided some 
clarifications, the authorities a nnounced legislation to convert il legal foreign currency private 
household indexed loans to domestic currency loans. These conversions will reduce the outstanding principles of the lo ans considerably. While the sec ond ruling has redu ced risks to 
the financial system compared to the initial decision, uncertainty over the precise financial 
implications remains, notably on the treatment of  corporate sector loans. The ruling is likely 
to weaken the banks’ equity base, potentially requiring an injection of  fresh capital by the 
government. Furthermore, other significant con tingent liabilities aris e from a potential 
settlement of Icesave, the total amount being dependent on recovery rates for Landsbanki’s 
assets and interest rates to be agreed  on deposit insurance guarantee obligations. Overall, a 
process of fiscal consolidation has been launc hed, primarily supported by tax increases, while 
the implementation of projecte d spending cuts remains a chal lenge. Significant fiscal risks 
arise from contingent liabilities mainly related to the financial sector.  
Gross general government debt increased fr om around 30% of GDP in  2007 to 88% at end-
2009. The increase resulted from the cyclical effects on the budget balance, government 
borrowing to strengthen foreign curr ency reserves as well as from  the costs of financial sector 
restructuring. The latter comprises the restru cturing and recapitalisation of the three large 
domestic banks as well as the capital injection into the central bank to cover losses from central bank loans to banks granted on weak co llateral. Further progre ss has been made in 
establishing a medium-term public debt manage ment framework. This aims to lengthen the 
average maturity of public debt to 4.5 year s by 2011, smooth the profile of debt coming due 
EN 12   EN and reduce the share of debt denominated in foreign currency. To that end, the government 
concluded agreements on bond buy-backs and other debt regulations. Overall, the government 
has taken measures to reduce refinancing- and currency risks in view of the high level of 
public debt.  
The policy mix, with a strong focus on exchange ra te stabilisation and fiscal consolidation, 
has been supportive in re-establishing a higher degree of macroeconomic stability. In response 
to higher trade surpluses and exchange rate appreciation the central bank has introduced a 
careful easing of monetary condi tions by lowering base rates in successive steps. Efforts to 
strengthen public revenues and implement spe nding cuts have conti nued with a view to 
lowering the public savings-invest ment gap. However, continued fiscal adjustments remain a 
challenge and the implementation of the 2011 budget will be an indication as to what extent 
fiscal consolidation will progre ss. Finally, macroeconomic stabilis ation occurred in a situation 
of temporary protection through capital account restrictions. Looking fo rward, their 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 liberalised most economic sectors and 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 restructuri ng, the banks’ equity was sold to foreign creditors. The 
government at this time still re tains majority ownership (81%) of  one of the three banks (NBI) 
and minority stakes in the other two banks. Th e private sector accounts for 73% of GDP. 
Some sectors remain in government ownership, su ch 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 and private 
ownership, with the exception of some strategic sectors. Efficient financial intermediation is 
still hampered by the ongoing but still in complete bank restructuring process. 
Market entry and exit 
Starting a business is facilitated by a genera lly low administrative burden and a supportive 
regulatory framework. The business environment remained characterised by low bureaucratic 
hurdles and, in general, effi cient administration. However, hi gh barriers to market entry 
continue to exist in some strategic sectors that  are not covered by the EEA such as fisheries, 
energy, air transport and real esta te. Of these, restrictions on investment in fisheries are the 
only ones that apply to EEA-residents. The reces sion has significantly affected company start-
ups. New business registration dropped further by around 8.5% in the fi rst six months of 
2010. Bankruptcy proceedings are generally straightforward and take less time than the 
OECD average. However, the financial crisis ha s put a large part of th e corporate sector under 
severe financial distress. The number of insolvent companies increased by close to 8% in the 
first half of 2010 and the cons truction sector accounted for th e largest share. Firms are 
suffering from a significant gro ss debt overhang as outstanding loans to the corporate sector 
amount to roughly 300% of GDP. Around 9% of outst anding debt is owed by firms already in 
bankruptcy. Half of outstanding lo ans to larger companies and one third of loans to SMEs are 
in default, based on the book value of the loan. Under these difficult circumstances, a new 
insolvency regime has been adopted to support large-scale corporate de bt restructuring. Since 
EN 13   EN court capacity is insufficient to handle a large nu mber of cases, the new regime aims to keep 
cases out of court to the extent po ssible while securing creditors’ rights. Overall, high barriers 
to market entry for non-residents remain in  key strategic sectors and market exit is 
complicated by a large corporate sector debt overhang. 
Legal system 
The legal system continued to support a business-frie ndly investment climate. It offers good 
protection and enforcement of property rights and provides a cl ear and stable framework for 
agents to take economic decisions in  a situation of legal certainty.  
Financial sector development 
The reconstruction of the banki ng sector has progressed. 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 mu ch smaller in size compared to pre-crisis levels, focusing on 
domestic operations. Domestic credit to the pr ivate sector is estimat ed at 110% of GDP in 
mid-2010, 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. Assets are largely 
denominated in or indexed to foreign exchange  whereas liabilities ar e in domestic currency 
and at variable interest rate s. Private households and busine sses are faced with significant 
operational problems and default is widespread. Efforts have been made at private sector debt 
restructuring, but due to its complexity, the pr ocess has advanced more slowly than expected. 
The sheer magnitude of balance sheet imbalances poses a significant challenge to financial 
sector stability, in spite  of banks’ currently rath er high capital adequa cy ratios (16%). Non-
performing loan ratios are ex ceptionally high. Currently, just under one fifth of the banks’ 
restructured loans are being paid on time, while 40% are in default. Write-offs are likely to increase, weakening the profitability and capit al base of banks. In addition, the Supreme 
Court decisions on loans indexed to a foreig n exchange clause could further erode the 
financial situation of the domes tic banks. Furthermore, banks ar e currently relying to a large 
extent on domestic deposits. This source of fi nancing has been growin g slowly despite the 
government’s blanket deposit guarantee, which has recently been increased. Looking forward, the deposit base could weaken as other investme nt opportunities arise (and capital  controls are 
lifted). At the same time, foreign direct inve stment and access to foreign credit still remains 
limited. The restructuring and recapitalisation of  the savings banks has further progressed, but 
savings banks remain burdened with foreign exch ange risks due to balance sheet mismatches. 
Overall, banking sector restructuring has further progressed, but  significant vulnerabilities 
remain with respect to banks’ a sset quality and capitalisation.  
Further progress has been made in strengtheni ng bank regulatory and supervisory practices. A 
new legal framework aims to improve risk ma nagement systems and governance, strengthens 
provisions on large exposures and connected lending, a nd enhances fit and proper 
requirements for major shareholders. Moreover , the discretionary powers of the Financial 
Supervisory Agency have been strengthened, inter alia  through the setting up of a large 
exposures credit registry to reinforce cont rol and transparency. Al so, deposit insurance 
regulations are being revise d to bring coverage into line with EU legislation.  
The non-banking financial sector comprises th e government-owned Housing Finance Fund, 
investment banks, leasing companies, payment card companies and investment credit funds. 
EN 14   EN Total credit provided by the sector grew by 10%  in 2009, reaching the equivalent of 60% of 
GDP, but the increase was largely due to loan  indexation rather than  to new borrowing. The 
government-owned Housing Financing Fund represents  two thirds of the sector’s total assets 
and private households constitute  by far the largest group of the Fund’s borrowers. However, 
many of the institutions continued to suffer from  equity problems, a weak capital base and 
uncertainties with respect to future financing. The financial situation of the Housing Financing Fund has been undermined by the weak ening performance of its loan portfolio, 
which had induced the Fund to introduce house hold debt restructuring measures and to 
encourage its borrowers to uti lise government programmes. Incr eases in defaults led to a 
significant decline in  the equity ratio belo w the envisaged long-ter m threshold. A government 
capital injection is currently being considered. Overall , a large part of the non-banking 
financial sector remains confronted with signi ficant credit risks and weak equity ratios.   
Since the collapse of ma rkets in late 2008, domestic equity markets have been playing a much 
smaller role in financial intermediation. The la ck of confidence in th e equity market is 
reflected in extremely low turnover, which in 2009 reached 4% of the 2008 turnover. The market value of all listed companies stood at 17% of GDP (end-Ap ril 2010), compared to 
120% prior to the crisis. In c ontrast to equity markets, tu rnover on bond markets seems to 
have recovered rather strongly, also due to  rising demand for government-guaranteed bonds 
following the failure of the domestic banks. Th e market capitalisation of all listed bonds 
increased to close to 100% of GDP (end-April). Overall, domestic financial markets have 
somewhat recovered on the back of a more li vely bond market while confidence in equity 
markets remains rather weak.  
3.2. The capacity to cope with competitiv e 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 has not yet recovered a 
level of macro-financial stability allowing for an efficient allocation of economic resources. 
The balance sheets of private households an d non-financial firms have been seriously 
damaged and a large number of firms are in th e process of or about to enter into debt 
restructuring. Under these circumstances, inve stment activity remains markedly restrained, 
holding back the recovery process.  An efficient allocation of resources remains rather limited 
in parts of the economy, also due to financia l sector weaknesses an d capital restrictions . 
Overall , there remains scope for improvi ng the functioning of markets. 
Human and physical capital 
The economic crisis severely affected the la bour market situation. The unemployment rate 
increased from 3% in 2008 to 7.2% in 2009; the activity rate dropped fr om close to 87% to 
around 85%. Moreover, the unemployment rate  of the young population has doubled to 16% 
and the share of long-term unemployed has ri sen markedly. The government continued to 
implement active labour market policies aimed at  retraining and upgradin g skills of the labour 
force. However, with unemployment well a bove equilibrium levels, human capital remains 
significantly underutilised. The cris is has also led to an increase in outward migration of 
professionals and high-skilled workers. Despit e the crisis, education spending has slightly 
increased to around 7.8 % of GDP in 2009 (from 7.6% in 2008) , but is foreseen to drop in 
2010 and 2011. The country enjoys a strong capital endowment and th e basic infrastructure is 
in line with the high income level of the economy.  
EN 15   EN Abundant geothermal sources have attracted subs tantial foreign investment in the aluminium 
and hydropower sectors over the past, but the financ ial crisis has put several investment 
projects on hold. The share of investment in GDP has fallen markedly in the context of the 
crisis, from around 30% over previous year s to 12% in 2009. Investments in the 
manufacturing sector (aluminium , food processing) have been pa rticularly affected, but they 
have also dropped in the energy and construction sector. At the same time, the fall in real 
estate activities reflects also some normalisa tion following the earlier ‘boom’ years. Public 
investments have also fallen, from  4% to 3% of GDP, with the largest declines in transport 
infrastructure. Inward FDI was negative in 2009 as foreign investors reduced their exposure; 
however, the net FDI balance rema ined positive as residents redu ced outward investments to a 
much larger extent. The total stock of in ward FDI remained at around 75% of GDP.  
Spending on research and development ha s remained high at around 2.7% of GDP. 
Overall , the country enjoys good basic infrastruc ture, abundant natural resources, and a 
generally well educated population.  Investments remain concentr ated in a few manufacturing 
sectors.  
Sectoral and enterprise structure 
Although some new segments in manufacturing and services have expanded over the past 
years, in particular in some high-tech area s such as software pr oduction and biotechnology, 
the economy’s industrial sector is characteri sed by a limited degree of diversification. The 
relatively small industrial sector (excluding construction), mainly steel manufacturing, 
represents roughly 9% of output and one fifth of employment. The share of the service sector 
in total output declined somewhat in the contex t of the crisis, mainly due to reduced economic 
activity in the real estate, reta il trade and financial sectors. Ho wever, services still account for 
two thirds of the economy and almost three qua rters of employment. Tourism and transport 
continued to be an important source of fo reign exchange income in 2009, accounting for a 
quarter of total export earnings. However, in  the first half of 2010, the number of foreign 
tourists dropped by 1.2% year on year, probably due to volcanic activity. Lastly, the share of 
construction in GDP has fallen markedly, from  around 10% of GDP over previous years to 
7.4% in 2010, reflecting adjustme nts in an over-lever aged sector as well as completion of 
large energy-related projects.  
Regarding network industries, energy productio n is predominantly publicly owned, but third 
party access to transmission and distribution is granted. Non-nationals are not granted market 
access to production. The telecommuni cation sector is liberalised  and privately owned while 
government interventions remain  limited to infrastructure i nvestments in remote areas. 
The importance of small firms in the economy remains high, accounting for 99% of the total 
and 70% of employment and output.  
Overall , the country’s industrial sector remained not very diversified and the construction 
sector is in a proce ss of deleveraging.  
State influence on competitiveness 
The relatively small agriculture sector continue d to benefit from government subsidies, import 
protection, and a system of production quotas. Certain indus tries, such as, energy, air 
transport and fishing remain heavily protected from foreign competition as non-residents from 
the EEA and/or third countries are not granted a ccess to markets. The level of state subsidies 
EN 16   EN amounts to 1.8% of GDP. 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 choices to be made by the state as rega rds the domestic allocat ion of fishing quotas. 
Energy production remained in government ownership, with la rge consumers being offered 
relatively favourable electricity prices. Followi ng its intervention in the banking sector, the 
state continued to divest by selling its shares; it  retains majority ownership of one of the three 
new banks. The government announced that it will continue the restructuring of the savings 
banks sector. While the government announced it would give creditors a chance to hold most 
of the equity, the process will involve some  state support. The Housing Financing Fund 
remained state-owned and indicated it requir es recapitalisation with public funds. State 
interference remains significant in some areas, including the ba nking sector as long as its 
restructuring and privatis ation is not completed.  
Economic integration with the EU 
Iceland is an open economy with  total trade in goods and serv ices representing around 95% of 
GDP. The country’s export structure is not very  diversified. Marine pr oducts and aluminium 
account for two thirds of merchandise exports. The share of services, mainly travel and 
transport, has increased to around one third of  total exports. The import structure is much 
more diversified, reflecting the country’s depe ndence 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 over 80% (January to April 2010, from around 
75% a year before), and half of the country’s imports originate in the EU. Overall , integration 
with the EU in the areas of trad e and investment remained high.  
In 2009, real wages declined on average by 7.3% as annual inflation (12.3%) was 
significantly higher than the growth of aver age nominal wages (3.9%). The increase in 
nominal labour costs was more pronounced in the non-tradable sector s (e.g. construction) 
compared to the tradable sector (e.g. manuf acturing, transport, storage, communication). 
Rough estimates point to a sli ght deterioration of averag e labour productivity in 2009, 
suggesting an increase in unit labour costs. The exchange rate of the króna vis-à-vis the euro 
has appreciated by around 15% in the first nine months of 2010. In real effective terms (trade-
weighted and adjusted for price differentials) a similar significant appreciation took place, 
suggesting a deterioration in pr ice competitiveness vis-à-vis the main trading partners. An 
analogous picture arises for the real exchange rate when measured on the basis of unit labour 
costs . Overall, recent changes in indicators suggest a r eal appreciation of the króna. However, 
this reflects a gradual rebound from the strong ov ershooting in the aftermath of the financial 
crisis, when the domestic currency lost ha lf of its value vis-à-vis the euro.  
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 th e policies of the Union. It 
also analyses Iceland’s administ rative 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.  
EN 17   EN 4.1. Chapter 1: Free movement of goods 
Iceland is highly aligned and applies, with a few exemptions, the acquis  in this field due to its 
EEA membership.  
No additional developments can be reported in the area of general principles . The legislation 
on alcoholic beverages remains to be adopted. 
With regard to horizontal measures , Iceland continued to apply the acquis on 
standardisation and metrology . No developments can be reported in the areas of conformity 
assessment , accreditation  and market surveillance . The latest changes in the acquis  in the 
field of conformity assessment, covering the establishment of a common framework for the marketing of products, have not yet been incorp orated into the EEA Agreement and thus have 
not been fully implemented. Internal and extern al coordination of mark et surveillance requires 
further improvement. 
In March 2010 the EFTA Surveillance Authority sent a reasoned opinion to Iceland for failure 
to implement EU legislation laying down uniform rules for the names, composition and labelling of textile products.  
As regards the old approach product legislation , Iceland’s alignment with the acquis  is well 
advanced. No additional developments can be reported in the automotive sector, where Iceland accepts vehicles produced and market ed according to technical requirements and 
standards other than the international ones on which EU legislation is based. 
Iceland continued to apply the acquis  in the areas of 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. No new developments can be report ed on horizontal measures and on the old 
approach product legislation. 
4.2. Chapter 2: Freedom of movement for workers 
Iceland applies the acquis in this field due to its EEA me mbership, with a few derogations. 
Iceland continued over the re porting period to apply the acquis on access to the labour 
market  and to fully participate in the Eur opean Employment Services network ( EURES ).  
Progress can be reported under the coordination of social security systems.  Preparations for 
electronic data exchange within  the Electronic Exchange of Social Security Information 
(EESSI) system, which was put into place in the EU in May 2010, advanced over the reporting period. A steering group has been esta blished to introduce the EEESI system in 
Iceland and work on the in stallation of an Access Point is in progress. 
Conclusion 
Overall, Iceland continues to apply the acquis  in the area of free movement of workers. The 
preparations to apply the ne w regulations for social secu rity coordination are on track.  
EN 18   EN 4.3. Chapter 3: Right of establishment and freedom to provide services 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis in this field due to its EEA membership.  
No developments can be reported in the area of right of establishment.  
There has been limited pr ogress in the area of freedom to provide cr oss-border services . 
The horizontal law transposing the Services Di rective and the bill with sector-specific 
legislative amendments required by this Direct ive have not been adopted yet. Work on the 
Point of Single Contact, required by the Services  Directive, has advanced; but adoption of the 
above-mentioned legislative texts is required befo re the Icelandic Point of Single Contact can 
be made operational.  
The EFTA Surveillance Authority decided in June 2010 to bring a case before the EFTA 
Court against Iceland as it consid ers that the Icelandi c rules are in breach  of the freedom to 
provide services and the Posting of Worker s Directive. The case concerns legislation 
regarding foreign undertakings posting their workers in Iceland for temporary work.  
Restrictions as regards the right of establishm ent and the freedom to provide services in the 
fisheries sector remain in place. 
No developments can be reported in the area of postal services . In May 2010, the Ministry of 
Transport, Communications and Local Government  requested from the EFTA Surveillance an 
adaptation regarding the implementation of the Third Postal Directive. The goal of this 
adaptation is to allow Iceland to take necessary steps to ensure the interests of consumers as 
well as the smooth functioning of th e postal market as a whole.  
Some progress can be reported in the area of mutual recognition of professional 
qualifications . The main Directive on the recogniti on of professional qualifications was 
incorporated into national law and partly impl emented through national regulations. However, 
technical implementation remains to be achie ved. For this reason the EFTA Surveillance 
Authority decided in July 2010 to bring Iceland be fore the EFTA Court re garding its failure to 
fully implement the EEA rules corresponding to the Directive on the recognition of 
professional qualifications. Iceland has sti ll to put in place all necessary changes. 
Conclusion 
The overall alignment with the acquis in the field of right of establishment and freedom to 
provide services is at a satisfactory level. Howe ver, the current rules are not in line with the 
Services Directive and the Third Postal Directive. The restrictions to foreign investment in the fisheries sector remain in place. Further effo rts have to be undertaken to complete the 
framework for mutual recognition of professi onal qualifications. The administrative capacity 
for effective implementation and enforcement of  EU rules and policies needs to be further 
strengthened. 
4.4. Chapter 4: Free movement of capital 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis in this field due to its EEA membership.  
EN 19   EN In November 2008, against the ba ckground of the financial cris is, Iceland took protective 
measures which restrict capital flows between Iceland and EEA Member States. 
Comprehensive exchange controls are still in force on transactions between Iceland and other 
countries. Certain controls were  further tightened in April an d November 2009 with a view to 
facilitating closer monitoring of the rules while capital inflows in foreign currency for new investment were authorised. 
As regards capital movements and payments,  Iceland introduced in April 2010 new rules on 
foreign exchange which reduce the maximum am ount of foreign currency that can be bought 
for travel. The new rules provide for a revisi on of the foreign exchange regime every six 
months in close cooperation with the IMF. An  amendment to the Act on foreign exchange, 
adopted in June 2010, extended the validity of the clause on capit al flow restrictions from 
November 2010 to August 2011, thus giving the Central Bank the power to restrict or 
temporarily suspend any or all categories of  capital movements and related exchange 
transactions. These provisions are not in line with the EU acquis . The permanent exception 
which restricts foreign investme nt in fisheries remains in pl ace. No development can be 
reported in lifting the investment  restrictions applied to third country (non-EEA) nationals in 
the sectors of energy, air tr ansport and real estate. 
No developments can be reported in the areas of payment systems and in the fight against 
money laundering . The Act laying down measures im plementing the third Anti-Money 
Laundering Directive remains to be fully impl emented. The administrative capacity of the 
Financial Intelligence Unit need s to be further strengthened.  
Conclusion 
Overall, Iceland applies the acquis  on free movement on capital,  with some exceptions. 
Significant and sustained efforts are needed to remove the existing restrictions on capital 
movements, including foreign investment in fish eries. The administrative capacity of the 
Financial Intelligence Unit re quires further strengthening.  
4.5. Chapter 5: Public procurement 
Iceland is fully aligned with the general principles  of the acquis .  
The entire acquis in this chapter is covered by the EEA Agreement, with the exception of two 
technical Directives and the new Remedies Dir ective. Iceland has implemented the main body 
of the acquis on public procurement in line with its EEA obligations. 
Regarding administrative capacities,  no developments can be reported. 
There has been some progress as regards the award of public contracts , where preparations 
for implementation of the two technical directives have started.  
Little progress has been  made in the area of remedies . The law on remedies, transposing the 
new EU directive, has yet to be adopted.  
Conclusion 
Overall alignment in the fiel d of public procurement is very good as Iceland has already 
implemented the main body of the acquis  and is currently preparing full implementation. 
EN 20   EN However, administrative capacity remains to  be further enhanced to ensure proper 
implementation of public procurement policy at all levels.  
4.6. Chapter 6: Company law 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis in the field of company law due to its EEA membership.  
Good progress was made in the area of company law . Transposition of the 2007 Directive on 
the exercise of certain rights of  shareholders in listed companies was completed and notified 
to the EFTA Surveillance Authority in January 2010. The European Commission’s Recommendations of April 2009 on remuneration policies in the financ ial services sector 
were incorporated into national law and entered into force in June 2010.  
In the area of corporate  accounting , no developments can be reported on the implementation 
of parts of the Directive amending certain pr ovisions on annual and consolidated accounts or 
on the implementation of the Regulations on e quivalence of accounting standards. In April 
2010, the EFTA Surveillance Authority delivered a reasoned opinion to Iceland for failure to incorporate the Commission Regulation, as amended in 2009, on international accounting 
standards. Some elements of the legislation leading to the reasoned opinion, have since been 
implemented by Iceland. 
Iceland continued to apply the acquis  on auditing .  
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 is 
not yet achieved. 
4.7. Chapter 7: Intellectual property law 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis in the field of intellectual property law due to its EEA membership.  
Iceland continued to implement the acquis  on copyright and neighbouring rights . A new 
amending bill was adopted in June. However, only one collecting society is legally 
recognised. The legal recognition of  copyright collecting societie s has not been reviewed or 
extended. The Ministry of Education, Science and Culture is respon sible for extending 
collective licensing.  
Good progress can be reported in the area of industrial property rights , with the adoption in 
December 2009 of revised legislation on trademarks. However, no developments can be noted as regards implementation of the rules on trad emark exhaustion and supplementary protection 
certificates for medicinal products.  
A comprehensive enforcement  policy, which is not covere d under the EEA, remains to be 
developed and adopted. 
Conclusion 
EN 21   EN Overall, Iceland has already reached a high level of alignment and applies a substantial part of 
the acquis in the field of intellectual property la w. A comprehensive enforcement policy 
remains to be adopted. 
4.8. Chapter 8: Competition Policy 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis  in the field of competition due to its EEA membership.  
Iceland has reached a high level of alignment in the field of anti-trust, including mergers  
and no developments can be reported. Some further monitoring of the quality and 
enforcement of the decisions of the Icelandic Competition Authority and of the aid measures 
adopted following the economic crisis remains necessary.  
Iceland notified the EFTA Surv eillance Authority of several state aid  measures taken in 
response to the financial crisis. These state aid measures relate to th e restructuring of the 
banking system, the recapitalisation of savings banks and the permission for the Housing Financing Fund to purchase mortgage loans secure d against collateral in  residential property. 
Iceland also provided information on the rest ructuring of its main insurance company. 
Conclusion 
Overall, Iceland has already reached a high level of alignment and applies a substantial part of 
the acquis  in the field of competition. Further monito ring of the state aid measures taken in 
response to the financia l crisis is necessary. 
4.9. Chapter 9: Financial Services 
Iceland is highly aligned and appl ies a substantia l part of the  acquis  in this field due to its 
EEA membership. 
Good progress has been made on financial conglomerates  with the adoption in June 2010 of 
the Act on insurance activities. This completes the implementation of the Financial Conglomerates Directive and consequently of the acquis  in this field.  
Iceland adopted in June 2010 a bill amending the Act on financial undertaki ngs with a view to 
improving the overall regulatory and supervisory framework. The bill strengthens the 
supervisory powers of the Financial Supe rvisory Authority (FME) and introduces 
improvements in the regime for and monitoring of large exposures by inter alia  creating a 
separate national registry, layi ng down stricter rules on financ ial institutions’ trading their 
own stock and prohibiting lending w ith collateral in own shares. It also introduces provisions 
for good business practices. The new framework is  to be supplemented with further measures 
to be adopted by the FME and by an agreement between the FME and the Central Bank on the operation of the large exposures registry.  
In banking , little progress has been made on rules regarding a new coverage level (at present 
maximum € 50,000 per account holder) of the de posit guarantee scheme, where legislation 
has yet to be adopted.  
Regarding Icesave, in December 2009 the Icela ndic parliament passed a law authorising a 
state guarantee on the obligations of the Icelandic depositors insurance scheme, putting into effect the Icesave agreement between Icela nd, the UK and the Netherlands of October 2009. 
EN 22   EN However, in January 2010, the Icelandic President refused to sign the bill. In accordance with 
the provisions of the Icelandic constitution th e bill was subsequently put to a referendum 
which, in March, resulted in a 93.6% ‘No’ vote with a 62.7% participa tion rate. Since then, 
talks among the three parties have slowed down. In June Iceland’s Fina nce Minister contacted 
the UK Chancellor of the Exchequer and the Dutch Minister of Finance to  reconfirm Iceland’s 
commitment to repay the Icesave loans and suggested restarting ne gotiations. Meetings 
between Icelandic, UK and Dutch representative s took place in July and in September.  
In May the EFTA Surveillance Authority (ESA) issued a letter of form al notice on Iceland’s 
application of the EU Deposit Guarantee Directive, on the ground that, by failing to ensure 
payment of the minimum amount of compensati on to Icesave depositors in the UK and the 
Netherlands within certain time limits, Iceland ha d failed to comply with  its obligations under 
the Directive and the principl e of non-discrimination. Iceland had until early September to 
respond to the letter. The Europ ean Commission indicated that it supported the legal analysis 
of ESA. At this stage the Icesav e dispute still remains unresolved. 
Some progress can be re ported in the area of insurance and occupational pensions . Since 
the adoption in June 2010 of the Act on insuranc e activities, Iceland has been implementing 
the provisions of the Reinsurance Directive. However, some provisions concerning the Life 
Assurance Directive as well as the Insuran ce Group Directive and th e Insurance Mediation 
Directive remain to be transposed.  
No developments can be reported in the area of financial market infrastructure .  
Iceland has already notified the implementation of  all relevant EU legislation in the area of 
securities markets and investment services  and no developments can be reported. However, 
ongoing and upcoming reviews of several securities  markets directives remain to be carried 
out in order to transpose amending directives.  
No development can be reported on administrative capacity. 
Conclusion 
Overall alignment in this area is good, although  the reforms introduced are, for the moment, 
only partial. However, implementation is not co mplete in some key areas, notably insurance 
and securities. The supervisory capacity ne eds further improvement. The Icesave dispute 
remains unresolved at this stage. 
4.10. Chapter 10: Information society and media 
Overall, 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 progress can be reported in the area of electronic communications and information 
technologies , with the entry into force in Apr il 2010 of the new regulation on roaming. 
Iceland's legislation is not yet in line with the Di rective on data retention, which is not part of 
the EEA Agreement. The EU electronic communi cations reform package, as amended in 
2009, has yet to be adopted. Discussions have been carried out over the reporting period on 
the need for greater independence of  national regulatory authorities. 
EN 23   EN No further developments can be reported in the area of information society services . 
Regarding  the transposition of the Directive on conditional access, legal protection was not 
extended to conditional access devices other than broadcasting services decoders.  
As regards audiovisual policy , the Audiovisual Media Services  Directive was not transposed 
into national law. 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 a nd media. However, the provisions of the 
telecoms reform, the Audiovisual Media Servic es Directive and the policies introduced by the 
recent adoption of the European Digita l Agenda remain to be implemented. 
4.11. Chapter 11: Agriculture and rural development 
As regards horizontal issues , no legislative developments can be reported. However, the 
administration has been concentrating on gaining a better understanding of the acquis  in the 
area. The limited administrative capacity has not been addressed.  
Preparations for the establishment of administra tive structures, in partic ular the setting-up of 
an EU-compliant paying agency  and an integrated administ ration and control system ( IACS ), 
remains at a very early stage. A working gr oup involving stakeholders was set up over the 
reporting period to review the ad ministrative structures in I celand with a view to designing 
appropriate structures in order to meet the acquis . The emphasis was put on the paying 
agency, management and control structures. A working group was formed in May to analyse 
the current land registration system. 
No developments can be reported to align w ith EU rules on support measures. As regards 
payment, Iceland is in a position to disseminate  information each year on beneficiaries. The 
current support system already requires the ad ministration to have detailed information on 
direct payments beneficiaries. This applies to dairy farming, sheep farming and horticulture. 
A strategy for agricultural statistics was fina lised in September by a task force including 
Statistics Iceland in cooperation with the Ministry of Fisheries and Agriculture.  
No developments can be reported as regards the single  Common Market Organisation.  
In the field of rural development  experts are working on a plan to set out how Iceland could 
coordinate its rural development strategies w ithin the EU framework. A formal working group 
on rural development is still to be set up. Appropr iate structures includ ing a rural development 
paying agency remain to be set up. 
No developments can be reported in the areas of quality policy  and organic farming , 
although the latter is covere d by the EEA Agreement and largely in line with the acquis . 
Conclusion 
Overall, Iceland’s agricultural policy is not in line with the acquis  and no new legislative 
developments can be reported. Working groups we re set up to review basic instruments and 
institutions for managing the common agricultu ral policy. The resource s for addressing the 
necessary preparations in this chapter will require strengthening. 
EN 24   EN 4.12. Chapter 12: Food safety, veterinary and phytosanitary policy 
Progress can be reported as regards general food safety with the entry into force in March 
2010 of the new Food Law Package, which brin gs Iceland further into line with EU acquis . 
The new legislation reinforces the powers of  the central competent food and veterinary 
authority (CCA-MAST) in the area of f ood and feed controls. The CCA-MAST is now 
responsible for the inspection of businesses producing foods of animal origin and for 
accrediting laboratories for the official contro l. Laboratories for measuring salmonella were 
designated in June 2010. However, the exact dist ribution of control task s between central and 
public health authorities is st ill under discussion and inspectio ns plans have not yet been 
prepared. 
The legal powers of the central competent f ood and veterinary authority over the local 
competent authorities and the reference laboratori es were not reinforced . Central oversight of 
the effectiveness of controls remained lim ited. The CCA-MAST has not signed inspection 
contracts with all reference laboratories. 
In the veterinary sector , Iceland continued to benefit, und er the EEA Agreement, from an 
exemption from EU rules on trade in live anim als and germplasm enabli ng it to prohibit all 
imports of live animals except for fish and fi sh germplasm. Icelandic legislation was, 
however, slightly amended in December 2009 to enable the food and veterinary authority to 
allow the import of frozen pig semen under spec ial conditions. Iceland already largely fulfils 
the acquis  on identification and registration of anim als. The general Act on protection against 
infectious diseases is in line with EU acquis on zoonoses. Iceland also adopted rules 
transposing EU legislation on cont aminates that are expected to enter into force in November 
2011. However, no developments can be reported in aligning with the acquis in the area of 
import of live animals. 
Limited progress can be reported as regards the placing on the market of food and feed with 
the entry into force in March 2010 of provisions in line with the acquis  on animal by-products 
not intended for human consumption. However, these provisions only cover fish products. 
The hygiene package remains to be fully impl emented. A national upgrading plan to bring 
food establishments in line with the hygiene ru les remains to be prepared. There is no 
collection system and incineration facilities for carcasses that are potentially infected with 
transmissible spongiform encephalopathy (TSE). 
Iceland is not in line with the acquis on novel foods and genetically modified foods ; which is 
not covered by the EEA. The competent authority  cannot test the full range of pesticide 
residues. With the exception of  the entry into force in 20 10 of EU requirements on feed 
hygiene, the  acquis on specific rules for feed as well as on the placing on the market and the 
use of feed is not transposed. 
No developments can be reported in the  phytosanitary  policy . The capacities of accredited 
laboratories remain to be enhanced. EU rules on plant protection product s and plant health are 
not applied. 
Conclusion 
Overall, Iceland is partially in line with the acquis on food safety, veterinary and 
phytosanitary policy. Efforts are required to strengthen administrative and laboratory 
capacities and to close the remaining gaps with regard to the acquis  on the hygiene package, 
plant protection products,  novel foods and genetically modified foods. 
EN 25   EN 4.13. Chapter 13: Fisheries 
As regards  resource and fleet management the working group reviewing the fisheries 
management system continued its work over th e reporting period and delivered a final report 
in September. The administration has been wo rking on gaining a better understanding of the 
acquis  in the area. No developments can be reported in lifting the restrictions to the internal 
market  acquis regarding the right of esta blishment and the freedom to  provide services as well 
as the free movement of capital in the fish eries production and processing sectors.  
The overall design and implementation of Icela ndic fisheries policy is similar to that 
implemented in the EU. Iceland continued to subscribe to the principles of sustainable 
resources management and has incorporated the precautionary approach and the ecosystem 
approach as guiding principles for decision making in its basic fisheries legislation. Iceland 
continued to manage its fish stocks according to harvest rules, similar in effect to the EU’s 
long-term management plans, but these rules have not b een translated into legislative acts. In 
addition, alignment with the acquis  on harvesting stocks at a level that provides maximum 
sustainable yield has not yet started. Iceland implem ents a policy of relatively low 
intervention: there is no fleet capacity policy, no funds for direct subsidies and no market 
intervention. The relevant administrative au thority is the Ministry of Fisheries and 
Agriculture, assisted by the Icelandic Direct orate of Fisheries and the Marine Research 
Institute. Overall, adequate administrative st ructures are in place. An EU-compatible vessel 
registry has not been set up.  
No developments can be reported in the area of inspection and control . However, 
preparations were made with a view to ratify ing the 2009 Agreement on port state measures to 
prevent, deter and eliminate illegal,  unreported and unr egulated fishing.  
There have been no developments as regards structural actions and state aid . Iceland 
provides only very limited support to the fisherie s sector. Preparations for the implementation 
of the European Fisheries Fund (EFF), includi ng the setting-up of management and control 
systems, have not started. 
In the area of market policy , Iceland has a limited but efficien t legislative and administrative 
framework which, however, is not in line with the EU acquis as regards the common 
organisation of markets for fisheries products . There are no commercial minimum sizes of 
fish products and/or freshness t ypes and unrestricted landing of  herring for other than human 
consumption is allowed.  
In the area of international agreements , Iceland has started to prep are for amendments to its 
legislation with a view to accepting the 1993 FAO Agreement to promote compliance with 
international conservation and management measures by fishing vessels on the high seas.   
Iceland is a party to arrangements which i nvolve direct cooperation between the Coastal 
States of the North-East Atlantic. Through such  arrangements, these Coastal States jointly 
manage the highly migratory stocks straddling the respective economic z ones. In relation to 
mackerel, Iceland was formally recognised as a Coastal State in 2010 but it has not been 
possible to reach an agreement on the manage ment of mackerel stock for 2010 between the 
Coastal States. Iceland’s rapidly expanded fishery of mackerel over the last three years is an 
issue of widespread concern within the EU, also with regard to the prin ciples of sustainable 
resources management.  
Conclusion 
EN 26   EN Overall, Iceland has a fisheries policy which ha s similar objectives to those being pursued in 
the EU, but some rules differ substantially. No new development can be reported in aligning 
with the EU common fisheries policy. Particular attention needs to be paid to the internal 
market  acquis regarding the right of establishment, the freedom to provide services as well as 
the free movement of capital in the fisheries production and processing sectors where the 
restrictions in place are not in line with the acquis . Mechanisms for implementing and 
monitoring EU support measures remain to be set up.  
4.14. Chapter 14: Transport policy 
Iceland already applies a significant part of the acquis  on transport policy. 
No developments can be reported in the area of road transport . Implementation of the acquis  
regarding social legislat ion, technical equipment, public pass enger transport services and road 
transport activities remains unfulfilled.  
There are no rail or inland waterway transport  sectors in Iceland.  
Good progress can be reported in the area of combined transport , where Directives on the 
establishment of common rules for certain ty pes of combined transport of goods between 
Member States have been implemented as we ll as the Decision on Community guidelines for 
the development of the trans-European transport network. Combined transport is in the case 
of Iceland mainly restricted to road transpor t, since there are no railway systems or inland 
waterways.  
There has been some progress with regard to air transport , with the implementation of the 
acquis  in areas including exchange of flight  data and information on civil aviation 
occurrences. However, no developments can be reported in aviation secu rity or in lifting the 
restrictions on direct foreign investment in  the aviation sector. Regarding air traffic 
management, the independence of the national S upervisory Authority needs to be ensured.  
The acquis  alignment is pending in several areas of maritime transport , including marine 
equipment, training, and safety  rules on passenger ships. The ESA has launched infringement 
proceedings in two cases (on minimum level of  training of seafarers in September 2009 and 
on Marine equipment in December 2009). No development can be reported in ensuring 
freedom of establishment with regard to  ship registration, or in the area of satellite 
navigation . 
Conclusion 
Overall, Iceland applies a substantial of the acquis on transport policy. However, the 
restrictions to foreign investment in air and ma ritime transport have not been brought into line 
with the acquis . The independence of the Supervisory Auth ority in air transport remains to be 
ensured. 
4.15. Chapter 15: Energy 
Some progress can be re ported with regard to security of supply and  the internal energy 
market . The Directive on measures to safeguard  security of electricity supply and 
infrastructure investment was implemen ted through the Electricity Act approved by 
parliament in December 2009. The steerin g group with the task of developing  a 
comprehensive energy policy for Iceland issued  its first consultatio n paper in May 2010. It 
EN 27   EN worked out steps to increase energy security, in particular through participation in the 
International Energy Agency. The Ministry of In dustry, Energy and Tour ism started to reflect 
on whether and how the independence of the National Energy Authority can be further 
strengthened . However, the process of adopting key legi slation with respect to oil stocks has 
not been launched.  
Against the background of existing restrictions in energy sector, the Icelandic government has 
appointed an independent task force to inves tigate and report whether the acquisition of one 
of Iceland's geothermal energy companies by a Sw edish subsidiary of a Canadian company is 
within the framework of the Icelandic law and the EEA regulations. In September, the task 
force acknowledged the lega lity of the acquisition. 
Iceland's share of renewable energy in its gross final energy  consumption has been 
constantly increasing over the last years.  The preparations and consu ltations with a view to 
implementing the new Directive on renewable en ergy and establishing a national target and a 
national renewable energy action plan are at an early stage.  
No development can be reported in the area of energy efficiency.  Iceland is currently 
exempted under the EEA from transposing th e Directive on the en ergy performance of 
buildings into national law and from impl ementing the Directive on the promotion of 
cogeneration based on useful he at demand in the internal en ergy market. Iceland does not 
have national energy saving targets and implementation of the acquis on energy end-use 
efficiency is at an early stage.  
Iceland’s is highly aligned with the acquis  in the area of nuclear energy, nuclear safety and 
radiation protection . Iceland participates in the Comm unity radiological data exchange 
system (EURDEP) and the European Commission is preparing to propos e membership in the 
European Community Urgent Radi ological Information Exchange. 
Conclusion  
Overall, Iceland continues to be highly aligned with the acquis  in the field of energy. 
However, alignment in the areas of oil stocks , independence of the re gulatory authority and 
energy efficiency is moderately advanced. 
4.16. Chapter 16: Taxation 
A working group on taxation started in early 2010 to evaluate the overall impact of acquis 
alignment in particular as far as the VAT Di rective, company tax le gislation, the Savings 
Directive and means to achieve interconnectivity /interoperability with the EU are concerned. 
In the area of indirect taxation  - VAT or excise  duties - no developments can be reported. Tax 
legislation is only part ly in line with the acquis , in particular on VAT a nd excise duties, with 
special reference to rates and product category definitions, including for alcohol and tobacco, 
petrol and diesel fuels, trav ellers’ allowances, warehousing, duty suspension and duty-free.  
With regard to direct taxation , no developments can be reported in aligning with the 
provisions of the Merger Direct ive, the Interest and Royalties Directive and the Savings 
Directive. Further adaptation to ensure complian ce in particular with the Parent-Subsidiaries 
Directive and the Capital Duty Directive and the explicit commitment to observe the Code of 
Conduct for business taxation did not start over  the reporting period. Amendment of several 
EN 28   EN detailed provisions of Iceland’ s legislation on the basis of Eur opean Court of Justice case law 
to ensure compliance with the acquis  is also pending.  
Concerning administrative cooperation and mutual assistance and operational capacity 
and computerisation , no developments can be reported. A central liaison office and excise 
liaison office remain to be establ ished, and the implementation of acquis  provisions relating 
to mutual assistance for assessment in direct ta x matters has not started. The need to further 
adapt the administrative organisation to meet EU acquis on mutual recovery assistance has 
not been addressed. Adapta tion of the IT network to achieve interconnectivity and 
interoperability with the EU’s IT sy stems for taxation remains unfinished. 
Iceland has achieved substantial progress in the delivery of statistical data on taxation, in line 
with the acquis .  
Conclusion  
Overall, limited progress can be noted. Iceland’ s tax legislation remains partially aligned with 
the acquis . Iceland has already achieved a good level of administrative capacity in the field of 
taxation. Nevertheless, liaison offices and IT interconnectivity remain to be set up. 
4.17. Chapter 17: Economic and Monetary Policy 
No progress has been made in the area of monetary policy . Following the Act on the Central 
Bank of 2001, central bank functional, institution al, personal and financial independence, are 
not in line with the EU acquis . National legislation foreseei ng the financing by the central 
bank of credit institutions  other than in connec tion with the support of insolvent credit and/or 
other financial institutions is incompatible wi th the prohibition on m onetary financing, unless 
it is established that the Central Bank acts only as a fiscal agent of the State. The 2001 Act on 
the Central Bank of Iceland does not regulate aspects necessary for the integration of the 
central bank into the Europ ean System of Central Banks. 
Some progress has been made in the area of economic policy . Iceland continued to submit 
fiscal notifications to the European Commi ssion. As a candidate country, Iceland is being 
included into the pre-accession fisc al surveillance. The country is requested to submit its first 
Pre-accession Economic Programme by end-Ja nuary 2011, for which preparations have 
started. However, inter-depart mental coordination and communi cation needs to be improved. 
Administrative capacity needs to be strengthened with a view to formulating and implementing economic policy in line with the Treaty on the Functioning of the European Union.  
Conclusion 
Some progress can be reported in  the area of economic policy while efforts are necessary to 
improve departmental coordination in prep aring the Pre-accession Economic Programme. 
Several shortcomings still exist in the field of  monetary policy, in particular regarding full 
independence of the central bank and the prohib ition of monetary fi nancing of the public 
sector. 
EN 29   EN 4.18. Chapter 18: Statistics 
Limited progress has been made in the area of statistical infrastructure . The coordination of 
the statistical system by Statisti cs Iceland, the national statisti cal institute, has improved and a 
cooperation agreement was signed between Statistics Iceland a nd the Central Bank in May 
2010. However, Statistics Iceland had to furthe r reduce its staff level and operational budget. 
The resources available for statistics are not sufficient for maintaining and advancing the current level of operations. 
The main statistical classificati ons are in place  and follow the  acquis . Limited progress can be 
reported on classifications and registers . Work on the statistical business register has 
progressed slowly.  
In the area of sector statistics , there has been some progress. Work on a strategy for 
improving agriculture statistics  is ongoing, dealing in particul ar with how to move the 
collection of statistical  data from the Farmers Associatio n to Statistics Iceland. Statistics 
Iceland has started preparations for the farm st ructure survey to be conducted in autumn 2010 
but the budget for conducting the survey has not b een allocated. As regards fisheries statistics, 
the methodological report was delivered to Euro stat in December 2009. The timeliness of data 
delivery has also been improved. Statistics Icela nd has taken steps to improve the coverage of 
missing variables on households in the Icelandi c labour force survey. The financing of the 
housing and population census to be conducted in  2011 is not secured. Significant weaknesses 
remain in the area of sector  statistics such as business, macroeconomic and agriculture 
statistics where further efforts are needed.  
Conclusion 
Overall Iceland is already highly in line with the acquis  on statistics. However, it needs to 
improve the availability of st atistical data in line with EU methodology, in particular in 
business, macroeconomic and agriculture statisti cs. Medium term funding of major statistical 
operations, such as the farm structure survey  and the population and housing census, remains 
to be ensured. Human and financial re sources have been further cut back. 
4.19. Chapter 19: Social Policy and employment 
Iceland already implements substantial parts of the acquis.  No additional developments can be 
reported in the fields of labour law  and health and safety at work .  
Iceland has a well establishe d tradition of a functioning social dialogue . In this context, the 
tripartite Stability Pact be tween labour, employers and gov ernment was signed in June 2009. 
It aimed to limit labour disput es by extending existin g collective agreements and stimulating 
economic recovery through investments and re forms of pension funds. However, social 
partners were not systematica lly involved by the government in  the decision-making process, 
which led to their withdrawal of the Confederati on of Icelandic Empl oyers in March 2010. 
The bi-partite social dialogue is functioning very  well. In June 2010 the social partners signed 
an agreement on working place identification cards aimed at reducing illegal labour.  
Some progress can be repor ted regarding Iceland’s 
employment policy . The surveyed 
unemployment rate amounted to 9% in the second quarter of  2010, a small decrease compared 
to the 2009 figures. Youth unemployment re mained particularly high. Long-term 
unemployment has particularly  affected low-skilled work ers. The government further 
developed active labour market measures focusing on activation and training of the 
EN 30   EN unemployed. From January to April 2010, the Minist ry of Social Affairs and Social Security 
launched two initiatives aime d at mobilising unemployed youth. Young people between the 
ages of 16 and 25, who had been  unemployed for three months or longer, were given the 
opportunity to engage in various activities (j obs, voluntary work, vocational training). The 
second initiative targeted young unemployed i mmigrants who, after a language placement 
test, were offered a language c ourse at an appropriate level. Both projects had a high success 
rate. However, an overall employment strategy has not yet been prepared.  
No additional developments can be reported in te rms of preparations for participation in the 
European Social Fund .  
Iceland continues to take appropriate social inclusion  measures for the vulnerable groups in 
society, based on the Nordic welfare approac h. A close monitoring and evaluation of the 
social situation of single parent families, lo w income elderly, children and social assistance 
recipients is necessary. The aim would be to asse ss the impact of the economic crisis on those 
groups, also in view of the reduced public  expenditure. Iceland took part in the 2010 
European Year for combating poverty and social exclusion. 
Iceland managed to en sure the quality of social protection  services over the reporting period 
against a difficult economic background. Overall, e xpenditures on social welfare were cut at a 
lower rate than other sectors of public expend iture. The government also took measures to 
shelter the lower income groups from the effects of the crisis, e.g. with  social protection, tax 
and debt relief measures.  
In the field of anti-discrimination,  parliament legalised same-s ex marriages in June 2010.  
Iceland’s standards in the field of equal opportunities , and particularly  gender equality, 
remained very high. In March 2010, parliament passed a law on gender quotas for the boards of public limited companies, whereby such co mpanies must now ensure that the board 
consists of as close as possible to an e qual number of females and males. Moreover, 
companies with 25 or more employees are required  to disclose the number  of male and female 
employees as well as the number of men and women in management positions. Two Equal 
Opportunities Directives on gende r equality in social secur ity and on access to goods and 
services remain to be transposed. 
Conclusion 
Overall, Iceland has already reached a high level of alignment and continued to apply a 
substantial part of the acquis  in this chapter, partly due to its EEA membership. Social 
dialogue mechanisms are well established, although the current financial and economic 
situation has affected the quality of tripartite dialogue. A comprehensiv e employment strategy 
remains to be worked out. 
4.20. Chapter 20: Enterprise and industrial policy 
Iceland has already reached a high level of alig nment and applies a substantial part of the 
acquis in this field due to its EEA membership.  
No additional developments can be reported in the areas of enterprise and industrial policy 
principles , and sector policies . Work continued on the ‘Iceland 2020 strategy’ which is 
aimed at setting socio-economic priorities  of the country for the next decade.  
EN 31   EN In the field of enterprise and industrial policy instruments Iceland continued to participate 
in the enterprise and innovation programme (EIP) and to be a full member of the Enterprise 
Europe network. 
Against the fallout of the financial and econom ic crisis, Iceland was not in a position to 
develop any specific industrial policy strategy and SMEs’ access to finance has not improved. 
Sector-specific development measures or initia tives are at an early stage of preparation, 
including the area of green ener gy in the transport sector.  
Conclusion 
Overall, alignment in th e area of enterprise and industrial policy is at high level. However, 
new measures in industrial and SME policy are n eeded in particular to address the challenges 
of the current economic difficulties.  
4.21. Chapter 21: Trans European Networks 
Iceland continued to participate in the TEN-T network in line with the acquis  and no further 
developments can be reported as regards transport networks .  
Good progress can be reported in the area of energy networks with the full transposition in 
April 2010 of the Regulation on conditions for access to the network for cross-border 
exchanges in electricity. However, no deve lopments can be reported regarding the 
establishment of a TEN-E-related policy.  
No additional developments can be reported in the area of telecommunication networks , 
where Iceland continued to participate in  the ICT Policy Support component of the 
Competitiveness and Innovation Framework Programme. There are four submarine 
communication cables, connecting Iceland to  the Faroe Islands, Greenland, Denmark, 
Scotland and Canada.  
Conclusion 
Overall, alignment with EU standards is alr eady high and some progress can be reported in 
this chapter. However, TEN-E-related policy requires further development. 
4.22. Chapter 22: Regional policy and coordi nation of structural instruments 
As far as the legislative framework  is concerned, no developments can be reported. The 
budget law does not yet provide su fficient flexibility for transfers between budget lines and 
years. 
Iceland set up two working groups within th e negotiating team on regional policy and 
coordination of structural instruments in Ja nuary and March 2010. The working groups started 
to analyse and reflect on: (i) th e required administrative capacity  and its institutional set-up 
and (ii) application of the NUTS classifi cation to the Icelandic system. The ongoing 
preparations demonstrate the interest and the commitment of the national and regional 
authorities and social partners in the process.  
No developments can be reported ove r the reporting peri od as regards the institutional 
framework, administrative capaci ty, monitoring and evaluation and financial 
management and control.   
EN 32   EN Conclusion 
Iceland is at an early stage of preparations for the implementation of the cohesion policy 
instruments. Limited progress has been made under this chapter over the reporting period. An 
appropriate needs analysis, including identifi cation of the institutions responsible for the 
implementation of the cohesion pol icy, remains to be performed. 
4.23. Chapter 23: Judiciary a nd fundamental rights 
Iceland's judiciary  is of a high standard and the j udicial system is well established. 
Good progress can be reporte d in strengthening the independence  of the judiciary  with the 
adoption in May 2010 of amendments to the Act of Judiciar y related to the appointment of 
judges . The amendments aim at reinforcing the po wers and the composition of the Evaluation 
Committee and broaden its mandate to cover app lications for the Supreme Court. According 
to these changes, the Minister  of Justice may only deviate fr om the recommendation of the 
Evaluation Committee if the Parliament approve s a motion from the Minister to appoint 
another candidate.  
It can not be excluded that there is a risk that  the decision taken in su ch a case is based not on 
qualifications but on political grounds due to the involvement of a parliamentary vote. 
As regards  training of judges, the Judicial Counci l continued to provide training over the 
reporting period to district court judges and othe r lawyers in service of the district courts.  
No developments can be reported on disciplinar y procedures for judges where the decision of 
the Committee on Judicial Functions to remove a judge is not binding and cannot be referred 
to any higher administrative authority.  
No developments can be reported in reviewing the role of the Minister of Justice in relation to 
the appointment and, to a lesser extent, the dismissal of prosecutors . 
The Office of the Special Prosecutor cont inued to carry out a number of criminal 
investigations over the reporting period. (See also political criteria)  
Good progress can be reported in the anti-corruption policy.   
The Parliament adopted in June 2010 a bill providing for the obligation to establish, under the 
supervision of the Parliament ary Ombudsman, Codes of conduct for all government officials 
and for members of the Prime Minister's Cabine t. It includes provisions to train the public 
administration on ethics related issues, gives protection to whistle blowers and specifies 
penalties for ministers in breach  of their responsibilities. This  bill aims at tackling possible 
conflicts of interest and take s into account parts of the reco mmendations of the Council of 
Europe's group of states against corruption (GRECO). The UN Convention against Corruption 
is not ratified yet. However, effective preventi on and awareness raising activities on all forms 
of corruption across the country are required. 
The ratification of the Council of Europe Civil Law Convention is still in process and all the 
relevant Ministries were informed about th e need to change legi slation accordingly.  
Iceland amended its legislation regarding the financing of polit ical parties and the obligation 
of political parties and their candidates to inform about th eir finances. The relevant amended 
act on finances of political part ies was adopted in September. 
EN 33   EN On fundamental rights,  Iceland provides for a high level of protection and no additional 
development can be reported. 
No developments can be reported in further strengthening the independence of the Data 
Protection Authority from the Government. The Additional protocol to Council of Europe 
Convention 108 for the Protection of Individuals with regard to Automatic Processing of 
Personal Data remains to be ratified.  
On EU citizens' rights,  no developments can be reported regarding the exception on the right 
to vote and to stand in local elections that are granted to  citizens of Denmark, Finland, 
Norway and Sweden after three years of residen ce against five years' residence to other EU 
citizens. These exceptions are not in line with EU acquis . 
Conclusion 
Overall, Iceland's judiciary is of a high sta ndard and Iceland provides for a high level of 
protection on fundamental rights. However, th e new provisions on conflict of interest and 
financing of political parties as well as of the act  of judiciary remain to be fully assessed. The 
legislation on citizens' rights and data protection is not yet in line with the acquis .  
4.24. Chapter 24: Justice, freedom and security 
Being an associated member of the Schengen Agreement , Iceland already implements a large 
part of the acquis  in the area of justice, freedom and secu rity, in particular as regards external 
borders and visa policy. In these areas the Schengen Agreement is being correctly implemented by Iceland. Iceland also continues its involvement in Frontex and contributes to 
its activities.   
Overall, Iceland is advanced in the area of migration  and the legislation is largely in line with 
the acquis . No additional developments can be reporte d in this area. Iceland needs to tackle 
some of the outstanding issues such as the abse nce of a specific scheme for researchers and as 
regards the right to family reunification. 
Overall, Iceland is well advanced in the area of asylum  but further steps are necessary.  
Amendments to the Act on Foreigners were ad opted in September on the rights for asylum 
seekers and refugees.  
In the area of judicial cooperation in civil and criminal matters , no developments can be 
noted with regard to joining the 1996 Ch ild Protection Convention and the 2007 Child 
Support Convention and its protocol on applicab le law. Iceland took further steps over the 
reporting period with a view to  ratifying the Lugano Convention. No devel opment with regard 
to judicial cooperation in criminal matters can  be noted. Iceland con tinues a good cooperation 
with Eurojust. Overall, Iceland is well advanced in these areas.  
As regards police cooperation, the fight against or ganised crime and the fight against 
terrorism , Iceland ratified the UN Convention ag ainst transnationa l crime (Palermo 
Convention) in May 2010 and its protocol on traffi cking in persons in June. In relation to the 
implementation of the Palermo Convention, the Ec onomic Crime Division serves as an asset 
recovery office. The protocol on smuggling of migrants and th e protocol on illicit 
manufacturing and trafficking in fi rearms remain to be ratified.  
EN 34   EN In the area of police cooperation, Iceland signe d the Agreement between  the European Union 
and Iceland and Norway on the application of ce rtain provisions of C ouncil Decision on the 
stepping up of cross-border coope ration particularly in comba ting terrorism and cross-border 
crime (Treaty of Prüm, May 2005) in Novemb er 2009. The Agreement still needs to be 
ratified. Iceland also continues a good coope ration with Europol and implements well the 
operational agreement.  
A law amending the Police Act was prepared pe nding parliamentary a pproval. It includes 
provisions on the division of Iceland into six po lice administrative areas instead of fifteen. 
These entities will be controlled by six police commissioners. The aim is to reduce administrative costs by cutting down executi ve positions and increase efficiency and 
cooperation between the police commissioners.  
Iceland has not ratified the Council of Europe Convention against trafficking in human 
beings. Legislation to align w ith the convention by adding two ne w types of residence permits 
for victims of trafficking was passed in September.  
Overall, Iceland is advanced in  the fight against money laundering (see also Chapter 4 — 
Free movement of capital). No developments can be report ed in improving the statistics 
relating to the number of investigations ini tiated each year on the basis of Suspicious 
Transaction Reports, the number of freezing/se izing orders, prosecutions, indictments, 
confiscation orders, actual confiscations, as we ll as the value of the assets and properties 
frozen/seized and confiscated. The technical re commendations of the Financial Action Task 
Force (FATF) have not been implemented.  
Overall, Iceland is close to  applying the EU rules on in the fight against terrorism .  
Overall, Iceland is ad vanced in the area of fight against drug  trafficking. Iceland does not yet 
participate in the work of the European M onitoring Centre for Dr ugs and Drug Addiction 
(EMCDDA). No developments can be reported in the areas of the fight against drugs  or 
customs cooperation . Iceland is well advanced as  regards customs cooperation.  
Overall, Iceland's legislation in the area of counterfeiting of the euro  is broadly in line with 
the acquis . However, Iceland is not  party to the 1929 Intern ational Convention on the 
Suppression of Counterfeiting.  
Conclusion 
Overall, Iceland applies the Schengen Agreement and continues to be highly aligned with the  
acquis  in the field of justice, freedom and secur ity. Further efforts are needed to ratify and 
implement relevant international instruments.  
4.25. Chapter 25: Science and research 
Research policy  is already well de veloped in Iceland. 
Iceland continued to par ticipate in the EU’s 7th
 Framework Programme for research and 
technological development and was particularly involved in the research themes dealing with 
health, the environment, socio-economic scie nces and humanities. The participation of 
Icelandic research entities in  the framework programmes is generally strong, indicating well-
established cooperation with  European partners.  
EN 35   EN Iceland remained involved in the European Research Area through its observer status in the 
European Research Area Advisory Committ ee (formerly the EU’s Scientific and 
Technological Advisory Committee) a nd other related advisory bodies.  
No additional development can be reported regarding research funding , where public 
spending in research and development remained, over th e reporting period, higher than the 
EU average, with 2.7% of GDP in 2010.  
Conclusion 
Overall, Iceland continues to actively particip ate in the Framework Programme and is already 
involved in European Research Area activities. Iceland is thus well advanced in terms of 
integration into the European Research Area.  
4.26. Chapter 26: Education and Culture 
Overall, there has been furt her progress in the area of education, training and youth.   
Regarding cooperation in the field of policies,  Iceland continued to par ticipate very actively in 
the open method of coordination in the field of  education as a member of the European 
Economic Area. The country consolidated its performance in relation to the EU-level 
benchmarks of the strategic framework for Euro pean cooperation in educ ation and training. It 
has reached the EU targ et for 2020 for tertiary education a ttainment and participation in pre-
school education, as well as for adult participation in lifelong learning. The rate of early 
school leavers decreased in the last year, although it is sti ll above the EU average. Upper 
secondary completion rate remains below the EU average. 
Progress can be noted as regards the access to education for EU citizens , where there were 
further developments regarding the transposition of the acquis .  
Regarding community programmes , Iceland continued to particip ate in the Lifelong Learning, 
Youth in Action and Erasmus Mundus programmes. 
In the area of culture , Iceland continued to participate in the Culture Pr ogramme 2007-2013 
and reiterated its interest in taking part in the open method of coordination once invited to do 
so.  
Conclusion 
In the field of education and culture, alignment with the acquis  is already advanced and there 
has been some progress.  
4.27. Chapter 27: Environment 
Iceland’s environmental policy is to a large extent in line with the EU acquis  through the EEA 
Agreement.  
Horizontal legislation  continued to be largely in line with the EU acquis . However, no 
developments can be reported in adopting the pending law on environmental liability and in ratifying the Espoo Convention on environmen tal impact assessment in a transboundary 
context and the Aarhus Conven tion on access to information, public  participation in decision-
making and access to justice in environmental matters. No legislation was adopted over the 
EN 36   EN reporting period to ensure access to justice in environmental matters. An updated strategy on 
sustainable development, inter alia  aiming at integrating envir onment into other policy areas 
was agreed by the Government in July.  
Air quality  legislation is to a large extent in line with the acquis . A new strategy for air 
quality  as well as a regulation setting a maximum level for hydrogen sulphide in the 
atmosphere and the rules for measuring and monitoring it and informing the public were 
adopted.  A law transposing the National Emissions Ce ilings Directive remains to be adopted.  
The waste management  acquis  is to a large extent transpose d. The transposition of some of 
the provisions of the Waste Framework Directiv e and of amendments to the Batteries and 
Mining Waste Directives needs to continue.  
Some progress can be reported as regards  water quality . A law aimed at aligning and 
implementing the Water Framework Directive, including river basin management plans, 
remains to be adopted. Iceland continued to  work on transposing the Marine Strategy 
Framework Directive and the Floods  Directive. The gaps related to bathing water quality have 
been identified by the Icelandic Environment Ag ency while measures remain to be taken.  
Nature protection is not covered by the EEA and poses a challenge: a task group was set up 
to identify gaps in the national nature legisl ation as compared to the Birds and Habitats 
Directives. A regulation on ba llast waters was adopted. Work is ongoing to develop 
management plans for the National Parks. No de velopments can be repor ted in aligning with 
the acquis  on protection of whales nor on the tr ade ban on seal products into the EU.  
As industrial pollution cont rol and risk management  is to a large extent in line with the 
acquis , no development can be reported in the area.  
As regards chemicals , no developments can be reported in  the area of laboratory animals and 
implementation of the Regulation on Classifi cation, Labelling and Packaging is still 
outstanding. The Rotterdam Convention on the pr ior informed consent procedure for certain 
hazardous chemicals and pesticides in intern ational trade remains to be ratified.  
Concerning  climate change , Iceland is covered by the EU Emissions Trading Scheme (ETS) 
through the EEA Agreement. Implementing legisl ation in this area needs to be adopted and 
further steps taken to enhance implementation. I celand associated itself  with the Copenhagen 
Accord. Iceland keeps on fulfilling its reporting obligations under the UNFCCC and the 
Kyoto Protocol. The Environment Agency is  analysing necessary steps to meet the acquis  on 
substances that deplete the ozone layer. 
As the legislation on noise  is in line with the acquis  and is being implemented, no new 
developments can be reported in this area. 
Conclusion 
Overall, Iceland has reached a high level of al ignment and applies a substantial part of the 
acquis in this chapter due to its EEA membersh ip and further progress can be reported. 
However, compliance with the nature protection acquis , in particular as regards protection of 
whales, seals and wild birds as well as conserva tion of natural habitats and of wild fauna and 
flora, remains to be achieved. The ratification of key multilateral environmental agreements 
such as the Espoo and Aarhus  Conventions is pending.  
EN 37   EN 4.28. Chapter 28: Consumer and health protection 
Iceland has already implemente d a significant part of the acquis  on consumer and health 
protection. 
No developments can be reported in the field of consumer protection .  
As far as product safety-related issues are concerned, no market surveillance activities were 
carried out vis-à-vis products not falling under sector-specific EU legislation, with the 
exception of decorative articles. With respect  to products falling under sector-specific 
legislation, such as toys, electr ical appliances and constructi on products, market surveillance 
consisted only in documentary checks without  any assessment of whet her such products may 
pose a risk to the health and safety of c onsumers. No progress can be reported on the 
processing of RAPEX notifications. 
There has been no development in the area of non-safety related issues . The transposition of 
the new acquis on credit agreements for consumers as well as on timeshares and injunctions 
remains outstanding.  
Good progress can be reported in the field of public health . Progress has been good in the 
areas of blood as well as  tissues and cells.  Alignment with the acquis  is completed since 
Directive 2009/1353 has been incorporated  into national law.  
There has been good progr ess in the areas of communicable diseases and cancer.  
Vaccinations against pneumococcal infections were  approved in June 2010 and will start as of 
2011. Vaccinations of all 12 year old girls agai nst HPV infection and cervical cancer were 
approved. A decision on when to start these vaccinations has yet to be taken. However, 
colorectal cancer  screening has not started. 
Pictorial health warnings on tobacco  products still need  to be introduced. 
No legislative developments can be reported in the field of mental health . The issue is one of 
the priorities of the National H ealth Plan, and the measures ta ken by the Icelandic authorities 
are similar to those in the EU Member States. 
Conclusion 
Overall, Iceland has already impl emented a significant part of the acquis  in the field of 
consumers and health protection, partly due to its EEA membership and little progress can be 
reported. However, the processing of RAPEX notifications requires further streamlining. 
Some further efforts are also needed  in the field of public health.  
4.29. Chapter 29: Customs Union 
Overall, the customs legislat ion of Iceland is to a large extent in line with the acquis . Iceland 
set up a working group to analyse the overall impact of aligning with the acquis  in this area in 
January 2010.  
There has been little progr ess in the area of the cu stoms union. With regard to customs 
legislation , no developments can be reported. The acquis  related to the Combined 
                                                 
3 Allowing temporary derogations to certain eligibility criteria for whole blood and blood components donors.  
EN 38   EN Nomenclature, valuation, origi n, cash controls, control of drug precursors, duty-free and 
measures to protect intellectual property rights is partially transposed. Iceland applies certain 
customs fees that are not in line with the acquis .  
There has been no development on administrative and operational capacity . The 
Directorate of Customs is measuring its opera tional capacity and best practices against the 
Customs Blueprints. Further effort s to ensure that the Iceland Customs Administration is able 
to effectively implement the EU acquis  upon accession are needed. In particular, major 
preparations for interconnectivity and interope rability with the EU’s computerised systems 
remain to be completed. 
Conclusion  
The customs legislation is largely in line with the acquis . However, further significant efforts 
are needed to meet EU rules on duty-free legislation and EU related practices.  
Iceland has a good level of administrative capac ity in the field of customs. Nevertheless, 
further efforts to effectively implement the EU acquis  upon accession remain to be 
undertaken, including developing interconne ctivity with the EU ’s IT systems. 
4.30. Chapter 30: External relations 
With regard to the common commercial policy , Iceland is in the pr ocess of assessing the 
adaptations required in or der to align with the acquis .  
Iceland started work on a databa se providing an overview of all international agreements in 
the area of external relations that are relevant for EU relati ons. The database will indicate 
which agreements would have to be term inated and which ones would have to be 
renegotiated. This overview is meant to beco me the basis for developing an action plan 
needed in accession negotiations.  
The Ministry for Foreign Affairs started to coll ect information in order to further align its 
horizontal limitations and secto r-specific commitments under the General Agreement on 
Trade in Services  (GATS) with those undertaken by the EU.  
In June 2010 Iceland intr oduced export controls on dual-use goods  on the basis of  the Act on 
the control of services and items that may ha ve strategic significance,  which is intended to 
implement the Regulation setting up the EU regi me for the control of dual use goods. Iceland 
is not a member of the Kimberly process. An am endment to the Act on the control of services 
and items is in line with  Regulation 2368/2002 covering  the Kimberley process obligations.  
In the area of  development policy , Iceland’s Official Deve lopment Assistance (ODA) 
amounted to approximately € 26.1 million, i.e.  0.32% of GNI, in 2009. For 2010, the estimate 
is approximately € 21.5 million, i.e. 0.28% of GNI.  
With regard to humanitarian aid approximately € 900,000 was allo cated to humanitarian and 
emergency assistance, approximately € 650,000 be ing channelled through NGOs and the rest 
through UN agencies. Revised guidelines from 2009 on cooperation with NGOs that provide 
humanitarian and emergency assistance were i ssued in September. These guidelines include 
expanded provisions on non-discri mination and thus take account  of the non-discrimination 
clause enshrined in the Hu manitarian Aid Regulation.  
EN 39   EN Conclusion 
Some progress can be reported in the field of external relations. Iceland has started 
preparations for assessing its obl igations in terms of the n eed to amend or renounce its 
international agreements; it has also begun prep arations related to the common commercial 
policy. Progress has also been made  in the dual-use area. Measures need to be taken to assure 
that Iceland’s Official Development A ssistance does not decline further.  
4.31. Chapter 31: Foreign, Security and Defence Policy 
The regular political dialogue  between the EU and Iceland has continued to cover foreign 
policy issues.  
As regards the common foreign and security policy (CFSP) , Iceland has aligned itself, 
when invited, with 68 out of 74 relevant EU  declarations and C ouncil decisions (92 % 
alignment). 
all the relevant EU Council deci sions and EU declarations, when  requested, except in cases 
relating to Eritrea, two restrict ive measures imposed against Liberia and specific measures to 
combat terrorism and restrictive measures against the Democratic  People’s Republic of 
Korea. Furthermore, Iceland issued its own st atement regarding the Israeli military operation 
against the flotilla.  
The Director-General for International and Secur ity Affairs in the Ministry of Foreign Affairs 
acts as Political Director. The post of ‘E uropean Correspondent’ is under preparation.  
With regard to sanctions and  restrictive measures , Iceland has implemented all United 
Nations Security Council Resolutions. There ha s, however, been no pr ogress in implementing 
the Common Position on the application of 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 actions based thereon or  resulting therefrom. 
No particular developments can be reported with regard to conflict prevention or non-
proliferation  and the strategy on weapons of mass de struction/small arms and light weapons  
(WMD/SALW) as Iceland is al ready involved in these areas. 
Iceland has kept up its good cooperation with inte rnational organisations , such as the UN, 
NATO, the OECD, the OSCE and the Council of Eu rope. It actively participated and played 
an important role in the Arctic Council, the Conference of Parliamentarians of the Arctic 
Region (CPAR), the Barents Euro-Arctic C ouncil (BEAC), the Northern Dimension, the 
Nordic Council of Ministers and the West Nordic Council. 
There have been no particular developments with regard to security measures (classified 
information). 
As regards Common security and defence policy  (CSDP) contributing capacities, no 
particular developments can be reported in the field of civil crisis management . Iceland 
continued to support EU civilian missions, such  as in Kosovo (Eulex Kosovo), and the Eupol 
Mission in Afghanistan.  
Conclusion 
EN 40   EN Overall, Iceland has reached a good level of a lignment in the area of foreign, security and 
defence policy. Iceland has aligned with most  EU declarations and Council decisions and 
continues to participate in CSDP  operations. It continued to pl ay an active part in regional 
organisations in northern Europe. 
4.32. Chapter 32: Financial Control 
Some progress can be reported in the in itialisation of reforming the field of public internal 
financial control . A working group was set up in January  2010 in the Ministry of Finance; 
the group is currently ev aluating the requirements for alignment with the acquis.  However, no 
steps were taken over the reporting period with a view to better separating public internal and 
external financial control in accordan ce with international standards.  
No measures have yet been identified to guarantee the constitutional independence of the 
Icelandic National Audit Office (INAO) or to  reform the systems of internal and external 
audit .  
Iceland's legislation is not in line with the Convention on the Protection of the EU's 
Financial Interests . Institutional capacity for effective and efficient cooperation with OLAF 
needs to be further strengthened. In the field of protection of the Euro  against counterfeiting 
Iceland needs to further develop institutional capacity by establishing a National Central 
Office for centralisation, technical analysis a nd processing of information on counterfeit bank 
notes and coins, both Euro  and other currencies. 
Conclusion 
Overall, some progress can be reported in the initialisation of reforming the field of public 
internal financial control. A gap assessment need s to be carried out in the areas of financial 
management and control systems, internal a udit and external audit to take into account 
internationally accepted standards.  Preparations regarding the protection of the EU´s financial 
interests remain to be enhanced. 
4.33. Chapter 33: Financial and budgetary provisions 
The basic principles and institutions fo r the related policy areas affecting the traditional  own 
resources  are in place and continued to function well. No partic ular developments can be 
reported regarding the func tioning of the national VAT  system. National accounts and GNI  
continued to be compiled based on ESA95 standards. 
Regarding administrative infrastructure  and the operational management of the own 
resources system, a working group has been set up in January to analyse the overall impact of 
aligning with the acquis . 
Conclusion 
Overall, there are no significan t divergences between the underl ying systems in Iceland and 
the EU as far as the own resources are concer ned. There has been some  progress under this 
chapter as Iceland has started to identify the required alignment with the acquis  on financial 
and budgetary provisions.  Appropriate coordi nation structures and administrative 
strengthening will be needed for implem entation of the rules on own resources.  
 
EN 41   EN Statistical annex  
STATISTICAL DATA (as of 14 October 2010)    
Iceland    
                       
                       
Basic data Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Population (thousand)  279 283 287 288 291 294 300 308 315 319 
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 
                      
National accounts Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Gross domestic product (GDP) (million national currency)  683 747 771 894 816 450 841 322 928 889 1 026 718 1 168 577 1 308 518 1 477 938 1 500 765 
GDP (million euro)  9 421 8 830 9 474 9 709 10 660 13 124 13 316 14 932 10 276 8 692 
GDP (euro per capita)  33 500 31 000 32 900 33 600 36 400 44 400 43 800 48 000 32 176 27 226 
GDP (in Purchasing Power St andards (PPS) per capita)  25100 26100 26600 26000 28400 29300b 29200 30400 30300 28300 
GDP per capita in PPS (EU-27 = 100)  131.4 131.8 129.8 125.6 130.9 130.2b 123.2 122.1 120.7 119.9 
Real GDP growth rate (growth rate of GDP volume, national currency, % change on 
previous year)  4.3 3.9 0.1 2.4 7.7 7.5 4.6 6.0 1.0 -6.8 
Employment growth (national acc ounts, % change on previous year)  2.0 1.7 -1.4 0.1 -0.4 3.3 5.1f 4.5f 0.8f  -2.0f 
Labour productivity growth: GDP growth pe r person employed (% change on previous 
year)  : : : : : : : : : : 
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)   102.8 103.7 104.3 101.2 107.6 105.4b 98.7f 96.8f 98.0f 99.9f 
Gross value added by main sectors (%)                      
Agriculture and fisheries 1) 9.0 9.2 9.3 7.9 6.8 6.2 6.3 5.6 6.4 7.7 
Industry  17.3 19.2 16.8 15.8 15.2 13.7 15.3 14.4 17.5 18.1 
Construction  8.6 7.8 7.5 7.5 8.8 10.4 11.1 11.6 9.5 5.3 
Services  65.2 63.8 66.4 68.9 69.2 69.7 67.3 68.4 66.6 68.9 
Final consumption expenditure , as a share of GDP (%)  84.0 79.8 80.2 83.3 82.2 84.0 82.6 81.7 78.3 77.5 
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 24.4 13.9 
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 -0.1 
Exports of goods and services, relative to GDP (%)  33.6 38.8 37.4 34.3 34.1 31.7 32.2 34.6 44.5 53.0 
Imports of goods and services, relative to GDP (%)  40.9 39.9 35.9 37.4 39.7 44.0 50.0 45.3 47.4 44.2 
                      
Industry Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Industrial production volume index (2000=100)  100.0 104.3 103.7 104.5 109.9 107.2 113.0 119.1 132.0 125.3 
                      
Inflation rate Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Annual average inflation rate (H ICP, % change on previous year)  4.4 6.6 5.3 1.4 2.3 1.4 4.6 3.6 12.8 16.3 
 
EN 42   EN                       
Balance of payments Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Balance of payments: current account total (million euro)  -957 -382 145 -463 -1047 -2119 -3173 -2424 -2274 -232 
Balance of payments current account: trade balance (million euro)  -516 -68 163 -183 -419 -1 190 -1 784 -1 004 -46 628 
Balance of payments current acco unt: net services (million euro)  -160 -18 -8 -106 -168 -412 -547 -502 -194 330 
Balance of payments current account: net income (million euro)  -269 -285 -23 -160 -446 -495 -815 -874 -2 010 -1 128 
Balance of payments current account: net current transfers (million euro)  -10 -11 14 -13 -14 -22 -28 -44 -24 -62 
of which government transfers (million euro)  -11 -13 -10 -8 -15 -20 -23 -41 -27 -38 
Net foreign direct investment (FDI) (million euro)  -241 -192 -254 -42 -1 486 -3 228 -1 352 -2 457 3 135 -1 838 
Foreign direct investment (FDI) abroad (million euro) 2) -427 -386 -347 -336 -2 079 -5 708 -4 425 -7 445 2 574 -1 902 
of which FDI of the reporting eco nomy in EU-27 countries (million euro)  : : : : : : : : : : 
Foreign direct investment (FDI) in  the reporting economy (million euro) 2) 185 194 93 294 593 2 480 3 073 4 988 561 64 
of which FDI of EU-27 countries in the reporting economy (million euro)  : : : : : : : : : : 
                      
Public finance Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
General government deficit/sur plus, relative to GDP (%)  1.7 -0.7 -2.6 -2.8 0.0 4.9 6.3 5.4 -13.5 -9.9 
General government debt relative to GDP (%)  36.0 40.5 44.5 39.9 36.0 26.0 30.3 28.5 70.5 87.8 
                      
Financial indicators Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Gross foreign debt of the whole economy, relative to GDP (%) 3) 107 123 111 140 179 286 444 568 971 1005 
Gross foreign debt of the whole economy, relative to total exports (%) 3) 319 318 296 407 525 901 1380 1641 2181 1922 
Money supply: M1 (banknotes, coins, overnight deposits, million euro)  1 000 811 1 018 1 242 1 606 2 209 2 411 4 688 3 855 2 974 
Money supply: M2 (M1 plus deposits with maturity up to two years, million euro)  1 814 1 672 1 854 2 183 2 778 3 886 4 137 7 399 8 075 5 863 
Money supply: M3 (M2 plus marketable instruments, million euro)  4 113 3 922 4 586 5 358 6 126 8 405 8 958 14 040 12 117 9 302 
Total credit by monetary financial instituti ons to residents (consolidated) (million euro)  8 278 7 737 8 061 9 484 13 108 21 996 27 752 36 359 15 403 9 721 
Interest rates: day-to-day money rate, per annum (%)  13.5 13.1 6.5 5.1 7.6 9.3 16.2 14.0 18.3 9.0 
Lending interest rate (one year), per annum (%)  12.4 12.0 8.2 7.7 10.3 12.0 15.3 15.3 22.0 11.5 
Deposit interest rate (one year), per annum (%)  6.9 6.7 3.3 2.8 6.3 9.0 12.8 13.3 15.0 8.5 
euro exchange rates: average of period - 1 euro = … national currency 4) 72.580 87.420 86.180 86.650 87.140 78.230 87.760 87.630 143.830 172.670 
Effective exchange rate index (2000=100)  115.4 135.0 120.6 121.4 111.9 102.7 128.0 120.2 216.4 232.8 
Value of reserve assets (including gold) (million euro)  434 400 439 647 785 901 1 774 1 785 2 533 2 696 
                      
External trade Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Value of imports: all goods, all partners (million euro)  2573 2317 2207 2291 2742 3682 4558 4520 3292 2378 
Value of exports: all goods, all partners (million euro)  2057 2249 2371 2107 2322 2492 2774 3492 3246 2901 
Trade balance: all goods, all partners (million euro)  -516 -68 163 -184 -419 -1190 -1784 -1028 -46 523 
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 
Share of exports to EU-27 countries in value of total exports (%)  68.7 70.0 72.6 73.7 75.2 74.7 71.0 74.7 75.9 77.7 
Share of imports from EU-27 countries in value of total imports (%)  60.7 59.0 58.2 63.0 59.8 61.4 56.9 59.1 53.5 51.8 
 
EN 43   EN                       
Demography Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Natural growth rate: natural change (bir ths 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 
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 
Life expectancy at birth: male (years)  77.9 78.3 78.5 79.5 78.9 80.2 79.4 79.6 80.0 79.7 
Life expectancy at birth: female (years)  81.5 82.9 82.3 82.3 82.8 83.3 83.0 83.4 83.3 83.3 
                      
Labour market Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Economic activity rate (15-64): share of popul ation 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 
Employment rate (15-64): share of populat ion aged 15-64 that is in employment (%)  86.6 86.5 84.7 83.3 82.3 83.8 84.6 85.1 83.6 78.3 
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 
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 
Employment rate of older workers (55-64): s hare of population aged 55-64 that is in employment 
(%)  84.2 85.6 87.2 83.0 81.8 84.3 84.3 84.7 82.9 80.2 
Employment by main sectors (%)                      
Agriculture  8.0 7.2 7.3 7.0 6.4 6.8 6.5 6.2 5.0 5.4 
Industry  16.0 15.7 14.7 14.6 14.7 14.2 12.4 11.8 12.3 12.5 
Construction  6.7 7.2 8.0 7.0 7.7 7.4 8.9 9.0 10.1 7.1 
Services  69.3 69.9 70.0 71.3 71.2 71.6 72.2 73.0 72.6 75.0 
Unemployment rate: share of labour force that is unemployed (%)  2.3 2.3 3.3 3.3 3.1 2.6 2.9 2.3 3.0 7.2 
Share of male labour force that is unemployed (%)  1.8 2.0 3.6 3.6 3.2 2.6 2.7 2.3 3.3 8.6 
Share of female labour force that is unemployed (%)  2.9 2.5 2.9 3.1 2.9 2.6 3.1 2.3 2.6 5.7 
Unemployment rate of persons < 25 years: share of labour force aged <25 that is unemployed (%)  4.7 4.8 7.2 8.2 8.1 7.2 8.2 7.2 8.2 16.0 
Long-term unemployment rate: share of labour force that is unemployed for 12 months and more 
(%)  0.2 0.3 0.3 0.2 0.3 0.3 0.2 0.2 0.1 0.4 
                      
Social cohesion Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Average nominal monthly wages and salaries (national currency)  225 000 249 000 266 000 284 000 301 000 336 000 377 000 414 000 446 000 433 000 
Index of real wages and salaries (index of nom inal wages and salaries divided by the CPI) 
(2000=100)  100.0 103.7 105.7 110.6 113.5 121.8 128.0 133.8 128.3 111.2 
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 23.2 
                      
Standard of living Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Number of passenger cars per 1000 population  569.8 564.7 566.5 580.2 603.6 631.4 647.5 668.4 662.1 646.5 
Number of subscriptions to cellular m obile telephone services per 1000 population  758.4 865.9 903.7 962.5 992.5 1013.7 1049.3 1045.5 1055.0 1069.5 
                      
Infrastructure Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Density of railway network (lines in operation, per 1000 km²)  : : : : : : : : : : 
Length of motorways (thousand km)  0.011 0.011 0.011 0.011 0.019: 0.019: 0.019: 0.019: 0.041 0.041 
 
EN 44   EN                       
Innovation and research Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Spending on human resources (public ex penditure on education in % of GDP)  6.7 7.0 7.6 7.6 7.5 7.6 7.6 7.4 7.6 7.8 
Gross domestic expenditure on R&D in % of GDP  2.7 3.0 3.0 2.8 : 2.8 3.0 2.7 2.7 : 
Percentage of households who have Internet access at home (%)  : : 78 78 81 84 83 84 88 90 
                      
Environment Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
Greenhouse gas emissions, CO 2 equivalent (tons, 1990=100)  110.8 109.9 110.6 109.6 111.1 109.7 125.4 132.6 143.5 : 
Energy intensity of the economy (kg of oil equivalent per 1000 euro GDP)  343.4 342.6 345.5 336.5 322.8 311.3 358.5 335.9 522.9 655.3 
Electricity generated from renewable sources in % of gross electricity consumption  99.9 100.0 99.9 99.9 99.9 99.9 100.0 100.0 100.0 100.0 
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 
                      
Energy Note 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 
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 
Agricultural production volume index of goods and  services (producer pric es, previous year=100)  : : : : : : : : : : 
Total utilised agricultural area (thousand hectare) e 120 120 120 120 120 120 120 120 120 120 
Livestock: cattle (thousand heads, end of period)  73 70 67 66 65 66 69 71 72 73 
Livestock: pigs (thousand heads, end of period)  4 5 4 4 4 4 4 4 4 4 
Livestock: sheep and goats (thousand heads, end of period)  466 474 470 463 456 455 456 455 459 469 
Production and utilisation of milk on the farm (total whole milk, thousand tonnes)  104 106 111 108 112 109 118 126 126 126 
Crop production: cereals (including rice ) (thousand tonnes, harvested production)  3 4 5 7 10 10 11 11 15 16 
Crop production: sugar beet (thou sand tonnes, harvested production)  : : : : : : : : : : 
Crop production: vegetables (thou sand tonnes, harvested production)  14 16 14 12 12 12 20 19 19 20 
 
: = not available 
b = break in series 
e = estimate f = forecast 
1) Fishing (predominantly marine fishing) represents between 80% (in 1999) and 77% (in 2008) of this share. 
2) The balance of payments sign conventions  are used. For FDI abroad a minus sign means investment abroad by the reporting econ omy exceeded its disinvestment in the period, while an entry without 
sign means disinvestment exceeded investmen t. For FDI in the reporting economy an entry without sign means that investment into  the reporting economy exceeded disi nvestment, while a minus sign 
indicates that disinvestment exceeded investment. 
3) This includes nominal foreign debt of the Icelandic banks currently in bankruptcy procedures 
4) Average annual exchange rate as published by the European Central B ank for years 2000-2008. This rate is very close to the r ate published by the Central Bank of Iceland for all years except 2008. For 
2008, as a result of the financial crisis which lead to high ex change rate volatility and very narrow markets for the Icelandic  Krona, the average annual rate published by the Central Bank of Iceland (127.46 
ISK for 1 EUR) differs by more than 10% from the ECB rate. For 2009, no ECB rate is available so that the rate published by the  Central Bank of Iceland is used.