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# 52012SC0337

**COMMISSION STAFF WORKING DOCUMENT ICELAND 2012 PROGRESS REPORT accompanying the document COMMUNICATION FROM THE COMMISSION TO THE EUROPEAN PARLIAMENT AND THE COUNCIL Enlargement Strategy and Main Challenges 2012-2013 /\* SWD/2012/0337 final \*/**

  

TABLE OF CONTENTS

1........... Introduction. 4

1.1........ Preface. 4

1.2........ Context 4

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

2........... Political criteria. 6

2.1........ Democracy and the rule of
law.. 6

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

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

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

3.2........ The capacity to cope with
competitive pressure and market forces within the Union. 14

4........... Ability to take on the
obligations of membership. 16

4.1........ Chapter 1: Free movement
of goods. 16

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.. 19

4.7........ Chapter 7: Intellectual
property law.. 20

4.8........ Chapter 8: Competition
policy. 20

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,
veterinary and phytosanitary policy. 23

4.13...... Chapter 13: Fisheries. 24

4.14...... Chapter 14: Transport
policy. 25

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. 28

4.19...... Chapter 19: Social policy
and employment 29

4.20...... Chapter 20: Enterprise and
industrial policy. 31

4.21...... Chapter 21: Trans-European
networks. 31

4.22...... Chapter 22: Regional policy
and coordination of structural instruments. 32

4.23...... Chapter 23: Judiciary and
fundamental rights. 33

4.24...... Chapter 24: Justice,
freedom and security. 35

4.25...... Chapter 25: Science and
research. 36

4.26...... Chapter 26: Education and
culture. 36

4.27...... Chapter 27: Environment and
climate change. 37

4.28...... Chapter 28: Consumer and
health protection. 39

4.29...... Chapter 29: Customs union. 39

4.30...... Chapter 30: External
relations. 40

4.31...... Chapter 31: Foreign,
security and defence policy. 41

4.32...... Chapter 32: Financial
control 42

4.33...... Chapter 33: Financial and
budgetary provisions. 42

1.
Introduction
1.1.
Preface

This is the Commission’s
third report to the Council and Parliament on progress made by Iceland since
the opening of accession negotiations.

This report:

– briefly describes the
relations between Iceland and the Union;

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

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

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

The period covered by
this report is from October 2011 to September 2012. Progress is measured on the
basis of decisions taken, legislation adopted and measures implemented. As a
rule, legislation or measures that are under preparation or are awaiting
parliamentary approval have not been taken into account. This approach ensures
equal treatment across all reports and enables an objective assessment.

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

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

1.2.
Context

Further to the
Commission’s Opinion, the June 2010 European Council decided to open accession
negotiations with Iceland. The first negotiation chapters were opened in June
2011. At present, 18 chapters have been opened, of which 10 have been
provisionally closed.

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

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

1.3.
Relations between the EU and Iceland

As a member of the EEA,
Iceland regularly transposes and implements the acquis adopted in this
framework. The EFTA Surveillance Authority (ESA) continues to monitor Iceland’s
performance under the EEA. The ESA has initiated proceedings against Iceland at
the EFTA Court in a number of cases, investigating possible
infringements of EEA provisions and seeking
a change in the relevant rules or practices. Overall, Iceland’s track record in
implementing its EEA obligations remains satisfactory. Some shortfalls are
still to be noted in areas such as financial services, food safety and free
movement of capital. Temporary restrictions on some capital flows adopted in
the aftermath of the 2008 financial crisis remain in place.

In the framework of
pre-accession fiscal surveillance, Iceland participated in the multilateral
economic dialogue between the Commission, EU Member States and Candidate
Countries. The dialogue included an ECOFIN ministerial meeting in Brussels in
May. Furthermore, a bilateral economic dialogue between the Commission and
Iceland was established to exchange views on economic issues and policies, with
a first annual meeting held at senior official level in November 2011. The
discussions are guided by the Copenhagen economic criteria and thus touch on
both macroeconomic and structural issues.

Bilateral meetings
between Icelandic parliamentarians and Members of the European Parliament
continue to take place on a regular basis. The fourth EU-Iceland Joint
Parliamentary Committee met in Reykjavik in April 2012.

The first meeting of
the EU-Iceland Joint Consultative Committee with representatives of the
European Economic and Social Committee (EESC) and Icelandic social partners
took place in July 2012. Preparations
are under way for the establishment of a Joint Committee between the Committee
of the Regions and the Association of Icelandic municipalities.

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

The accession
negotiations have progressed further. During the reporting period, 14
chapters were opened, of which eight were provisionally closed. Negotiations
continued in a number of areas such as competition, energy, social
policy and employment and financial control. In the chapters on company
law, intellectual property law, freedom of movement of workers, consumer
and health protection, judiciary and fundamental rights and foreign
security and defence policy negotiations were provisionally closed.
Overall, more than half of all negotiating chapters (i.e. 18) have now been
opened, of which 10 have been provisionally closed.

The EU accession process continued to
attract attention in the political sphere and more generally in the public
debate. Interparty and intraparty divisions on EU accession remained over the
reporting period. A motion for a resolution for a national referendum on
whether or not to continue the EU accession process was voted down by the
parliament in May 2012. Opinion polls indicated that a majority of Icelanders
continued to support the accession negotiations although a majority also
remained opposed to membership. In January 2012, the EU Information Centre
opened officially in Reykjavik, its primary role being to provide information on
EU policies and institutions. A Consultative Group for Iceland’s EU accession
negotiations was set up by the Minister of Foreign Affairs at the end of 2011,
with the purpose of sharing information on progress in the negotiations with
the public and facilitating discussions on the process in the Icelandic
mainstream discourse. Its 24 members are from different
backgrounds and represent different views on European
affairs.

Financial assistance is provided to Iceland under the Instrument for
Pre-Accession Assistance (IPA). The
strategic priorities for Iceland under IPA were set in a Multiannual Indicative
Planning Document (MIPD) for the period 2011 to 2013 with a budget of € 30
million. They address institutional capacity building for transposing and implementing
the acquis and for preparing for and utilising the EU’s Structural and
other funds. The second National IPA Programme for Iceland was adopted in July
2012 with a budget of € 12 million. The IPA Framework Agreement was
approved by the Icelandic parliament in June 2012.

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

As an EEA member,
Iceland continued to benefit from participation in EU programmes, e.g. the
7th Framework Programme for research and technological development, the
Lifelong Learning programme, the EU Culture programme and the EU Progress
programme.

2.
Political criteria

This section assesses the situation in
Iceland in terms of the political criteria for membership, concentrating on the
progress made by the country in addressing the shortcomings identified last
year.

As a well-established and functioning
democracy, Iceland continues to meet the political criteria as stated in the
Commission’s Opinion of February 2010, and the two previous Progress Reports on
Iceland (November 2010 and October 2011).

2.1.
Democracy and the rule of law

Stable institutions guarantee Iceland’s
well-functioning democracy and sound governance, at both national and local levels. The public administration is
overall effective, transparent and independent. Respect for the rule of law is
ensured in particular by an efficient judicial system and the high quality of
the judiciary and the law enforcement forces. Human rights and the rights of
persons belonging to minorities enjoy a high level of legal protection and
respect in practice.

The advisory constitutional council
completed a comprehensive review of the Constitution and, in August 2011,
presented its proposals to the parliament, which has since been reviewing them.
The amendments proposed are aimed at increasing democratic safeguards,
strengthening checks and balances, improving the functioning of the state
institutions and better defining their respective roles and powers. The
parliament would see its powers broadened while direct democracy through
referenda would also be strengthened. Several proposals also address conflicts
of interest issues and aim to further strengthen the independence of the
judiciary and respect for human rights. The parliament has agreed to put the
constitutional amendments to an advisory referendum, to be held on 20 October
2012. The referendum will contain six questions on a range of proposals.

At the presidential election of June 2012,
the incumbent President of Iceland was re-elected for a fifth term in
office.

The law amending the parliament’s
rules of procedure is being implemented after its entry into force in September
2011. It has strengthened the parliament’s power of political supervision,
creating a standing committee on constitutional matters and government control,
providing for the Prime Minister to present an annual report on follow-up given
to parliamentary resolutions, setting out the obligation of ministers to
provide information to the parliament on important matters and enhancing the
possibilities for the minority to request information.

The government was reshuffled in
December 2011: the Minister of Economic Affairs and the Minister of Fisheries
and Agriculture left the Cabinet. The two ministries were taken over by the Minister of Finance, who
was in turn replaced by the leader of the major coalition partner’s
parliamentary group. The revised law on central government entered into force
in September 2011. It clarifies further inter alia the relationship
between ministries and government agencies, defines the role of civil servants in
providing objective advice to ministers, in particular on the lawfulness of
their decision, and provides a clearer framework for the cabinet and
ministerial committees.

Overall, the state of local democracy is in
line with the European Charter on Local Self-Government. A law was adopted in
January 2012, further clarifying the legal status, responsibilities and
activities of municipalities. A law was adopted in June 2012 with guidelines on
monitoring the local government finances. Ratification of the Additional
Protocol to the Charter of Local Self-Government on the right to participate in
the affairs of a local authority is pending.

Good progress can be reported in further
implementing the recommendations of the Special Investigation Committee (SIC)
and improving the already generally efficient public administration. The
restructuring of ministries was decided by the government and a relevant
resolution was adopted by the parliament in May 2012. The number of ministries was
reduced from 10 to 8 in September 2012. The new ministries are the Ministry of
Finance and Economic Affairs, the Ministry of Industries and Innovation and the
Ministry for the Environment and Natural Resources. The government’s working
methods have been streamlined. The cabinet has overhauled its working methods
to increase efficiency. Rules on transparent recruitment procedures for the
central government were adopted in April 2012, whereas rules for mobility
within the civil service are under preparation.

The working group set up by the Prime
Minister on non-discrimination and transparency in the process of partial or
full privatisation of state enterprises delivered its recommendations in February
2012. Work on following up these recommendations has commenced in the form of
legislative proposals. The Administrative School continued to run training courses
focusing on topics such as human resources and project management.

The Icelandic judicial system continues
to meet high standards. In September 2012, 186 civil and criminal cases were
pending before the Supreme Court. The new cases registered by the district
courts during the first half of 2012 amount to 8,393, an important part of them being bankruptcy and debt cases. The
numbers of district court judges and Supreme Court judges, which temporarily
increased in order to deal with the additional case-load following the
financial crisis, will decline gradually (see also Chapter 23 — Judiciary
and fundamental rights). The budget for the judiciary (excluding the
salaries of replacement judges by the Supreme Court) was approximately € 8.5
million in 2011, representing 0.08% of the country’s GDP. It has increased in
2012 by around 14%.

In April 2012, the Court of Impeachment
found the former Prime Minister at the time of the
financial crisis guilty of one of four charges against him, namely that he had
failed to hold dedicated Cabinet meetings ahead of the 2008 financial crisis.
No sentence was passed.

The Financial Supervisory Authority,
investigating possible offences in financial undertakings, has been strengthened.
According to its November 2011 annual report, the Authority has forwarded 77
cases to the Special Prosecutor’s office for further investigation, whereas it
has dealt with 44 cases without taking any further action. A new Director has
been appointed to the Authority. The previous one was dismissed by the Board of the Authority and criminal charges were
laid against him.

The Office of the Special Prosecutor
continued working efficiently. Currently, 76 cases relating to the 2008 banking
crisis are being dealt with by the Office of the Special Prosecutor, in which 130
individuals have the legal status of accused persons. A total of seven cases
have been referred to the Courts, where 12 individuals have been prosecuted.

As regards conflicts of interest, in the
context of anti-corruption policy, in accordance with the relevant law
of 2010 a code of conduct for central government staff was established in
spring 2012. Codes of conduct for civil servants in general and political
advisors remain to be established.

A bill amending Iceland’s General Penal
Code has been adopted by the government, aimed at achieving full implementation
of all the recommendations in the December 2010 Interim Compliance Report of
the Council of Europe’s Group of States against Corruption (GRECO) on
incrimination of corruption offences. The bill’s objective is also to implement
recommendations of the OECD Working Group on Bribery and to allow ratification
of the additional protocol to the Council of Europe Criminal Law Convention on
Corruption. The bill has yet to be adopted by the parliament.

2.2.
Human rights and the protection of minorities (see also Chapter 23 — Judiciary and
fundamental rights)

As regards human rights and the protection
of minorities, Iceland has continued to guarantee fundamental rights, including
economic and social rights, and the protection of minorities through legal and
normative instruments and their actual implementation. During the reporting period, the European
Court of Human Rights (ECtHR) delivered judgments on two applications finding
that Iceland had violated rights guaranteed by the European Convention on Human
Rights (ECHR). A total of eight new applications have been submitted to the
ECtHR since September 2011, bringing the total of pending applications to 12.

During the reporting period, Iceland
ratified the Aarhus Convention and the Council of Europe Convention on Action
against Trafficking in Human Beings. The Council of Europe Convention on the
Protection of Children against Sexual Exploitation and Sexual Abuse was
ratified in spring 2012. In March 2012, the outcome of the Universal Periodic
Review on Iceland was adopted by the UN Human Rights Council. It confirmed that
overall the status of human rights was good in the country and made a number of
recommendations, also regarding the better treatment of immigrants. The new
media law stipulates a ban on hate speech and incitement to criminal behaviour
by the media on the basis, inter alia, of race, religious belief or nationality.

The UN Convention on the Rights of Persons
with Disabilities, the Council of Europe Convention on preventing and combating
violence against women and domestic violence and the Council of Europe
Framework Convention for the Protection of National Minorities have been signed
and remain to be ratified.

Work to prepare a National Action Plan for
the Respect of Human Rights to be presented to the parliament commenced during
the reporting period and two groups were appointed — a group of representatives
of ministries and a consultative group of representatives of civil society and
academia.

A media regulatory authority has been
established under the new media law. Two new bills adopted by the
government and yet to be adopted by the parliament, address ownership
concentration in the Icelandic media market and the role of the State
Broadcaster (RUV), narrowing its scope in the advertising market.

3.
Economic criteria

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

3.1.
The existence of a functioning market economy

Economic
policy essentials

Broad political consensus on the key
essentials of a market economy and the preservation of a welfare state
continues to be strongly embedded in Iceland’s society. The authorities
proceeded with domestic debt restructuring, financial sector stabilisation and
fiscal consolidation. Following the first post-crisis international bond issue
in mid-2011, the country was able to sell a USD 1 billion bond to foreign
investors in May 2012 at a yield of 6%. Early repayments of IMF and Nordic
loans started in March 2012 and continued in June. Furthermore, Iceland was
restored to investment grade status by major rating agencies. The country
submitted its second Pre-Accession Economic Programme (PEP) in January 2012. It
presents a broadly plausible medium-term macroeconomic scenario and a
relatively ambitious fiscal framework. Both are subject to considerable
downside risks and are not fully underpinned by supporting structural reform
measures. Overall, economic policy has been geared towards further
stabilisation.

Macroeconomic
stability

Following a deep and long recession, the
Icelandic economy eventually turned to growth in 2011. Real GDP increased by 2.6%,
after economic activity had declined by 4% a year before. The recovery was
driven by a 2.7% growth in private consumption, which benefited from temporary
income-boosting measures provided to households, such as early third-pillar
pension withdrawals, temporary increases in subsidies and transfers and debt
relief schemes. Investment activity recorded growth of 12.8%, driven by a close
to 26% increase in business investment. At the same time, the contribution of
net exports to growth remained negative, as strong domestic demand led to an
acceleration of imports. In the first half of 2012, the economy continued to
grow, at 2.4%, somewhat weaker than earlier expected and based on robust
private consumption and investment demand. Net exports continued to be a drag
on growth as import growth outpaced export growth. High frequency and leading indicators
point towards a continued growth in the third quarter, including a pick-up in
the construction sector. While the recent growth pattern has become more
broad-based, remaining balance sheet vulnerabilities in both the corporate and
household sectors as well as the challenging global outlook and the euro area
debt crisis could threaten the recovery process. Average per capita income (in
Purchasing Power Standards) remained at 110% of the EU average in 2011. Overall,
the economy continued to recover at a reasonably robust pace, but uncertainties
persist regarding the sustainability of growth.

External trade developments point to a
narrowing surplus in trade in goods and services, primarily due to stronger
merchandise imports. The surplus fell from around 10.1% of GDP in 2010 to 8.5%
in 2011 and further to 6.6% in the four quarters to June 2012. Thanks to a
significantly lower deficit in the net factor income balance, the current
account deficit declined from 8% of GDP in 2010 to 7% in 2011, however, it
increased again to 8% in the four quarters to June 2012. Reported current
account balances remain highly influenced by accrued interest of banks in
winding-up proceedings which do not reflect any current (or future) outflow of
funds. Corrected for these factors, the ‘underlying’ current account recorded a
much lower deficit of 1.1% of GDP in 2011, down from 2.1% in 2010, according to
the Central Bank estimates. Overall, while external imbalances improved
compared to pre-crisis levels, the surplus in trade with goods and services
narrowed.

Total net capital inflows in 2011 were
larger than needed to finance the current account deficit. As a result, gross
official foreign exchange reserves held at the Central Bank increased to close
to 65% of GDP at year-end. In March and June 2012, Iceland repaid early around
55% of the € 3.5 billion loans received from the IMF and Nordic countries
with a view to reducing short-term debt and costs of holding borrowed reserves.
These transactions contributed to a moderate fall in the stock of gross
reserves which stood at 45% of projected GDP in August 2012. At the same time,
the high stock of external debt continues to represent a key challenge to the
Icelandic economy. Official debt statistics report the stock of gross foreign
debt at around 840% of GDP at end-March 2012. However, corrected for foreign
debt of banks and holding companies in winding-up proceedings, the Central Bank
estimates the external debt stock at around 220% of GDP and Iceland’s net
international investment position at a negative 52% of GDP. This compares
favourably with a pre-crisis external debt of around 570% of GDP. However, Iceland’s
balance of payments situation remained sheltered by capital controls and
external financing could become tighter once capital restrictions start to be
lifted. Overall, recent estimates of Iceland’s net international
investment position suggest a much lower external indebtedness when compared to
the pre-crisis period, but risks and vulnerabilities remain high with respect
to Iceland’s external financial position.

Unemployment remained close to historically
high levels for the country, at 7.1% in 2011, though somewhat lower than the
7.5% recorded a year before. The drop was mainly due to labour market exits
rather than job creation. Employment levels remained unchanged from 2010, but
the share of full-time employment increased. During the first half of 2012, labour
market conditions gradually improved. The unemployment rate was recorded at
7.2%, a significant improvement compared to the rate of 8.2% in the same period
of 2011. The level of total employment rose by about 1% year-on-year. Data on
registered unemployment confirm positive trends in early 2012. The registered
rate fell to 4.4% in July, the lowest rate since December 2008, and the average
unemployment rate in the first seven months was 6.2%, compared to 7.8% a year
before. At the same time, the high and increasing rate of long-term
unemployment (27% of total unemployed in 2011) remains a particular concern.
Also, the youth unemployment rate remained high at 16% in 2011 and 17.1% in the
first quarter of 2012. Despite high unemployment, the annual average gross wage
growth increased by 2 percentage points to 6.8% in 2011, and further
accelerated to close to 10% in the first seven months of 2012. Average real
wage growth increased from 2.8% in 2011 to 4.0% in the first seven months of
2012. Overall, amid some recent stabilisation, the labour market remains
affected by the post-crisis recession with high unemployment rates for the
country, particularly among youth and long-term unemployed.

The Central Bank of Iceland continued to
officially operate under an inflation targeting regime to keep consumer price
inflation under 2.5% with a tolerance band of 1.5% in both directions. After
annual inflation had fallen below the Central Bank’s inflation target in early
2011, a weaker exchange rate, rising oil, house and food prices and higher
wages pushed inflation to 5.3% by end-2011, exceeding the upper band of the
inflation target. Inflation accelerated further in the first four months of
2012, but since then the rate has gradually fallen to 4.1% in August. In
reaction to rising inflation in 2011 and early 2012, monetary policy has been
gradually tightened since August 2011. The key policy rate (7 day
collateralised lending rate) has been increased in five successive steps to
5.75% in June. Since the crisis, exchange rate stabilisation remained an
intermediate objective of monetary policy, supported by a regime of capital
controls. Seasonal effects have remained relatively strong on the Icelandic
króna due to the capital controls and the importance of the fishing and tourism
sectors for currency flows. The Icelandic króna depreciated in the first months
of 2012 in line with the usual seasonal patterns and driven by the decision of
some large domestic firms to pay down foreign-denominated debt. In reaction to
unusually strong foreign exchange outflows, the Central Bank intervened in the
foreign exchange market for the first time since 2009, selling € 12
million in March. Since May, the króna gradually recovered and appreciated
relatively strongly by some 11% by mid-August, mainly due to inflows from
tourism, a strengthening of capital controls, and a lower accumulation of
reserves for debt service payments by market participants. The strong
appreciation let the Central Bank to announce at end-July to double its weekly
purchases of foreign exchange to € 1 million from each market maker. Under
the current policy framework, while exchange rate risks appear limited over the
short term, they could become more prominent in view of the need to gradually
liberalise capital movements. Overall, a recently tighter monetary
policy stance has supported a gradual lowering of inflation and exchange rate
stability has been broadly preserved under the cushion of capital controls.

The authorities continued to implement the first
steps of the capital liberalisation strategy which essentially aims to
transform the large stock of non-resident króna holdings, mostly short-term
deposits and government-guaranteed bonds into long-term domestic investments. These
holdings are estimated at 25% of GDP, but may increase substantially as the old
failed banks are being wound up. In a first phase, under way since May 2011,
the Central Bank organised auctions to purchase króna from non-residents and
auction them to investors willing to buy long-term government bonds or other
domestic assets and hold them for a minimum of five years. It conducted a
number of auctions resulting in a minor decrease of off-shore holdings, which
fell by less than 10% of the initial estimated stock. A second phase started in
November 2011, enabling investors to purchase half of the króna required to
perform their investment through auctions, and to finance the remainder on the
Icelandic financial market (50/50 option). Once the off-shore holdings are
significantly reduced, liberalisation of capital controls on residents is
envisaged. Following an extension of the capital controls until the end of
2013, rules were tightened in early 2012 to eliminate loopholes, remove
exemptions on some bond payments and regulate payments made by the estates of
the old banks. The Ad Hoc Group on the Removal of Iceland’s Capital
Controls set up by the Icelandic government and the European Commission met in
September 2012 to assess the state of play, prospects and challenges associated
with lifting the existing controls. Overall, implementation of Iceland’s
strategy for lifting of capital controls has progressed slowly and with limited
success.

Fiscal consolidation continued in 2011,
with significant cuts in current and capital spending and increase revenues
through higher capital income, net wealth and inheritance taxes and a new bank
levy. These measures helped reduce the general government deficit from 10% of
GDP in 2010 to 5.4% in 2011. The deficit target of 3.4% of GDP was missed,
largely due to the activation of government guarantees. Moreover, some fiscal
slippage occurred as a result of the government’s decision to contribute to the
collective wage agreement by raising current spending. The 2012 budget targets
a reduction of the general government deficit to 1.4% of GDP. It includes new
consolidation measures of around 1.7% of GDP with most of the adjustment on the
revenue side (1.2% of GDP). Expenditure restraint measures are projected at
0.5% of GDP, encompassing cuts in current expenditure and transfers and in investment.
Fiscal performance during the first half of 2012 saw a solid 11% year-on-year
rise in general government revenues, the strongest increase since 2007. This
resulted mainly from higher receipts from income taxes and —to a lesser extent—
taxes on goods and services. Compared to initial plans, some fiscal loosening
continued on the expenditure side, estimated at 0.5-1% of GDP. Total spending
rose by around 6.6%, encompassing all main components of current spending and a
particularly strong increase in wages and debt service costs. Public investment
spending continued to decline, by around 9% year-on-year. The deficit in the
first half fell to 2.5% of GDP (or 1.2% of projected annual GDP), compared to 4.1%
in the first half of the previous year. Overall, amid a successful
process of fiscal consolidation, the adjustment of government finances has
recently slowed.

Fiscal risks remain significant. Implementing
expenditure restraint has become more challenging following years of fiscal
adjustment and new expenditure pressures appear to be mounting. Weaknesses in
Iceland’s budgetary framework still hinder effective control of spending by government
agencies. The authorities have prepared and launched consultations on a draft
organic budget law which aims to improve budget preparation and execution,
broaden the coverage of fiscal reporting, and increase the government’s accountability
to the Parliament. Risks remain linked to contingent liabilities in the form of
government guarantees for public companies. The government’s expressed
commitment to further strengthen the capital base of the State Housing
Financing Fund implies a considerable fiscal effort, estimated at around 1% of
GDP. In view of the high level of public debt, fiscal space remains very
limited. Moreover, capital controls have provided public finances with the
benefit of artificially lower interest rates than could otherwise be expected
in view of the level of indebtedness. Overall, fiscal risks remain high
and expenditure-based fiscal consolidation a particular challenge.

Gross general government debt increased
from 88.1% of GDP in 2009 to 98.7% at end-2011 and debt levels remain high
compared to pre-crisis levels of around 30%. Further progress has been made in
professionalising medium-term public debt management. The average maturity
profile of the public debt portfolio was extended to over 4 years, reducing rollover
risks. The new Medium-Term Debt Management Strategy (2012-2015) published in
March 2012 confirms the authorities’ commitment to reduce central government debt
to below 75% of GDP by 2015 and to below 60% in the long term. Comprehensive
legislation to strengthen local government finances was adopted, stipulating
strict limits on municipal borrowing. Overall, in view of the high level
of public debt, the authorities have taken further welcome measures to reduce
refinancing risks and to strengthen local government finances.

The policy mix with a strong focus on
exchange rate stabilisation, fiscal consolidation, and domestic debt
restructuring has been supportive in re-establishing a higher degree of
macroeconomic stability, but risks and vulnerabilities remain. Annual Inflation
remains still above target and inflation expectations have apparently not come
down. Fiscal risks are elevated and preserving exchange rate stability remains
challenging, all in all requiring a rather tight policy mix. Implementation of
the 2012 budget and medium-term fiscal plans will remain a key test for the
government’s commitment to continued fiscal adjustment. Macroeconomic
stabilisation occurred in a situation of protection through capital account
restrictions. Their gradual removal remains a key policy challenge.

Interplay
of market forces

Prices of goods and services continued to
be mostly determined by supply and demand conditions except in agriculture
where the level of import protection remained high. The private sector accounts
for nearly 80% of GDP. Some sectors remain in government ownership, such as
energy, postal services and broadcasting. The state owns the Housing Financing
Fund and retained majority ownership (81%) of one of the three commercial banks
(Landsbankinn) and minority stakes in the other two banks. It has also kept its
position as a large investor in the savings banks system, although the
importance of the system has declined significantly with the exit from the
market of the two largest savings banks. There are currently no plans to
transfer public ownership in those sectors to private investors. Overall,
market mechanisms are to a large extent driven by free prices. Public ownership
remains significant in some sectors and there are no plans for privatisation.

Market
entry and exit

The business environment remained
characterised by low bureaucratic hurdles and a generally efficient
administration. Starting a business is facilitated by a supportive regulatory
framework. High barriers to entry continue to exist in fishing, agriculture and
energy, which are not covered by the EEA Agreement. The economic recovery has
recently led to the revival of company start-ups. The number of newly
registered private limited companies increased by 8.8% in the 12 months to July
2012, following a 23% drop in the preceding 12 months when potential businesses
were still harshly affected by the strong recession. However, total
registrations remained at around two thirds of pre-crisis levels. Bankruptcy
proceedings are generally straightforward. The crisis put a large part of the
corporate sector under severe financial distress and insolvency levels in 2011
were still twice as high as pre-crisis levels. In the twelve months to July
2012, the number of insolvent companies dropped for the first time after the
crisis, by close to 5%, but was still one third higher compared to pre-crisis
levels, suggesting on-going adjustments and deleveraging. Overall, high
barriers to market entry for non-residents remain in key strategic sectors. Market
exit has been functioning well, supporting economic adjustment.

Legal
system

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

Financial
sector development

The restructuring and recapitalisation of
the core banking sector has been largely completed even though further
operational and financial restructuring is required to allow bank lending to resume.
The number of banks decreased from 22 prior to the crisis to 14, and banks are
solely operating domestically. The three largest commercial banks together with
the Housing Financing Fund represent a market share of 94%. Private sector
deleveraging and bank balance sheet repair continued through 2011 and the first
half of 2012, and the private sector credit to GDP ratio dropped further to an
estimated 88% of GDP, from 90% at the end of 2010, reflecting continuing
adjustment to deal with past excessive imbalances. The government retains
majority ownership of one of the banks, and minority stakes in the other two
banks, with the majority stakes (indirectly) owned by non-residents. The total
capital adequacy ratio of the three banks increased to 23% in the first half of
2012 from 22.1% a year before, well above the minimum requirement of 16%. All
banks remained profitable with returns on equity at 11.5% in the first half of
2012, down from 16% a year before, but banks carry relatively high
cost-to-income and cost-to-asset ratios. Also, the Supreme Court’s February
2012 judgement on the settlement of illegal exchange rate-linked loans could
significantly impact on the quality of banks’ balance sheets and reduce future
profits. However, the Financial Supervisory Agency expects a limited impact,
not least due to relatively high capital buffers. Finally, interest rates on
deposits remain distorted by capital controls, providing a competitive
advantage to domestic banks that will disappear once restrictions start to be
lifted.

Banks are faced with significant
vulnerabilities as asset quality is subject to considerable uncertainty and
financial imbalances are likely to persist for some time. Debt restructuring
continued and led to more manageable domestic debt positions. Household debt
fell further to 110% of GDP by March 2012, down from a peak of 130% in 2009.
Corporate debt declined to 194% of GDP, after peaking at 380% at end-2008.
However, private debt levels still remain among the highest for industrial
countries and private households and businesses are still operating under
significant financial constraints. The share of non-performing loans continued
to decrease significantly from 40% at end-2010, but remains high at 23%
(end-2011) and above 20% (mid-2012)[3],
and defaults continue to be widespread. Open foreign exchange positions of
banks decreased following the earlier Supreme Court judgment on the illegality
of foreign currency indexation of some loans and the subsequent transformation
of the relevant loans into domestic currency loans. But legal uncertainty for
some loan classes persists, adversely affecting their value. On the funding
side, banks continued to rely mainly on domestic deposits, since foreign direct
investment and access to foreign credit remained limited, except for the
sovereign. Prescribed liquidity requirements remained over-fulfilled through
2011 by a large margin. Savings remained locked by capital controls,
facilitating banks’ domestic funding. Overall, banking sector and debt
restructuring continue to progress, but significant uncertainties remain with
respect to banks’ asset quality.

Further progress has been made in
strengthening bank regulatory and supervisory practices, including the creation
of a framework for effective coordination between the Central Bank and the
supervisory authority (FME). A Basel Core Principles Assessment of Effective
Bank Supervision was concluded in mid-April 2012. On this basis, the FME has
developed a two-year action plan to address remaining supervisory gaps. New
risk management tools are being introduced. Supervision needs to be further
strengthened to bring it in line with international best practice and to close
supervisory gaps.

The non-banking financial system comprises
the government-owned Housing Financing Fund, pension funds, insurance companies
and mutual, investment and institutional funds. The government injected € 206
million into the Housing Financing Fund in 2011 to raise its capital to just
above 2% of risk-weighted assets, still far below the 5% long-term target.
However, the capital adequacy ratio dropped again in the first half of 2012, to
1.4% as a result of continued losses from operations. The government expressed
its commitment to strenghten the Fund’s capital base to the regulatory target
as soon as clearer evidence exists on the losses resulting from the private
sector debt restructuring process. The authorities also started work on a
comprehensive review of the Fund’s operations and its position in the restored
Icelandic financial system, expected to be finalised by end-2012. Overall,
a number of steps have been taken to restore the non-banking financial sector;
an overhaul of the Housing Financing Fund’s operations remains a challenge in view
of reducing the government’s contingent liabilities.

Domestic equity markets continue to play a
much smaller role in financial intermediation than before the crisis. Turnover
in the equity market in the first four months of 2012 remained broadly unchanged
from the same period a year before while the stock market index increased by
19%. The total market value of all listed shares remains at only around 20% of
GDP (mid-2012) compared with a pre-crisis level of around 120% of GDP. The bond
market, on the other hand, recovered its trading volume and reached pre-crisis
levels. The market continues to be dominated by government and
government-guaranteed bonds. Overall, domestic financial markets have
somewhat recovered on the back of a more lively bond market while equity
markets remain shallow.

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

Existence
of a functioning market economy

The country’s economy continued to recover
from the long and severe post-crisis recession. Private sector debt
restructuring made further progress, generally improving the financial positions
of household and firm, conducive to macro-financial stability. The authorities
expect the debt restructuring process to be completed by end-2012, although a large
number of private sector balance sheets remain vulnerable. Efficient allocation
of resources is still impeded in parts of the economy, due to financial sector
vulnerabilities, extensive capital restrictions, and high barriers to market
entry in some sectors. Overall, improving the functioning of financial
markets and reducing barriers to market entry in some sectors remains a
particular challenge.

Human and
physical capital

The economic crisis severely affected the
labour market. The labour participation rate fell further in 2011, to a
historical low of 80.4% (compared to a pre-crisis level of 83.3%), but remains
nonetheless high in international comparison. The share of employment in
part-time work dropped to 24% (from 27% a year before) and total average
working hours per week rose to 40 (from 39 in 2010). Outward migration may have
prevented the unemployment rate from rising even faster, but net migration
could entail a loss of skills. Net migration however has declined substantially
since 2009. The structure of unemployment remains problematic with youth and
low-skilled workers representing large shares of the unemployed.

The share of youth neither in education nor
in the labour force has risen significantly. Under these circumstances, efforts
to offer retraining and education, active labour market initiatives and
lifelong learning approaches continued, aimed at retraining and upgrading
skills of the labour force. The government also introduced measures to grant
all persons under the age of 25 access to free secondary education. Total
education spending remained at around 7.8% of GDP in 2011, with private
households bearing around 10% of total costs. Overall, with unemployment
still very high for the country, human capital remains significantly underutilised.
Newly introduced measures on education and vocational training are addressing
some of these problems.

Abundant sources of hydro- and geothermal
power attracted substantial foreign investment in the aluminium sector in the
past. Although the financial crisis slowed down investment, several new
projects are under preparation, but continued risk aversion in international
capital markets seems to have delayed planned projects. The share of investment
in GDP reached a historic low at 12.9% in 2010 and increased somewhat to 14.1%
in 2011, but still remained markedly below the long-term pre-crisis average of
22%. At the same time, the fall in real-estate activities and construction
reflects some normalisation following earlier ‘boom’ year excesses. Public
investment also fell, from a 3.7% of GDP long-term average to 2.2% in 2011. Net
FDI inflows declined in 2011 but still remained rather strong at 7.4% of GDP,
raising the total stock of inward FDI to around 95% of GDP, up from 85% a year
before. Regarding future investment potential, Iceland is implementing a
large-scale mapping exercise of energy resources, categorising them in areas
for conservation and for exploitation. The results of this exercise were
presented to the parliament in early 2012. Overall, the country
continues to benefit from good basic infrastructure and abundant natural
resources, suggesting significant potential for investment.

Sector
and enterprise structure

Although new segments in manufacturing and
services have expanded over the past years, in particular in some high-tech
areas such as software, pharmaceuticals and biotechnology, the economy’s
industrial sector continues to be characterised by a limited degree of
diversification. The relatively small industrial sector (excluding construction),
mainly aluminium manufacturing, represents roughly 9% of output and one fifth
of employment. The share of construction in GDP has fallen markedly, from 11%
in the boom year 2007 to approximately 4% of GDP in 2010 and 2011, reflecting
adjustments in an over-leveraged sector and completion of large energy-related
projects. The share of the service sector in total output declined somewhat in
the context of the crisis, mainly due to reduced economic activity in the real
estate, retail trade and financial sectors. However, services still account for
two thirds of the economy and almost three quarters of employment. The
importance of tourism and transport as a source of foreign exchange income has
been steadily increasing, accounting for a quarter of total export earnings in
2011, a result of the 20% increase in foreign tourism income in 2011. The share
of marine products and primary aluminium products increased to 80% of
merchandise exports. The share of services, mainly travel and transport,
remained fairly stable in 2011 at around 35% of total exports. The importance
of small firms in the economy remains high, accounting for 70% of employment
and output. Overall, post-crisis adjustment continued to impact the
sector structure of the economy; in particular tourism and transport have
gained in importance.

State
influence on competitiveness

The level of state subsidies amounted to
1.7% of GDP in 2011, decreasing by 0.1 percentage points compared to 2010. The
relatively small agriculture sector continued to benefit from government
subsidies, import protection, and a system of production quotas. Certain
industries such as energy and fishing remain protected from foreign ownership.
The fishing industry does not receive any State support. The telecommunication
sector is liberalised and privately owned while government interventions remain
limited to infrastructure investments in remote areas. Overall, State
interference remains significant in some areas including the banking sector.

Economic
integration with the EU

Iceland is an open economy with total trade
in goods and services representing around 108% of GDP. The country’s export
structure continues to show a low level of diversification. The import
structure is more diversified, reflecting the country’s dependence on a wide
range of manufactured goods and some commodities. The EU continues to be the
largest trading partner, although its share in Icelandic merchandise exports
dropped somewhat to 75% in the first four months of 2012, compared to 81% a
year before. Just over 40% of imports originate in the EU. FDI inflows originate
almost exclusively originate from EU partner countries. Overall,
integration with the EU in the areas of trade and investment remained high.

Rough estimates point to average labour productivity
remaining unchanged in 2011 as compared to 2010. Thus, unit labour costs rose
in line with total labour costs, increasing on average by around 6% in the
manufacturing sector. In 2011, the exchange rate of the króna depreciated by
3.5% vis-à-vis the euro. It remained rather constant in nominal effective terms
and recorded a slight appreciation in real effective terms, continuing the
trend of the previous year. According to estimates, the real exchange rate
remains around 20% below its long-term average. Overall, Iceland still
benefits from strong price competitiveness vis-à-vis its main trading partners
as a result of the marked depreciation of the króna during the crisis.

4.
Ability to take on the obligations of membership

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

4.1.
Chapter 1: Free movement of goods

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

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

On horizontal measures, Iceland
continued to apply the acquis on standardisation. No progress has been made in the field of conformity
assessment, where Iceland is not yet fully aligned with the acquis
covering the establishment of a common framework for the marketing of products.
No progress has been made on accreditation, as the Icelandic Board for
Technical Accreditation has not yet been peer-evaluated. Progress has been made
on metrology, with Iceland aligning with the Directive on units of
measurement. Some progress has been made in the area of market surveillance,
with Iceland publishing its first National Market Surveillance Programme in
January 2012. Administrative capacity as well as internal and external
coordination of market surveillance need further improvement.

As regards the ‘Old Approach’ product
legislation, Iceland’s alignment with the acquis continues to be
well advanced. No further progress can be reported in the automotive sector,
where Iceland does not apply the acquis for importing vehicles. Alignment with the latest acquis in the areas of REACH and
pharmaceuticals needs to be completed. (See also Chapter 27 — Environment)

Progress has been
made in the area of ‘New and Global Approach’
product legislation and procedural measures.
Regarding legal metrology, Iceland aligned with the
Directive on measuring instruments in respect of the exploitation of maximum
permissible errors. In the field of medical devices, alignment has been
achieved with the Directive on in vitro diagnostic medical devices. The Iceland
Construction Authority was established and took over responsibility for market
surveillance of electrical equipment intended to be permanently fixed to
buildings. Legislative alignment needs to continue in particular on pressure
equipment, low voltage equipment, toys and construction products.

Conclusion

Overall, Iceland continues to be highly
aligned with the acquis in the area of free movement of goods. Progress
was made in the area of metrology and market surveillance. Legislative
alignment of horizontal measures, ‘Old Approach’ product legislation
(automotive sector, REACH and pharmaceuticals) and ‘New and Global Approach’
product legislation needs to be completed. Administrative
capacity, including in the area of market surveillance, needs to be improved.

4.2.
Chapter 2: Freedom of movement for workers

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

As regards access
to the labour market, Iceland continues to apply the acquis. As
of January 2012 the restrictions on the free movement of workers from Romania
and Bulgaria have been lifted.

No further
developments can be reported on the EURES (European Employment Services)
network, in which Iceland is already fully participating.

Good progress can be reported on coordination
of social security systems. Iceland adopted in June 2012 the modernised
coordination rules in this area. Iceland will need to
extend these rules also to legally resident third-country nationals and apply
the respective EU Regulation by accession. Further
staff training is necessary on the new EU coordination rules. Preparations for
electronic data exchange within the Electronic Exchange of Social Security
Information (EESSI) system are advancing via participation in the dedicated
EU-level steering group. Work
on installation of an access point is advancing.

The European Health Insurance Card is
in use in Iceland.

Conclusion

Overall, Iceland continues to be highly in line
with the acquis on freedom of movement for workers. Good progress can be
reported on coordination of social security systems, where the modernised rules
on social security coordination have been adopted.
Iceland will need to extend these rules also to legally resident third-country
nationals and continue preparations for setting up an electronic
data exchange system.

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

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

Progress can be reported on the right of
establishment and freedom to provide cross-border services.
Administrative requirements imposed on cross-border temporary employment
agencies have been aligned with the acquis. Although the Services
Directive is being implemented, some restrictions on the right of establishment
and the freedom to provide services in the fisheries sector continue to be in
place. (See also Chapter 13 — Fisheries)

No progress can be reported in the area of postal
services. The EEA EFTA countries, including
Iceland, have so far opposed a decision on the incorporation of the Third
Postal Directive into the EEA Agreement. A working group has been established
in January 2012 by the Ministry of the Interior to work on the revision of the Icelandic postal legislation.

Good progress can be reported on mutual
recognition of professional qualifications. Iceland has aligned with the outstanding elements of the Directive
on the mutual recognition of professional qualifications. However, the
Icelandic legislation on the recognition of professional qualifications of
health care professionals from other EEA Member States contains requirements in
which are not in line with the Directive.

Conclusion

Overall, there
is a high level of alignment with the acquis on the right of
establishment and freedom to provide services. Iceland is now almost fully
aligned with the acquis in the field of mutual recognition of
professional qualifications. Alignment with the Third Postal Directive is yet
to be achieved and existing
restrictions in the fisheries sector need to be lifted. The administrative
capacity for effective implementation and enforcement of EU rules and policies
needs to be ensured.

4.4.
Chapter 4: Free movement of capital

Iceland applies
parts of the acquis in this field due to its EEA membership. Significant
exceptions remain, notably in connection with Iceland’s extensive capital
controls and restrictions on the free movement of capital between Iceland and
third countries.

No progress can be reported on capital
movements and payments. Legislation allowing the extension of the temporary
capital controls from 2011 until 2013 was enacted. The first phase of the
capital controls liberalisation strategy continued, with incentives for the
medium- and long-term investment of offshore krónur in Iceland, in the form of
currency auctions and the sale of foreign exchange-denominated Treasury bonds.
The Foreign Exchange Act was amended in March 2012 to prevent the circumvention
of capital controls through the bond market and to tighten control on capital
flows related to the winding-up of the failed Icelandic banks. In line with the special rules in the EEA Agreement, the EFTA Court
ruled in December 2011 that the critical situation in Iceland after the
financial crash justified a number of temporary protective measures that were
necessary to safeguard macroeconomic and financial stability.Iceland’s overall policy of capital controls is still not in line
with the requirements of the acquis.

In May 2012, the Icelandic government and the European Commission agreed
to establish an Ad Hoc Group on the Removal of Iceland’s Capital Controls, with
the purpose of assessing the state of play, prospects and challenges associated
with lifting the existing controls. The group held its first meeting in
September 2012 (See also Economic Criteria).

No progress can be reported as regards the
lifting of existing restrictions on foreign investment in fisheries, which are not
in line with the acquis. (See also Chapter 13 — Fisheries) There
has been no progress in lifting the investment restrictions applied to
third-country (non-EEA) nationals in the sectors of energy, real estate and air
transport.

No progress can be reported in the area of payment
systems. Work continues on aligning with the new EU
Directive on e-money.

Some progress can be reported in the fight
against money laundering. In June 2012 the parliament amended the existing
legislation on measures against money laundering and financing of terrorism
with the aim to implement recommendations made by the
Financial Action Task Force. However, several shortcomings are still to be
addressed, including the
under-resourcing of the Financial Intelligence Unit. Full implementation of the
third Anti-Money Laundering (AML) Directive is yet to be completed.

Conclusion

Overall, Iceland applies parts of the acquis
on free movement on capital. Exceptions remain, notably in connection with
investment restrictions including in the fisheries sector and extensive capital
controls. The administrative capacity of the Financial Intelligence Unit still
requires further strengthening.

4.5.
Chapter 5: Public procurement

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

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

There has been some progress on award of
public contracts. Iceland has decided not to establish a formal Public
Procurement Advisory Council as regular consultation meetings with stakeholders
have proven to be sufficient. A website publishing Icelandic authorities’
tender notices is under preparation and is expected to facilitate the
collection of statistics on public procurement. The Directive on defence
procurement remains to be transposed into Icelandic legislation.

The administrative capacity of the
Ministry of Finance has been strengthened by allocating a full-time staff
member to deal with public procurement issues. The State Trading Centre has
also recruited three additional staff and currently employs 25 persons.

Some progress has been made on remedies.
The two technical directives are implemented as of June 2012. Iceland has yet
to align with the Remedies Directive.

Conclusion

Overall, Iceland is
well advanced in the area of public procurement. The level of alignment and implementation in this field remains
satisfactory, with the exception of the Remedies and Defence Procurement
Directives.

4.6.
Chapter 6: Company law

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

Progress has been made in the area of company
law. Legislation on reporting and documentation
requirements in the case of mergers and divisions was adopted in February 2012,
in order to align with the Second, Third and Sixth Company Law Directives and
with the Directive on cross-border mergers of limited liability companies.
Alignment with the Directive on shareholders’ rights is yet to be completed.

There has been no further progress in the
area of corporate accounting.
Alignment with the Directive on certain disclosure
requirements for medium-sized companies and the obligation to draw up
consolidated accounts still has to be achieved.

There has been no further progress in the
area of auditing. Iceland continued to apply the existing acquis
in this area. Alignment with the international aspects of the Directive on
statutory audits of annual and consolidated accounts still has to be completed.

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. Full alignment with company law acquis and with accounting
and auditing standards is yet to be completed.

4.7.
Chapter 7: Intellectual property law

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

No further progress can be reported in the
area of copyright and neighbouring rights. Iceland attended as an
observer the plenary meeting of the Observatory on Counterfeiting Intellectual
Property Rights (IPR) Infringements in September 2012.

Some development can be reported in the
area of industrial property rights. In June 2012 the parliament adopted
legislation on patents to incorporate the Singapore Agreement, a World
Intellectual Property Organization (WIPO) Trademark Law treaty. It also amended
legislation on brands, adding services to the definition of brand, and on fees
and trademark application procedures and adopted legislation on patent fees,
trademarks, designs, and on trademark registration.

There has been little progress in the field
of enforcement. The Icelandic website with information on IPR
infringements has been established and is operational. Iceland is not yet fully
aligned with the Enforcement Directive.

Conclusion

Overall, Iceland has already reached a high
level of alignment with the acquis on intellectual property law and has
the administrative capacity necessary to implement it. Full alignment with the
Enforcement Directive has yet to be achieved.

4.8.
Chapter 8: Competition policy

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

No progress can be reported in the field of
anti-trust and mergers. In the area of State aid control,
progress was made regarding the review by the EFTA Surveillance Authority (ESA)
of the main State aid measures granted by Iceland to its financial sector. In
July 2012 the ESA approved the State aid granted for the restructuring of two
Icelandic banks. These final ESA decisions close the main cases that it has
dealt with following the collapse of the financial system in Iceland in 2008.
In assessing the impact of the aid on competition, the ESA has cooperated
closely with the Icelandic Competition Authority. It is also analysing the
restructuring plan for the Sjóvá Insurance Company, after it was submitted by
Iceland in September 2011. In March 2012, ESA decided to open a formal
investigation regarding the transfer of mortgage loans secured against
collateral in residential property from financial undertakings, to the Icelandic
Housing Financing Fund (HFF). Following this ESA decision, Iceland adopted
legislation in June 2012 on appropriate measures to be adopted by the State,
including revision mechanisms.

Regarding State aid measures to the state
radio broadcaster, proposals have been submitted to the parliament to change
its financing regime in order to bring it into line with State aid guidelines
as required by the ESA.

Conclusion

Overall, Iceland has already reached a high
level of alignment and applies a substantial part of the acquis in the
field of competition. Iceland’s State aid measures taken in response to the
financial crisis have been in line with the relevant acquis.

4.9.
Chapter 9: Financial services

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

There has been
some progress in the areas of banks and financial conglomerates. Amendments were made to the winding-up procedures, ensuring equality
of creditors of financial undertakings undergoing liquidation proceedings by
extending the time limit for cancellation, as well as ensuring the equal
treatment of Icelandic and foreign parties. A National Credit Registry became
operational in the autumn of 2011, allowing the Financial Supervisory Authority
(FME) to collect information regarding exposures above ca € 1.85 million.
The credit registry is only accessible to the FME, but the information is being
shared with the Central Bank of Iceland (CBI) without specific data regarding
particular obligors and financial undertakings.

The FME has
devised a detailed plan to address the shortcomings outlined in an assessment
report carried out in August 2011, regarding non-compliance with the Basel Core
Principles for Effective Banking Supervision, particularly the lack of a Risk
Model to supervise and assess banks.

Legislation on
a new deposit guarantee scheme, based on the new acquis, including
minimum coverage of € 100,000, remains to be adopted. Work on implementing
the new Financial Conglomerates Directive and the Omnibus I Directive has not
yet started.

Alignment with
the Capital Requirements Directive (CRD II) has not yet been fully achieved,
despite some limited progress. Legislative work is advancing on drafting new
rules concerning: good business practices and customs; loans secured by
mortgages on shares or guarantee capital certificates issued by the
undertaking; calculation of the amount of exposure, hybrid capital investment,
and what constitutes secure collateral; the evaluation
of connections between parties within the meaning of rules on large exposures;
the exemption from rules on internal auditing units for
financial undertakings, and qualifying holdings outside the financial sector.

In December 2011 the EFTA Surveillance
Authority (ESA) filed a case against Iceland with the EFTA Court, seeking a
declaration that Iceland had failed to comply with the Directive on deposit
guarantee schemes and with Article 4 of the EEA Agreement regarding
non-discrimination. Iceland rejected these claims and contended that they
should be dismissed. A number of EU and EFTA Member States sent written
observations to the Court. The European Commission has
intervened before the EFTA Court in support of the EFTA Surveillance Authority.
Meanwhile, the first two partial payments to priority
creditors in the commercial winding-up of Landsbanki Íslands hf were made in
December 2011 and May 2012. At this stage, the Icesave dispute remains
unresolved.

Progress has
been made on insurances and occupational pensions with the
implementation of the two Directives on motor insurance. Preparations for
alignment with Solvency II are under way. New rules have been adopted to
address issues of financial independence, assessment of qualifications and
remuneration of board members and chief executive officers.

No developments
can be reported in the areas of financial market infrastructure. The amending Directives on settlement
finality and financial collateral arrangements need to be transposed.

Progress has
been made on securities markets and investment services by aligning with
the Directive on undertakings for collective investment in transferable
securities (UCITS) regarding the clarification of certain definitions. The FME
also published rules implementing the Directives on risk management. Alignment needs to continue in areas such as
markets in financial instruments, prospectuses, market abuse and UCITS.

Some progress
can be reported on administrative capacity. In January
2012 the FME completed an institutional reorganisation from a sector-oriented
approach to on-site, off-site and oversight departments. The fees paid to the
FME by regulated entities have also been amended. The reinforcement of the FME’s
staff numbers needs to be matched by an increase in the quality of technical
expertise, supervisory systems and practices and IT systems so as to ensure
effective and reliable prudential supervision.

Conclusion

Overall,
alignment in the area of financial services is good. Despite progress being
made, work on alignment with and implementation of the new acquis needs
to continue in all the areas covered by this chapter. The supervisory capacity
requires further improvement in view of the FME’s
increasing responsibilities and future obligations deriving from the
application of the evolving acquis. The Icesave dispute remains
unresolved. The ESA case against Iceland is pending before the EFTA Court.

4.10.
Chapter 10: Information society and media

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

Some progress can be reported in the areas
of electronic communications and information and communications technologies
(ICT). The independence of the national regulatory authority has to be
strengthened further with the amendment of the Media Law. Furthermore, the
authority’s financial viability needs to be safeguarded, in order to perform
its role independently. The 2009 EU electronic communications reform package
(revised regulatory framework) has not been transposed into national law. The
EU Directive on data retention and the Regulation on the .eu top-level domain
also remain to be transposed.

Good progress
can be reported in information society services. Legal protection for
conditional access devices was extended in June 2012 to decoders for purposes
other than broadcasting services. The e-Commerce Directive remains to be fully
transposed.

Iceland
continued to participate in the Information and Communication Technologies
(ICT) Policy Support component of the EU Competitiveness and Innovation
Programme.

No progress was
achieved in the area of audiovisual policy. Digital switchover is
planned for the end of 2014, but the method remains to be decided.

Iceland
continued to participate in the MEDIA 2007 Programme.

Conclusion

Overall,
Iceland has already reached a high level of alignment and applies a substantial
part of the acquis in the field of information society and media. Good
progress was achieved in information society services, where legal protection
of conditional access devices was established. The independence of the national
regulatory authority has to be further strengthened. The revised communications
regulatory framework has yet to be transposed and several gaps in transposition
in the field of audiovisual policy and information society services, in
particular the e-Commerce Directive, need to be addressed.

4.11.
Chapter 11: Agriculture and rural development

Iceland’s agricultural
policy is not in line with the acquis.

Little progress
can be reported as regards horizontal issues. In
July 2012, Iceland presented to the Commission a strategy paper for meeting the
EU agriculture and rural development policy requirements. The paper describes
the necessary preparations in all areas included in this chapter and provides a
timetable for their implementation. As part of this strategy, a feasibility
study will be carried out on domestic implementation of the Land Parcel
Implementation System.

Current
adminstrative capacity in the field of agriculture and rural development is
limited and will need to be further addressed in order to administer the CAP,
including the management of agricultural and rural development funds. As part of the general restructuring and streamlining of the public
sector, the Agricultural Economics Institute was closed down on 1 January 2012.
Its tasks were transferred to the Agricultural University and Statistics
Iceland. Statistics Iceland will now be responsible for gathering and
processing statistical information on agriculture. Overall, preparations in the
area of horizontal issues are at an early stage.

Little progress
can be reported in the areas of common market organisation and rural
development. The strategy paper on meeting the agriculture and rural
development policy requirements includes a decsription of steps to be
undertaken in order to comply with the acquis in both areas. The preparations
in these areas still need to be launched.

No progress can
be reported in quality policy and organic farming. The
latter is covered by the EEA Agreement and Iceland is largely in line with the
relevant acquis. Alignment with the acquis on organic products
and on imports of organic products from third countries has yet to be achieved.
Preparations in the area of quality policy still need to be launched.

Conclusion

Overall, Iceland’s agricultural policy is
not aligned with the acquis. Preparations in this chapter are at an
early stage and progress has been limited. A strategy and planning schedule of
measures to be taken to ensure compliance with the EU agriculture and rural
development requirements has been adopted. The appropriate administrative structures
to implement all aspects of the common agricultural policy including the
management of agricultural and rural development funds needs to be set up.
Preparations in the areas of the common market organisation and quality policy
need to be launched and alignment in the field of organic farming needs to be
completed.

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

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

Progress can be reported on general food
safety. In November 2011 Iceland started implementing the EU hygiene
package. However, Iceland continues to prohibit the import of fresh meat, meat
products and other products of animal origin from the EU, which is not in line with
the acquis. The EFTA Surveillance Authority (ESA) has started legal
proceedings against Iceland concerning these bans on imports. Preparations in
the area of general food safety are advanced.

There has been no progress as regards veterinary
policy, where Iceland is partially aligned with the acquis.
Iceland still needs to align with the EU legislation on animal health as well
as remove present restrictions on imports of live animals, which are not in
line with the acquis. On both these issues, Iceland currently has an
exemption under the EEA Agreement.

There has been some progress in the field
of placing on the market of food, feed and animal by-products. A
national upgrading plan is under preparation for evaluating all
slaughterhouses, dairies and other food establishments and bringing them into
conformity with EU standards. No progress was made on closing existing gaps in
Iceland’s legislation, which concern in particular the alignment with acquis
on novel foods, transmissible spongiform encephalopathies (TSEs) and animal
by-products that are not intended for human consumption. In this area, Iceland’s preparations are moderately advanced.

Progress can be
reported with regard to food safety rules. The relevant legislation was
amended in spring 2012 to allow the small-scale direct sale of products under
certain conditions. No progress was made as regards specific rules for feed.
Alignment with the acquis in these areas is advanced.

In the area of phytosanitary policy,
no progress can be reported. Iceland still needs to align with the acquis
on both plant health and plant protection. Regarding pesticide residues
Iceland’s legislation is partly aligned with the acquis, except for
import restrictions on certain plants and plant material. The capacity of accredited
laboratories to conduct residue analyses still has to be enhanced. Preparations
in the area of phytosanitary policy are at an early stage.

There has been no progress in further
aligning with legislation regarding genetically modified organisms.

Conclusion

Overall, Iceland is partially aligned with
the acquis on food safety, veterinary and phytosanitary policy due to
its participation in the EEA Agreement. Some progress was made in the areas of
general food safety and food safety rules. The import restrictions on fresh
meat and live animals are not in line with the acquis. Gaps in
legislation in the areas of animal and plant health, genetically modified
organisms, novel foods and animal products that are not intended for human
consumption are yet to be addressed. Administrative and laboratory capacity
also need further strengthening.

4.13.
Chapter 13: Fisheries

Iceland’s fisheries
policy is generally not in line with the acquis.

There have been no developments as regards resource
and fleet management. No major changes have taken place in the fisheries
management system in Iceland. Iceland adopted part of
the reform of its fisheries management system by significantly raising
the fees paid by quota holders. Restrictions on the right of establishment and
the freedom to provide services and on the free movement of capital in
fisheries production and processing remain in place.

Little progress has been made in the area
of inspection and control. Iceland signed in 2011 an agreement on an
Electronic Reporting System (ERS) with Norway which is to be implemented in
2012 and 2013. Preparations are still ongoing for the ratification of the 2009
Food and Agriculture Organisation (FAO) Agreement on port state measures to
prevent, deter and eliminate illegal, unreported and unregulated fisheries.

No new developments can be reported in the
areas of structural action, market policy and State aid.

Progress has been limited concerning
international agreements. Preparations to ratify the 1993 FAO
Agreement, to promote compliance with international conservation and management
measures by fishing vessels on the high seas, continued.

It was not possible, over the reporting
period, to reach an agreement on the management of the mackerel stocks for 2012
between the coastal states of the North-East Atlantic. Iceland’s mackerel fisheries continue to cause widespread concern within the
EU with regard to the principles of sustainable resource management of this
stock.

Conclusion

Iceland continues to apply a fisheries
management system which has similar objectives to those pursued in the EU, but
some rules differ substantially. Overall, Iceland’s fisheries policy is not in
line with the acquis. Existing restrictions in the fisheries sector on
freedom of establishment, services and capital movements are not in line with
the acquis.

4.14.
Chapter 14: Transport policy

Iceland applies a substantial part of the acquis
on transport policy due to its EEA membership.

A new Transport Strategy 2011-2022 and a
Transport Action Plan 2011-2014 were adopted in June 2012. They formulate the
policy and objectives for air, maritime and road transport in Iceland. The
transport strategy is set for 12 years, to be revised every four years. Within
the new strategy, the Action Plan is adopted for four years with the aim of
revising it every two years. The objectives of the new strategy are to improve
accessibility and mobility in the transport of passengers and goods within and
between regions, ensure cost-efficient, safe and environmentally sustainable
transport and take into account the needs and specific conditions of regions
and thus promote regional development.

Progress can be reported in the area of road
transport. The acquis regarding driving licences, road
infrastructure safety management and roadside check lists for inspections was
transposed. The acquis regarding the adaptations to technical progress
of requirements on vehicle roadworthiness and dangerous goods transport,
including a uniform roadside check list for dangerous goods transport, has yet
to be fully implemented.

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

No progress can be reported in the area of combined
transport due to the absence of railway systems or short sea shipping modes
of transport.

Good progress can be reported in the field
of air transport. A regulation transposing the aviation security acquis
was adopted in January 2012. The EU Regulation on common rules for civil
aviation security for domestic air services has yet to be implemented. New
legislation was adopted with the aim of transposing the acquis on the
continuing airworthiness of aircraft and aeronautical products, parts and
appliances, and on the approval of organisations and personnel involved in the
relevant tasks. The acquis concerning common rules for the operation of
air services in the EU was transposed during the reporting period. The maximum
length of the time limitation for public services obligations is yet to be
established. The acquis regarding the list of air carriers which are
subject to an operating ban within the EU based on the flag state criteria and
on company performance (following inspection of airfleets) has been transposed
into Icelandic law, as well as the acquis on insurance requirements for
air carriers. The acquis concerning the computerised reservation system
and the single European Sky II package remains to be transposed. During the
reporting period eight new agreements on air services were signed between
Iceland and Ghana, Jordan, Laos, Paraguay, Ruanda, Saudi Arabia, Zambia and
South Africa. A Memorandum of Understanding on air traffic and a future
agreement was signed with Australia.

Some progress can be reported in the area
of maritime transport. The acquis regarding port state control
was transposed in April 2012. A new regulation concerning the rescue and safety
equipment of Icelandic vessels was issued in June 2012, which covers the acquis
on passenger ships and safety of fishing vessels. The acquis concerning
the rights of passengers travelling by sea and port reception facilities for
ship-generated waste has yet to be transposed.

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

Conclusion

Overall,
Iceland has a good level of alignment with the acquis on transport
policy. Progress can be reported as regards road safety rules. Transposition of
the relevant EU legislation on air and road transport needs to be completed.

4.15.
Chapter 15: Energy

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

There has been
little progress in the area of security of supply. In February 2012, the
Minister for Industry presented a report to the parliament containing
recommendations on a comprehensive energy policy for Iceland. The report is
based on the work of the steering committee set up by the Ministry in 2009. No
progress can be reported on aligning with the acquis on oil stocks.

No progress can
be reported in the area of the internal energy market. With regard to the procedure for improving the transparency of gas
and electricity prices, legislation has not been adopted. The Third Energy Package has not been fully incorporated into the
EEA Agreement and, as such, is not yet implemented in Iceland. Separation of
the regulatory authority from the Ministry of Industry,
Energy and Tourism and further measures to guarantee
the independence of the regulator’s budget and board still have to be
implemented. Ownership unbundling of the Transmission System Operator from the
energy companies also remains to be achieved. The
independence of the National Energy Authority needs to be achieved and its
working arrangements with the Competition Authority established.

There has been
little progress in the field of renewable energy. The National Renewable Energy Action Plan to meet the 2020 targets
is still in the process of being drafted under the leadership of the Ministry
of Industry. A new bill was adopted in June 2012 partially aligning with the
2009 Renewable Energy Directive. Full alignment is yet to be achieved.
Approximately 67% of Iceland’s consumed energy already comes from renewable
sources. Initial steps were taken to increase the use of renewable energy in
the transport sector, such as the VAT exemption on importing electric cars.

In the area of energy
efficiency no progress can be reported. Full alignment with the energy
efficiency acquis is yet to be achieved, including rules on the energy performance of buildings, the Directive on energy end-use
efficiency and energy services and the new legislation on eco-design and
labelling of energy consumption. Iceland does not have
national energy-saving targets yet and the implementation of the acquis on
energy end-use efficiency is still at an early stage.
The administrative capacity to implement the energy efficiency acquis is
limited.

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

Conclusion

Overall,
Iceland is partly aligned with the acquis in the field of energy.
Alignment in the areas of oil stocks, the internal market, renewable energy, energy
efficiency and nuclear safety and radiation protection needs to continue. The
independence of the regulatory authority and the administrative capacity to
implement the new acquis need to be addressed.

4.16.
Chapter 16: Taxation

Iceland partly applies the acquis in
the area of taxation.

Tax legislation in the area of indirect
taxation is partly in line with the acquis. Little progress
can be reported on aligning the legislative framework with the acquis.
Iceland adopted various laws on VAT during the reporting period, including an
amending law reducing VAT on e-books, CDs with books and electronically
supplied music from 25.5% to 7%, and introducing new obligations whereby
foreign sellers of e-books and electronic music have to register with the
Icelandic authorities for VAT purposes. These new provisions partially diverge
from the acquis, since the EU VAT Directive stipulates that reduced
rates must not apply to electronically supplied services (such as e-books) or
music. The provisions concerning temporary reimbursement of two thirds of the
VAT paid when purchasing or renting coaches were extended to 31 December 2013.
Provisions on the reimbursement system applicable to fire equipment and
vehicles for municipalities were adopted in June 2012. Neither of the above is
in line with the acquis.

In June 2012, an amending law was adopted
on VAT exemptions and repayments for electric and hydrogen powered vehicles.
The legislation aims at making ‘green’ vehicles less expensive by deducting an
amount from the customs value or the VAT transaction price. This provision is
not in line with the EU customs and VAT legislation.

Divergences with the acquis on
indirect taxation concern mainly VAT - regarding definitions, exemptions,
special VAT schemes or reimbursement - and excise duties, with special
reference to rates and product category definitions, including for alcohol and
tobacco, petrol and diesel fuel, traveller’s allowances, warehousing, duty
suspension and duty-free goods.

With regard to direct taxation,
there has been little progress. A Financial Activity Tax (FAT) was introduced
on the activities of companies providing financial and/or insurance services.
The FAT was set at 5.45% or 6% of the taxable base established for income tax,
depending on whether the income tax base is below, or above € 6.1 million,
respectively. New implementing provisions were introduced concerning income tax
for persons with limited tax liability and earning not less than 75% of their
income in Iceland. In the area of direct taxation, the tax legislation
remains partially aligned with the acquis.

Some progress can be reported in the area
of administrative cooperation and mutual assistance. Iceland ratified
the Protocol amending the OECD Convention on Mutual Administrative Assistance
in Tax Matters which became applicable in February 2012. Iceland does not have
legislation reflecting the acquis on mutual assistance and
administration.

Little progress took place in the field of
operational capacity and computerisation. Work has continued to assess the
operational capacity and best practices of Iceland’s tax system against the EU
tax blueprints and best practices. Iceland is working on a strategy to achieve
interconnectivity and interoperability of its VAT and other IT systems for
taxation with those of the EU. The process of establishing a Central Liaison
Office and an Excise Liaison Office has yet to start. In the area of
operational capacity and computerisation, Iceland remains partially aligned
with the acquis.

Conclusion

Overall, Iceland’s tax legislation remains
partially aligned with the acquis and some progress can be reported.
Iceland continues to have a good level of administrative capacity in the field
of taxation. IT interconnectivity and interoperability with EU IT systems for
taxation are yet to be achieved.

4.17.
Chapter 17: Economic and monetary policy

Iceland is largely aligned with the acquis
in the area of economic and monetary policy.

No progress can be reported on monetary
policy, including as regards the functional, institutional, personal and
financial independence of the Central Bank, and the prohibition of monetary
financing, all areas where alignment with the acquis remains incomplete.
In March 2012 the Ministry of Economic Affairs released a report on the future
structure of the financial system, including the role of the Central Bank.
Proposals for a comprehensive legal and regulatory framework are under
preparation.

Some developments can be reported on economic
policy. In November 2011 the Minister for Economic Affairs introduced an
Economic Programme for Iceland, drawn up after completion of the recovery
programme under Iceland’s stand-by arrangement with the International Monetary
Fund (IMF). It analyses competitiveness, fiscal consolidation, the labour
market, restructuring of household and corporate debt, rebuilding of the
financial system and monetary policy.

In March 2012 the Ministry of Finance
released the Treasury’s Medium Term Debt Management Strategy for 2012-2015. The
Strategy sets out the government’s plans for medium-term debt financing of
government debt. The Local
Government Act, which includes sections on controlling local government
finances, was approved in September 2011.

Iceland is included in the pre-accession
fiscal surveillance procedure and submitted its second Pre-Accession Economic
Programme (PEP) in February 2012. (See also Economic criteria)

The capacity for economic policy
formulation and coordination needs to be further improved at local and central
level also because a significant part of government spending is linked to local
governments, which requires stronger coordination and planning for fiscal
policy consolidation.

Conclusion

Overall,
Iceland has a good level of alignment with the acquis on economic and
monetary policy. There has been some progress in the area of economic policy.
Gaps in alignment with the acquis in the field of monetary policy remain
to be addressed, including strengthening the independence of the Central Bank
and the prohibition of monetary financing of the public sector.

4.18.
Chapter 18: Statistics

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

With regard to statistical
infrastructure, some
progress has been made. In addition to the cooperation between Statistics
Iceland and the National Land Survey of Iceland, work on a cooperation
agreement with the Directorate of Immigration has started. Work continues on
cooperation agreements between Statistics Iceland and the Customs Department,
the Environment Institute and the National Energy Authority. In June 2012,
Iceland adopted a law on imposing fines on private firms and public
institutions, if they do not respond to requests for information for
statistical purposes. Also in June 2012, the new business statistics
directorate was set up and a new director recruited. Since September 2011 there
has been a net increase of five staff members at Statistics Iceland while the
operational budget has been cut by a further 3%.

Some progress can be reported in the area
of classifications and registers. A paper on the classification of
statistical regions and a paper on national classification of completed
education is under preparation. Work to set up the statistical business
register has not yet started.

Concerning sectoral statistics, good
progress has been made despite the scarce resources. With a response rate of
75%, the data from the Farm Structure Survey carried out during the reporting
period are considered reliable. The majority of the administrative registers
related to the housing and population census has already been collected. The
development of the database for the census data is under way.

Statistics Iceland has started to compile
agricultural statistics. These include milk production statistics, livestock
statistics, statistics on slaughtering and meat production, statistics on
activity of hatcheries and trade of chicks, annual crop statistics and land use
statistics. Work has also started on economic accounts for agriculture (EAA)
and agricultural price statistics (APS).

Statistics Iceland has continued
preparatory work on Intrastat, including carrying out a feasibility study and
exploring data collection procedures. With financial support from the
Modernisation of European Enterprise and Trade Statistics (MEETS) programme,
work has started on exploring how to estimate the minimum data quality needed
for Intrastat. Preparations for delivery of comprehensive data on national
accounts need to be stepped up in order to comply with the requirements of the
data transmission programme. The adult education survey and the continuing
vocational training survey are yet to be carried out.

Conclusion

Overall, Iceland is partly aligned with the
acquis on statistics. Progress can be reported. A large part of the
register-based population and housing census was carried out. Allocation of
sufficient resources remains a concern and additional human and financial
resources will have to be made available to the Statistical Office in order to
fulfil the obligations of the acquis in this chapter.

4.19.
Chapter 19: Social policy and employment

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

There have been some developments in the
area of labour law, where Iceland has already implemented a substantial
part of the acquis as a member of the EEA. Following the EFTA Court
Decision of June 2011 regarding the Posting of Workers Directive,
Iceland amended parts of its legislation in March 2012. Further amendments are
under preparation. Legal alignment has yet to be achieved as regards temporary
agency work and the establishment of a European Works Council. The EFTA
Surveillance Authority (ESA) has started proceedings in a number of cases due
to incorrect implementation of labour law Directives.

Few developments can be reported in the
area of health and safety at work, where Iceland has already implemented
substantial parts of the acquis as a member of the EEA. The first yearly
Campaign Against Bullying Day took place in November 2011. It was organised by
the Ministry of Welfare in cooperation with social partners and other
stakeholders. Alignment with the acquis on asbestos has yet to be
achieved. Full alignment with the health and safety acquis needs to be
ensured in all three sub-sets of national legislation regarding land, air and
sea.

Social dialogue has continued to function well. The wage agreements concluded in
2011 are still valid and they contribute to substantial net wage increases for
both public and private sectors. Social partners continue to be proactive in
labour market policies, and participate in their implementation.

There has been progress with regard to employment
policy. The consultative committee that was appointed in 2011 and includes
representatives from the Ministry of Welfare, the Directorate of Labour and
social partners is working on developing a comprehensive employment strategy
for Iceland. However, overall, the labour market situation continues to be
adversely affected by the 2008-2010 economic crisis, with young workers and the
low-skilled being hardest hit. The government has continued to implement
active labour market policies according to the Iceland 2020 Policy Statement
and focusing on efforts to reduce unemployment among young people, in
particular for the long-term unemployed. In February 2012, the Directorate of
Labour and the Ministry of Welfare introduced a new initiative, ‘Working Way’,
targeting long-term unemployed with the aim of bringing 1,500 unemployed back
into the labour market. The government has also stepped up cooperation with
civil society and social partners in order to reduce unemployment. A special
campaign to reduce undeclared work in the small-scale maintenance and
reconstruction sector through means of VAT deductions for house owners has
continued in 2012.

Progress has been made regarding the European
Social Fund (ESF), where preparations for participation in the ESF have
started. The Ministry of Welfare has been identified as the institution
responsible for drafting the ESF operational programme. The Minister for
Welfare charged a working group in March 2012 with drafting an operational
programme for the preparations necessary to participate in the ESF. Iceland has
also drawn up an action plan on how to meet the objectives of the EU cohesion
policy. Adequate training is necessary in this field.

In the area of social inclusion progress
has continued. The impact of the financial crisis continued to be visible, with
most households reporting that they make ends meet ‘with difficulty’ or ‘with
great difficulty’. Whilst disposable earnings of households fell across the
board due to the financial crisis, government policies helped to cushion the
effects for the lowest income groups. Targeted debt relief measures were
effective. Overall, the percentage of households at risk of poverty remains
substantially lower than the EU average. Close monitoring and evaluation of the
social situation of single-parent families, low-income elderly, children and
social assistance recipients is needed.

An ‘Action Plan for People with
Disabilities’ was approved by the parliament in June 2012. The UN Convention on the Rights of Persons with Disabilities remains to
be ratified.

Social protection expenditures increased to 8% of GDP, the highest level ever in
Iceland, although still lower than the EU average. Cuts in the health care
system were significant, but high-quality services were maintained.
Unemployment expenditures have increased more than sixfold since 2007. In June the
parliament adopted legislation on the establishment of an Employment
Rehabilitation Fund. The objective of the Fund is to make sure that everyone
who is forced to leave the labour market can receive assistance to return.

Some developments can be reported in the
field of anti-discrimination. In June, the parliament adopted
legislation improving the legal status of transgender persons. Work is ongoing
to align with the two Anti-Discrimination Directives. An Equality body
responsible for combating discrimination on grounds of racial or ethnic origin
has yet to be established. Iceland needs to ensure that the future Equality
body is independent and able to carry out independent surveys, produce reports
and provide assistance to victims of discrimination.

No further
development can be reported in the field of equal opportunities, where
Iceland’s standards continue to be high. The Plan of Action on Gender Equality
for the period 2011-2014 continues to be implemented with gender mainstreaming
and gender budgeting playing a central role. Full alignment with the acquis
has yet to be achieved, namely as regards alignment with the acquis on
equal treatment of men and women in matters of employment and occupation.

Conclusion

Overall, Iceland has reached a high level
of alignment and continues to apply a substantial part of the acquis in
this chapter due to its EEA membership. Preparations for participation in the
European Social Fund have commenced and a comprehensive employment strategy is
being drafted. Legal alignment remains to be completed in the areas of
anti-discrimination and equal opportunities. The impact of the 2008-2010
financial crisis remains visible; challenges in social inclusion and employment
thus persist.

4.20.
Chapter 20: Enterprise and industrial policy

Iceland has already reached a high level of
alignment in the area of enterprise and industrial policy.

In the area of enterprise and industrial
policy principles, Iceland has an industrial policy that is in line
with EU principles and is associated with the EU Small Business Act.

No new developments can be reported on enterprise
and industrial policy instruments. Iceland has a wide array of
enterprise and industrial policy instruments. It continues to participate in
the Enterprise and Innovation Programme and is a member of the Enterprise
Europe Network. In addition to EU resources, Iceland also uses own resources to
provide direct support to SMEs through the appropriate instruments. But access
to finance for SMEs can still be problematic due to the macroeconomic
situation.

Regarding sectoral policies, Iceland
continues to implement policies according to its sectoral strategies, which are
in line with EU principles.

Conclusion

Overall, alignment in the area of
enterprise and industrial policy remains at a high level. Little progress can
be reported in the field of enterprise and industrial policy. Access to SME
finance is still affected by the financial crisis.

4.21.
Chapter 21: Trans-European networks

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

There has been good progress in the field
of transport networks. Iceland has finalised the TEN-T maps according to
the new TEN-T Guidelines, one on airports and one on roads, ports and airports.

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

Conclusion

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

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

Regarding the legislative
framework, alignment of legislation with the acquis relevant for EU
cohesion policy is at an advanced stage. Iceland’s current budget planning
system does not include sufficient rules on multiannual programme budgeting.
Planned preparations in this area include an assessment of municipal
co-financing capacities, review of the public budgeting process, drafting
legislation -where necessary- for cohesion policy implementation, and
preparations for mechanisms for complying with EU policies.

In January, a new law on the municipalities
entered into force which overhauled the pre-existing laws on the
municipalities. The main changes relate to the municipalities’ finances and
their monitoring. Municipalities are now expected to prepare multiannual
programming. The law also stipulates increased consultation between the
government and the municipalities.

Some progress can be reported as regards the
institutional framework for managing the Structural Funds. In March
2012, Iceland presented to the Commission a plan for meeting the EU cohesion
policy requirements. The plan describes the preparations in all areas included
in this chapter and provides a timetable for their implementation. The Ministry
of Industry, Energy and Tourism is leading the preparatory work for setting up
the Managing Authority in close cooperation with other relevant ministries.
Other stakeholders such as the Association of Local Authorities were also
associated in the preparations for the implementation framework. The Icelandic
National Audit Office (INAO) has been identified as the future Audit Authority
and the Ministry of Finance as the future Certifying Authority.

Progress was made in the area of administrative
capacity, where a comprehensive training action plan was put in place and
started being implemented. It addresses most of the institutions likely to be
involved in implementing the cohesion policy and covers areas relating to
programme and project preparation and management.

Some limited
progress was made in relation to programming. Iceland
has identified the Ministry of Industry, Energy and Tourism as the body
responsible for supervising preparations for programming for the European
Regional Development Fund. The Ministry of Welfare has been identified as the
institution responsible for supervising preparations for programming for the
European Social Fund. Programming preparations are overseen by the Negotiation
Group on Regional Policy. The Ministry of Education and the Ministry of the
Interior will also be fully associated with the programming work and the
involvement of further stakeholders, in particular local authorities, will be
emphasised.

Some modest progress can be reported on monitoring
and evaluation. Iceland has started preparatory work for the establishment
of a monitoring and information system for cohesion policy programmes. Experts
are working on analysing needs and processes.

As regards financial management, control
and audit, Iceland is already advanced due to its participation in EU
programmes in the framework of the EEA Agreement and no further progress can be
reported. Financial management and control systems in Iceland are largely in
line with EU best practices and international standards, but progress is
required in the field of internal audit. Independent external audit of the
public sector is under the responsibility of INAO. INAO does not audit the
municipalities. However, it is authorised to examine the accounting of
municipalities in relation to joint operations of central and local
governments. (See also Chapter 32 — Financial control)

Conclusion

Overall, Iceland has started preparations
and adopted a timetable and action plan for meeting the EU cohesion policy
requirements. Certain institutions (future Audit Authority and Certifying
Authority) have been identified, preparations for setting up the Managing
Authority have started and a comprehensive training action plan has started to
be implemented The Managing Authority and other bodies still need to be
identified. The establishment of implementation systems, including the
monitoring and information system, is at an early stage.

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

Iceland’s judiciary continues to be
of a high standard. As regards its independence and impartiality, there
have been no major developments with regard to the recommendations delivered
last year by the working group set up in December 2010 to look into the
establishment of an Appeal Court for civil and criminal cases, although the
issue is under examination by the Ministry of the Interior.

As regards the efficiency of the
judicial system, the numbers of district court judges and Supreme Court judges,
which were temporarily increased in order to deal with the additional case-load
following the 2008 financial crisis, are planned to be gradually reduced after
January 2013. Of the 43 district court judges currently in office, two were
appointed during the reporting period. The number of Supreme Court judges
remained the same. A law was adopted in June 2012 to further improve the
efficiency of the assistants to courts, giving them more legal power in civil
cases. An expert group on the future organisation of the investigation and
prosecution of economic crime cases was appointed in January 2012.

In the first major
case relating to the banking collapse brought by the Office of the Special
Prosecutor in December 2011, criminal charges were filed against the former
CEO of the old Glitnir Bank, the first of the Icelandic banks that collapsed in
2008, and one of his senior staff. The Supreme Court confirmed in February 2012
that the former Permanent Secretary of the Ministry of Finance, already
convicted by the District Court of Reykjavik in 2011, was guilty of insider
trading and upheld his sentence to two years’ imprisonment.

In March 2012, the CEO of the Financial
Supervisory Authority was dismissed by the Board of the Authority and criminal
charges were laid against him.

A law amending the Code of Criminal
Procedure was adopted in December 2011, delaying the setting-up of regional
prosecutors’ offices until 2014, due to lack of funding. The time until 2014
will be used to evaluate whether this new administrative level of prosecution
should be established at all. A group of specialists will be set up to assess
the structures.

Progress can be reported on anti-corruption
policy. A code of conduct for central government staff and civil servants
in ministries was adopted in May 2012. Codes of conduct for civil servants in
general and political advisors are yet to be established and work is under way.
The Prime Minister presented to the parliament the first report of the
Coordination Committee on ethical standards within the administration in spring
2012. A bill amending the General Penal Code following the December 2010
Interim Compliance Report of the Council of Europe’s Group of States against
Corruption (GRECO) on incrimination of corruption offences was adopted by the government. It also aims to
implement recommendations of the OECD Working Group on Bribery and to introduce
the necessary changes to the Code in order to ratify the additional protocol to
the Council of Europe Criminal Law Convention on Corruption. The bill has yet
to be adopted by the parliament.

The State Auditor continued to monitor
implementation of the law on the financing of political parties, which requires
parties to provide a financial report as a precondition for receiving state
funding. During the reporting period, six out of seven political parties
delivered their obligatory financial report for the year 2010. GRECO adopted
its second Third Round Compliance Report on Iceland in May 2012. It concluded
that its previous recommendation on party funding regarding the independence of
auditors who check political parties’ and candidates’ accounts has been dealt
with in a satisfactory manner.

Some measures were taken during the
reporting period to further strengthen the already high level of protection of fundamental
rights.

Work to prepare a National Action Plan for
Human Rights to be presented to the parliament started during the reporting
period and two groups were appointed — a group of representatives of ministries
and a consultative group of representatives of civil society and academia. The
Plan is intended to further enhance the protection and promotion of human
rights in Iceland, determine the role and coordinate the work of different
ministries and organisations in human rights matters, decide on ratification of
human rights agreements and evaluate whether a national institution for human
rights should be set up. Monthly seminars on human rights issues in connection
with the ongoing work have been held since December 2011.

As regards civil and political rights,
several meetings and seminars were organised in cooperation with stakeholders,
the academic community and the public on freedom of expression and democracy,
freedom of religion, and democracy and municipalities.

A draft law on religion is being discussed
in the parliament. It includes provisions that would make all religions and
philosophical organisations equal before the law, and give greater freedom to
those who choose not to register with any religion at all. It would also mean
that philosophical organisations, secular humanist groups and the like would be
able to receive the ‘tithe tax’ which normally goes to whichever religious
group a person is registered with. The draft law would also discontinue
automatic registration with the national church of a child born to a mother
registered with that church.

As regards economic and social rights, an
awareness-raising campaign on sexual violence against children started during
the reporting period. The Icelandic Centre for Gender Equality published an
overview on gender equality in Iceland aimed at offering insight into
successes, best practices and lessons learned.

A law on compensating victims of sexual
offences was adopted in June 2012. A conference was organised on the same
subject to discuss how to further improve the judicial system. Issues discussed
included various aspects of procedures, legislative reform and the role of
prosecution in the area of sexual offences, and the protection of children
against sexual exploitation.

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

There are no developments to report on EU
citizens’ rights. The differential treatment between citizens of Nordic
countries and other EU countries, as regards voting rights in municipal
elections, is not in line with the EU acquis and Iceland will need to
align in due course.

Conclusion

Iceland continues to have high standards in
the area of the judiciary and fundamental rights. Progress was made in further
reinforcing the anti-corruption policy framework. Iceland also continues to
strengthen its high level of protection of fundamental rights. Data protection
legislation in Iceland is yet to be aligned with the acquis, in
particular as regards the independence of the national Data Protection
Authority.

4.24.
Chapter 24: Justice, freedom and security

Iceland has already achieved a high level
of alignment and applies a large part of the acquis in the area of
justice, freedom and security as an associated member of the Schengen
Agreement, in particular as regards external borders and visas.
Iceland has continued to be actively involved in the activities of Frontex.
Iceland has also continued to participate in the Visa Information System (VIS).

No progress can be reported in the field of
migration. Legislation on long-term residents, special provisions for
researchers and implementation of the EU Blue Card Directive still need to be
aligned with the acquis. The same applies to family reunification and
minimum standards on sanctions and measures against employers of illegally
staying third-country nationals. Overall, Iceland is advanced in this area.

There has been no progress in the area of asylum.
Iceland still needs to ensure full alignment with the relevant acquis,
including amending the definition of refugees and persons eligible for
subsidiary protection. Iceland has not yet joined the European Asylum Support
Office (EASO). Iceland is well on track to meet the requirements in this area.

No progress can be reported in the area of judicial
cooperation in civil and criminal matters. The 1996 Child Protection
Convention and the 2007 Child Support Convention and its protocol on applicable
law have yet to be signed and ratified. The good cooperation between Iceland
and Eurojust has continued. Preparations need to be made for the exchange of
criminal records with Member States through the European Criminal Records
Information System (ECRIS). Iceland is well on track to meet the requirements
of the acquis in these areas.

Progress has been made in the area of police
cooperation and the fight against organised crime. Iceland has ratified the
Council of Europe Convention on trafficking in human beings and work on
reviewing the five-year Action Plan against human trafficking has started. The Council
of Europe Convention on the protection of children against sexual exploitation
and sexual abuse is signed but remains to be ratified. Iceland amended the
General Penal Code concerning child pornography in order to align with the
Council of Europe Convention on cybercrime. The Optional Protocol to the
Cybercrime Convention still needs to be ratified. The Economic Crime Department
of the National Commissioner of Police merged with the Office of the Special
Prosecutor. The protocols to the UN Convention against transnational organised
crime (Palermo Convention) on the smuggling of migrants and on the illicit
manufacturing of and trafficking in firearms have been signed but remain to be
ratified. Iceland has continued its good cooperation with Europol. Practical
rules and procedures regarding exchange of data as well as IT infrastructure
need to be adapted to meet the requirements in the areas of police and customs
cooperation. Iceland is well advanced in this area. Iceland remains well advanced
in the fight against terrorism, cooperation in the field of drugs and
customs cooperation, where no further developments can be reported.

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

Conclusion

Overall, Iceland continues to apply the
Schengen Agreement and is well advanced in aligning with the acquis in
the area of justice, freedom and security. Iceland needs to continue its
alignment with the acquis in areas including migration, asylum and
judicial cooperation.

4.25.
Chapter 25: Science and research

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

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

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

Progress was made regarding the European
Research Area (ERA), where Iceland took a number of steps to further
facilitate its integration into the ERA and strengthen its research and
innovation capacity. The Iceland 2020 Policy Statement takes due account
of the objectives of the ERA.

Regarding research funding, the aim remains
to raise the level of expenditure on R&D from currently 2.7% of GDP to 4%
of GDP by 2020 as stated in the Iceland 2020 Policy Statement. To attain
this objective, the government continues to offer tax incentives to private
companies for R&D spending.

Conclusion

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

4.26.
Chapter 26: Education and culture

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

Some developments can be reported in the
fields of education, training, youth and sport. A new curriculum
for all school levels was published in May 2011 and implementation commenced
with the academic year 2011-2012. In June 2012 amendments to the Law on
Universities were adopted regarding the autonomy of the universities, democracy
and participation of students and staff in the management of the universities,
and the rights of disabled students.

As regards cooperation on policies, Iceland
continued to participate in the open method of coordination on education.
Iceland’s share of 30-34 year-olds with tertiary education remains above the EU
average, as does, however, the rate of early school leavers. Over the reporting
period the government formally signed an agreement for a programme to encourage
early school leavers between the ages of 18 and 25 to enter secondary school.
In the field of lifelong learning, Iceland remained above the EU average
targets for 2020.

Some progress can be reported in the area
of access to education for EU citizens. Legislation was adopted in September
2011 clarifying access for EEA citizens to loans from the Icelandic Student
Loan Fund and introducing a general residence requirement for beneficiaries.

Iceland continued to take part in several EU
programmes, including Lifelong Learning, Youth in Action and Erasmus Mundus. It
also continued to participate in the European Centre for the Development of
Vocational Training and appointed representatives to take part as observers in
the Advisory Committee on Vocational Training. The Ministry of Education,
Science and Culture continued to work on streamlining procedures and achieving
full compliance with the programme management requirements for the Lifelong
Learning and Youth in Action Programmes. Iceland has shown interest in
participating in the Europe for Citizens Programme.

A comprehensive national qualifications
framework, based on learning outcomes, has been developed at university level.
This framework is based on the European Qualification Framework (EQF).

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

Conclusion

Overall, Iceland has achieved a high level
of alignment in the field of education and culture and continued to participate
in several EU programmes on education and culture.

4.27.
Chapter 27: Environment and climate change

Iceland’s policy in this field is to a
large extent in line with the acquis due to its EEA membership.

In the area of environment,
regarding horizontal legislation, a law
designed to transpose the Environmental Liability Directive was adopted in June
2012. The Law includes provisions on damage to protected species and nature
conservation areas as defined by Icelandic law.

The Aarhus
Convention was ratified in October 2011. Amendments were made to existing
legislation on the duty of the government to provide information on the
environment. The government is from now on always responsible for informing, on
its own initiative, the public of imminent danger caused by pollution or
significant changes in the environment. Transposition of the Environmental
Crime Directive is still pending.

Amendments to
the environmental impact assessment legislation are under preparation. The
proposed changes concern the criteria on which projects will be subject to screening
in order to decide whether an environmental impact assessment is required. No
developments can be reported regarding ratification of the Espoo Convention on
environmental impact assessment in a transboundary context.

Iceland’s air
quality legislation is largely in line with the acquis. Work is
ongoing to align with the National Emissions Ceilings Directive.

Waste
management legislation is to a large extent in line
with the acquis. No new developments can be reported in this area.

No progress can
be reported in the field of water quality. A regulation on bathing water
exists but it is not completely in line with the Directive. Alignment with the
Marine Strategy Framework Directive and the Floods Directive has yet to be
achieved.

As regards nature protection,
Iceland continued the work on mapping habitat types in the 60% of the territory
that remains to be mapped, and on other tasks needed for the selection of
preliminary sites for the Natura 2000 network. No legislative or implementing
measures can be reported to align with the acquis on protection of
whales, wild birds and conservation of natural habitats and wild fauna and
flora or with the trade ban on imports of seal products into the EU.

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

As regards chemicals,
the Regulation on the Registration, Evaluation,
Authorisation and Restriction of Chemicals (REACH) is being implemented and
work is on track. No developments can be reported as regards ratification of
the Rotterdam Convention.

Iceland lost an EFTA court case brought by
the EFTA Surveillance Authority for failing to address
the problem of road noise, as required by the Environmental Noise
Directive, and has handed in noise maps for major roads in June 2012 as
required by the court.

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

Regarding climate change, Iceland continued
to make steady progress. The EU and Iceland strengthened cooperation in the
international context. Iceland submitted in May its provisional quantified
emission limitation and reduction objective (QELRO) for the second commitment
period under the Kyoto Protocol, which is based on the understanding that it
will be fulfilled jointly with the EU and its Member States, in accordance with
Article 4 of the Kyoto Protocol. Furthermore, Iceland regularly associated itself
with EU positions and also continues to fulfil its reporting obligations under
the United Nations Framework Convention on Climate Change and the Kyoto
Protocol.

Legislation on climate was adopted in June
2012 to align with the revised EU Emissions Trading System (EU ETS), as well as
provide the legal basis to adopt a National Climate Action Plan and set up a
Climate Fund. Alignment with EU ETS related acquis regarding auctioning,
registries, monitoring and reporting has yet to be achieved.

In so far as the EU Monitoring Mechanism is
concerned, Iceland made good progress towards compliance, although some
adjustments are still needed, especially with regard to the compilation and
reporting of data for the greenhouse gas (GHG) inventory.

As regards fuel quality, Iceland still
needs to align with the Directive on specifications for fuels. Regarding
emissions from road transport, preparations for the implementation of the EU
Regulation on emission standards for new cars and vans are under way.

Steps were taken to align with EU
legislation on fluorinated gases and ozone depleting substances. Iceland still
needs to align with the Directive on the geological storage of carbon dioxide.

Regarding administrative capacity,
the Ministry of the Environment has increased its staff by three during the
reporting period. The Icelandic Institute of Natural History has hired an extra
four staff for three years. However, in the field of climate change no
developments to strengthen the administrative capacity took place during the
reporting period.

Conclusion

Overall, Iceland’s policy is to a large
extent in line with the acquis in this chapter, due to its EEA
membership, and there has been further progress. Institutional structures are
mostly in place. Compliance with the acquis on nature protection has not
been achieved, in particular with regard to the protection of whales, seals and
wild birds and the conservation of natural habitats and of wild fauna and
flora. The same applies to the water sector, with special reference to
alignment with the Marine Strategy Framework Directive and the Floods
Directive. Further steps are also needed as regards climate change, in
particular in the areas of the EU ETS (registries, auctioning, monitoring and
reporting), fuel quality as well as geological storage of carbon dioxide.
Iceland also needs to ratify the Espoo and Rotterdam Conventions.

4.28.
Chapter 28: Consumer and health protection

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

There has been
some progress in the area of consumer protection. A committee within the
Ministry of the Interior is reviewing consumer protection issues with a view to
simplifying procedures for consumers and establishing a one-stop shop.

Concerning product
safety related issues, alignment with the Commission
Decision on banning products containing biocide dimethylfumarate has been
completed. Alignment with the acquis on general product safety, on dangerous
imitations and on liability for defective products has yet to be achieved. The
RAPEX early notification system has become more efficient, with an improved
notification procedure. Furthermore, the rules regarding the access of national
surveillance authorities to the RAPEX system were amended in February
2012 giving all relevant Icelandic supervisory authorities access to RAPEX. Proactive
market surveillance needs to be strengthened.

As regards non-safety
related issues, the parliament has yet to adopt legislation aligning with
the Directive on credit agreements for consumers and the Directive on
timeshares. Legislative initiatives are also needed in areas such as unfair
contract terms, injunctions, distance selling, doorstep selling, misleading and
comparative advertising and unfair commercial practices.

Some progress can be reported in the field
of public health. Preparations have started for the National
Health Plan 2015, which will replace the Health Plan 2010.

On tobacco control, a national policy
on tobacco prevention is under preparation. The National Hospital and the
Directorate of Health have signed a cooperation agreement which includes the
roll-out of a tobacco control strategy at the hospital.

In the area of communicable diseases a
list of diseases covered by the EU surveillance system has been published.

In the field of
blood, tissues, cells and organs, alignment with the Directive regarding
the maximum pH values for platelets concentrates at the end of shelf life has
been achieved. Alignment with the acquis on organs, on guidelines concerning the conditions of inspections and control
measures, and on the training and qualification of officials still has to be
achieved.

Alignment with the acquis on patients’
rights in cross-border healthcare is yet to be completed.

Promotion of
community-based mental health services is similar to that of EU Member
States.

Preparations
have started to develop a National Cancer Plan. The colorectal cancer
screening programme remains to be implemented.

Conclusion

Iceland has
already achieved a high level of alignment and applies a substantial part of
the acquis on consumer and health protection. Further progress can be
reported in the field of public health. Additional efforts to align with the acquis
are necessary, especially in the area of consumer protection, where certain
transposition gaps remain.

4.29.
Chapter 29: Customs union

Iceland applies to a large extent the acquis
in the area of customs union.

There have been no further developments in
the area of customs legislation. The gaps in transposition of the EU
Customs Union acquis, which include the customs tariff, general customs
rules, rules of origin, procedures with economic impact, security rules and the
abolition of customs fees, have still to be addressed. Preparations in this
area are ongoing.

Progress can be reported regarding administrative
and operational capacity. Following recommendations resulting from
the Blueprints exercise, a Business Strategy is currently being drafted. Work
on an IT Strategy started in spring 2012 and initial steps have been taken with
regard to developing the IT systems. This included further study trips,
workshops and training. A budget has been set aside for the preparation of the
transit and tariff customs systems project and a number of specialists have
been recruited. Training in the areas of the structure, decision-making
processes and functions of the Customs Union and customs legislation is
ongoing.

A law amending the rules related to
the customs school was issued in January 2012. The required minimum education
for being hired to certain positions in the customs area has been raised.
Preparations in this area are moderately advanced.

Conclusion

Iceland applies
to a large extent the acquis in the area of customs union. Some progress
has been made in the area of customs union. Discrepancies, in particular in the
fields of customs rules, rules of origin, procedures with economic impact,
security rules and the abolition of customs fees, have still to be addressed. Preparations
for effective implementation of the acquis upon accession have been
initiated, in particular regarding customs procedures and the development of
interconnectivity with the EU-related IT systems. Nevertheless, efforts to
address the existing gaps as regards customs legislation and administrative
capacity, including IT, need to be stepped up.

4.30.
Chapter 30: External relations

Iceland is
already highly aligned in the area of external relations.

With regard to
the common commercial policy, Iceland continued to assess the
adjustments required in order to align with the acquis. With regard to the World Trade Organisation (WTO), Iceland and the
EU have agreed to hold regular trade policy consultations.

No new major developments can be reported
on export credits and dual-use goods. Legislation in this field is already
largely in line with the acquis. As regards dual use, Iceland’s
application to join the Wassenaar Arrangement on export controls for
conventional arms and dual-use goods and technologies is still being processed.
No new developments can be reported with regard to joining the Kimberley
process.

As regards bilateral agreements with
third countries, negotiations continued on a bilateral free-trade agreement
(FTA) on goods and services with China. In the context of EFTA, Iceland
ratified FTAs with Montenegro, Hong Kong and the Cooperation Council for the
Arab States. FTA negotiations are ongoing with Bosnia and Herzegovina, central
American countries (Guatemala, Honduras, Costa Rica and Panama), India,
Indonesia, Algeria and Vietnam, along with negotiations for a joint agreement
with Russia, Belarus and Kazakhstan. Negotiations on bilateral investment
treaties are ongoing with Turkey.

As regards development policy,
development aid in 2011 amounted to 0.21% of GNI. Iceland is pursuing the
strategy for development cooperation for the years 2011-2014 that it adopted
last year. An agreement was signed between the United Nations University (UNU)
and the Icelandic National Energy Authority extending cooperation with regard
to the UNU Geothermal Training Programme (UNU-GTP). Iceland started a
cooperation partnership with the World Bank and six east African countries in
the field of geothermal energy. Iceland also funded a new hospital in Malawi.

With regard to humanitarian
aid Iceland spent in 2011 8.4% of its official
development assistance on humanitarian and emergency assistance, compared to 9%
in 2010.

Conclusion

Iceland is
already highly aligned with the acquis in this area and some further
progress can be reported as regards external relations. Some progress can be
reported with regard to the WTO, as Iceland and the EU have agreed to hold
regular trade policy consultations.

4.31.
Chapter 31: Foreign, security and defence policy

Iceland has
already reached a high level of alignment in this policy area.

The regular political
dialogue between the EU and Iceland continued to cover foreign policy
issues. Iceland has been showing particular interest in an active dialogue
focusing on the Arab Spring, with the situation and developments unfolding in
Syria and Iran. Given its geographical position, Iceland continued playing an
active role in Arctic affairs.

As regards the common
foreign and security policy (CFSP), during the reporting period
Iceland aligned itself, when invited, with 64 out of 70 relevant EU
declarations and Council decisions (91% alignment). Non-alignment is largely
due to technical reasons, as in several of the cases implementing regulations
are already in place.

In September
2011, the parliament adopted a resolution calling on the Minister for Foreign
Affairs to set up a cross-party committee of parliamentarians tasked with
drafting a national security policy for Iceland. The policy needs to be based
on the fact that Iceland has no armed forces, while taking into account the
Risk Assessment Report for Iceland of 2009, the United Nations Charter and
other international commitments entered into by Iceland. The committee was
appointed in January 2012 and convened its first meeting in February. The committee
is expected to present its proposals to the Minister for Foreign Affairs by
November 2012.

There has been
no progress in establishing and filling the post of European Correspondent. The
Director-General for International and Security Affairs in the Ministry of
Foreign Affairs continues to act as the Political Director.

With regard to restrictive
measures, Iceland adopted the relevant decisions to implement most
restrictive measures introduced by the Council Decisions. There has been no
progress concerning implementation of the Common Position on specific measures
to combat terrorism or the Joint Action concerning measures protecting against
the effects of the extra-territorial application of legislation adopted by a
third country and action based thereon.

No further
developments can be reported with regard to conflict prevention and
non-proliferation and the strategy on weapons of mass destruction/small
arms and light weapons.

Iceland
continued its good cooperation with international organisations, such as
the UN, NATO, the OECD, the OSCE and the Council of Europe. It participated
actively and played a key role in the Arctic Council, the Conference of
Parliamentarians of the Arctic Region, the Barents Euro-Arctic Council, the
Northern Dimension, the Nordic Council of Ministers and the West Nordic
Council. Iceland actively supported the call on the governments of the Nordic
countries to draw up a strategy for cooperation on the Arctic under the
auspices of the Nordic Council. It supports the EU’s application for permanent
observer status in the Arctic Council. Iceland has also launched an initiative
to define the common interests of Iceland, Greenland and the Faroe Islands in
the area of climate change and global warming.

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

As regards the common
security and defence policy (CSDP) and contributing capacity, no
developments can be reported in the field of civil crisis management.
Iceland is currently not participating in any EU civilian or crisis management
missions. Responsibility for defence, security and NATO matters remains with
the Ministry of Foreign Affairs, whereas responsibility for managing the tasks
of the former Defence Agency now falls under the Ministry of the Interior.

Conclusion

Overall,
Iceland has reached a high level of alignment in this area. It has aligned with
most EU declarations and Council Decisions when invited to do so. It further
advanced the agenda on Arctic affairs given its clear objective to play an
active part in regional organisations in northern Europe and the Arctic region.

4.32.
Chapter 32: Financial control

Iceland is partly in line with
international standards and EU best practices in the field of financial
control.

There has been some progress in the area of
public internal financial control (PIFC). A detailed PIFC gap assessment
was finalised in January 2012. A comprehensive law revising budgetary
procedures, including PIFC is under preparation. A PIFC policy paper, including
deliverables and timeframes for actions, still needs to be prepared. Internal
audit in the public sector remains to be systematically introduced.
Preparations in this area are ongoing.

Good progress can be reported in the area
of external audit. External audit has been separated from internal
audit, as the Icelandic National Audit Office (INAO) ceased all internal
audit-related activities at the end of 2011. A strategic development plan for
external audit is currently being drafted. Full alignment with the standards of
the International Organization of Supreme Audit Institutions (INTOSAI) is yet
to be achieved, including immunity from prosecution for the Auditor General and
INAO staff. Preparations in this area are well on track.

No progress can be reported in the area of protection
of the EU’s financial interests. Iceland’s legislation needs to be further
aligned with the Convention on the protection of the EU’s financial interests
and its protocols. Iceland also needs to designate the entity responsible
for coordination and cooperation with the European Commission in the fight
against fraud and the protection of the EU’s financial interests. Preparations
in this area are ongoing.

There has been little progress in the area
of protection of the euro against counterfeiting. The Geneva Convention
for the suppression of counterfeiting currency is being translated into
Icelandic with a view to being ratified Overall preparations in this field are
on track.

Conclusion

Overall, Iceland’s financial control system
is partly in line with international standards and EU best practices and
preparations in this chapter are ongoing. Work needs to
continue on preparing the PIFC policy paper, establishing internal audit,
ensuring compliance with INTOSAI standards in the area of external audit and protecting
the EU’s financial interests.

4.33.
Chapter 33: Financial and budgetary provisions

Iceland is partially aligned with the acquis
in the field of financial and budgetary provisions.

There has been no progress as regards traditional
own resources (TOR). Appropriate procedures and systems for accounting for
TOR and making them available still have to be put in place, in
particular as regards the ‘A’ and ‘B’ accounts. The system for writing off
irrecoverable debts remains to be amended and post-clearance auditing on
traders’ premises further developed.

There is no development to be reported
regarding the preparations for the application of the own resources system
(OWNRES). The basic principles and institutions for the policy areas indirectly
affecting the OWNRES continue to function well. The information requirements of
the OWNRES need to be reviewed and procedures set up to communicate cases of
fraud and irregularity to the Commission.

A guarantee system for customs duties
incurred on release of goods for free circulation with deferred payment
facilities needs to be introduced to protect the EU’s financial interests. The
customs clearance declaration processing system (CDPS) will have to be further
developed to make it compatible with EU systems.

There have been
no developments in the area of the VAT resource, where Iceland
will need to develop the capacity to accurately calculate the weighted average
rate and the positive and negative corrections to the intermediate VAT base.

There has been
some progress as regards the Gross National Income (GNI) resource, where
Iceland is already well aligned with the acquis and widely applies the
ESA 95 standards. Remaining shortcoming in the application of ESA 95 are being
addressed by means of an action plan with related timetable.

Little progress can be reported in the area
of administrative infrastructure. Iceland needs to set up the
operational management of the own resources system (OWNRES) at national level
and apply the EU own resources rules. Coordination and cross-institutional cooperation still has to be
initiated to prepare for the application of the EU funding rules. An action
plan to develop an adequate level of administrative capacity needs to be
established by the Icelandic Ministry of Finance.

Conclusion

Overall,
Iceland has a good level of alignment in the policy areas underlying and
affecting financial and budgetary provisions. There has been no further
progress on this chapter during the reporting period. A coordination unit needs
to be formally set up to steer and streamline pre-accession preparations and
working procedures need to be established. The various institutions to be
involved in the OWNRES need to be designated and their tasks and
responsibilities defined.

Statistical Annex

STATISTICAL DATA || || || || || || || ||

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

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

Basic data || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Population (thousand) || || 283 || 308 || 315 || 319 || 318 || 318

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

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

National accounts || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Gross domestic product (GDP) (million national currency) || || 771 894 || 1 308 530 || 1480 346 || 1497 639 || 1536 512 || 1 626 335

GDP (million euro) || || 8 823 || 14 938 || 11 614 || 8 673 || 9 491 || 10 075

GDP (euro per capita) || || 31 136 || 48 550 || 36 817 || 27 158 || 29 881 || 31 637

GDP (in Purchasing Power Standards (PPS) per capita) || || 26 293 || 30 533 || 31 245 || 27 664 || 27 210 || 27 672

GDP per capita in PPS (EU-27 = 100) || || 132 || 121 || 123 || 118 || 111 || 110

Real GDP growth rate (growth rate of GDP volume, national currency, % change on previous year) || || 3.9 || 6.0 || 1.2 || -6.6 || -4.0 || 2.6

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

Labour productivity growth: GDP growth per person employed (% change on previous year) || || 2.2 || 1.4f || 0.5f || -0.8f || -3.7f || 3.0f

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) || || 104.0 || 96.5f || 100.9f || 100.1f || 93.6f || :

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

Agriculture and fisheries || 1) 2) || 8.8 || 5.3 || 6.0 || 7.1 || 7.8 || :

Industry || 1) || 19.0 || 14.5 || 17.7 || 18.1 || 19.0 || :

Construction || 1) || 8.4 || 11.6 || 9.0 || 4.9 || 4.5 || :

Services || 1) || 63.9 || 68.6 || 67.3 || 69.9 || 68.7 || :

Final consumption expenditure, as a share of GDP (%) || || 79.8 || 81.7 || 78.2 || 77.5 || 77.4 || 77.2

Gross fixed capital formation, as a share of GDP (%) || || 21.5 || 28.5 || 24.4 || 13.8 || 12.8 || 14.0

Changes in inventories, as a share of GDP (%) || || -0.3 || 0.5 || 0.2 || 0 || -0.2 || 0.3

Exports of goods and services, relative to GDP (%) || || 38.8 || 34.6 || 44.4 || 52.8 || 56.3 || 59.3

Imports of goods and services, relative to GDP (%) || || 39.9 || 45.3 || 47.2 || 44.2 || 46.2 || 50.8

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

Industry || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Industrial production volume index (2005=100) || || 95.5 || 107.9 || 124.5 || 121.3 || 119.0 || 126.5

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

Inflation rate || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Annual average inflation rate (CPI, % change on previous year) || || 6.7 || 5.0 || 12.4 || 12.0 || 5.4 || 4.0

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

Balance of payments || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Balance of payments: current account total (million euro) || || -381 || -2 351 || -2 853 || -1 013 || -758 || -719

Balance of payments current account: trade balance (million euro) || || -68 || -1 004 || -52 || 523 || 743 || 600

Balance of payments current account: net services (million euro) || || -18 || -502 || -219 || 209 || 210 || 223

Balance of payments current account: net income (million euro) || || -285 || -800 || -2 554 || -1 693 || -1 658 || -1 490

Balance of payments current account: net current transfers (million euro) || || -11 || -44 || -27 || -51 || -53 || -53

of which government transfers (million euro) || || -13 || -41 || -31 || -32 || -34 || -31

Net foreign direct investment (FDI) (million euro) || || -192 || -2 458 || 3 537 || -1 580 || 1 966 || 819

Foreign direct investment (FDI) abroad (million euro) || || 386 || 7 448 || -2 904 || 1 641 || -1 780 || -91

of which FDI of the reporting economy in EU-27 countries (million euro) || || -224 || -4 018 || 1 885 || -1 740 || 1 446 || -

Foreign direct investment (FDI) in the reporting economy (million euro) || || 194 || 4 990 || 633 || 61 || 186 || 728

of which FDI of EU-27 countries in the reporting economy (million euro) || || 41 || 6 003 || 423 || 607 || 176 || -

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

Public finance || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

General government deficit/surplus, relative to GDP (%) || || -0.7 || 5.4 || -13.5 || -10.0 || -10.1 || -4.4

General government debt relative to GDP (%) || || 42.0 || 27.2 || 52.8 || 84.4 || 97.8 || 102.7e

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

Financial indicators || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Gross foreign debt of the whole economy, relative to GDP (%) || 7) || 112.7 || 245.8 || 168.1 || 220.4 || 218.5 || 232.5

Gross foreign debt of the whole economy, relative to total exports (%) || || -0.7 || 5.4 || -13.5 || -10.0 || -10.1 || -4.4

Money supply: M1 (banknotes, coins, overnight deposits, million euro) || || 811 || 4 688 || 4 257 || 2 976 || 3 074p || 3 099p

Money supply: M2 (M1 plus deposits with maturity up to two years, million euro) || || 1 672 || 7 399 || 8 494 || 5 859 || 5 717p || 6 192p

Money supply: M3 (M2 plus marketable instruments, million euro) || || 3 922 || 14 053 || 12 758 || 9 316 || 8 950p || 9 622p

Total credit by monetary financial institutions to residents (consolidated) (million euro) || 3) || : || 36 359 || 15 410 || 9 724 || 10 527 || 10 999p

Interest rates: day-to-day money rate, per annum (%) || 4) || 13.1 || 14.0 || 18.3 || 9.0 || 4.6 || 4.3

Lending interest rate (one year), per annum (%) || 4) || 12.0 || 15.3 || 22.0 || 11.5 || 5.5 || 5.8

Deposit interest rate (one year), per annum (%) || 4) || 6.7 || 13.3 || 15.0 || 8.5 || 3.5 || 3.8

euro exchange rates: average of period - 1 euro = … national currency || 5) || 87.490 || 87.600 || 127.460 || 172.670 || 161.890 || 161.424

Effective exchange rate index (2005=100) || || 135.0 || 120.2 || 216.4 || 232.8 || 208.0 || 217.3

Value of reserve assets (including gold) (million euro) || || 400 || 1 771 || 2 533 || 2 696 || 4 322 || 6 606

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

External trade || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Value of imports: all goods, all partners (million euro) || || 2 536.0 || 4 881.0 || 4 167.0 || 2 583.0 || 2959.0 || 3477.0

Value of exports: all goods, all partners (million euro) || || 2 247.0 || 3 479.0 || 3 650.0 || 2 908.0 || 3478.0 || 3839.0

Trade balance: all goods, all partners (million euro) || || -289.0 || -1 403.0 || -517.0 || 324.0 || 519.0 || 362.0

Terms of trade (export price index / import price index) || || 102.5 || 101.0 || 94.8 || 84.3 || 92.4 || 90.7

Share of exports to EU-27 countries in value of total exports (%) || || 70.0 || 74.6 || 75.9 || 77.6 || 77.4 || 78.3

Share of imports from EU-27 countries in value of total imports (%) || || 58.9 || 60.1 || 54.0 || 51.9 || 52.0 || 46.0

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

Demography || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Natural growth rate: natural change (births minus deaths) (per 1000 inhabitants) || || 8.3 || 8.4 || 9.0 || 9.5 || 9.1 || 7.9

Infant mortality rate: deaths of children under one year of age per 1000 live births || || 2.7 || 2.0 || 2.5 || 1.8 || 2.2 || 0.9

Life expectancy at birth: male (years) || || 78.3 || 79.6 || 80.0 || 79.8 || 79.8 || 79.9

Life expectancy at birth: female (years) || || 83.2 || 83.4 || 83.3 || 83.8 || 84.1 || 83.6

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

Labour market || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Economic activity rate (20-64): share of population aged 20-64 that is economically active (%) || || 89.9 || 88.1 || 87.3 || 86.2 || 86.2 || 86.1

\* Employment rate (20-64): share of population aged 20-64 in employment (%) || || 88.6 || 86.7 || 85.3 || 80.6 || 80.3 || 80.6

Employment rate male (20-64) (%) || || 93.1 || 91.5 || 89.9 || 83.2 || 83.1 || 83.3

Employment rate female (20-64) (%) || || 83.8 || 81.4 || 80.4 || 77.8 || 77.6 || 77.9

Employment rate of older workers (55-64): share of population aged 55-64 in employment (%) || || 86.1 || 84.7 || 82.9 || 80.2 || 79.8 || 79.2

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

Agriculture || || 7.3 || 5.8 || 4.6 || 4.8 || 5.5 || 5.3

Industry || || 16.0 || 11.9 || 12.4 || 12.0 || 11.7 || 12.3

Construction || || 7.2 || 9.1 || 9.9 || 7.1 || 6.3 || 6.0

Services || || 69.6 || 73.3 || 73.1 || 76.1 || 76.5 || 76.3

Unemployment rate: share of labour force that is unemployed (%) || || 1.9 || 2.3 || 2.9 || 7.2 || 7.6 || 7.0

Share of male labour force that is unemployed (%) || || 1.6 || 2.2 || 3.2 || 8.6 || 8.3 || 7.8

Share of female labour force that is unemployed (%) || || 2.2 || 2.3 || 2.6 || 5.7 || 6.7 || 6.2

Unemployment rate of persons < 25 years: share of labour force aged <25 that is unemployed (%) || || 5.1 || 7.0 || 8.2 || 15.9 || 16.2 || 14.4

Long-term unemployment rate: share of labour force that is unemployed for 12 months and more (%) || || : || 0.2 || 0.1 || 0.4 || 1.3 || 1.7

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

Social cohesion || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Average nominal monthly wages and salaries (national currency) || || 249 000.0 || 414 000.0 || 446 000.0 || 433 000.0 || 446 000.0 || 474 000.0

Index of real wages and salaries (index of nominal wages and salaries divided by the CPI/HICP) (2000=100) || || 103.7 || 133.9 || 128.3 || 111.2 || 108.7 || 111.1

\* Early school leavers - Share of population aged 18-24 with at most lower secondary education and not in further education or training (%) || || 30.9 || 26.3 || 27.6 || 23.4 || 25.9 || 23.1

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

Standard of living || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Number of passenger cars per 1000 population || || : || : || : || : || : || :

Number of subscriptions to cellular mobile telephone services per 1000 population || || 875.2 || 1 059.6 || 1 068.3 || 1 095.9 || 1 180.6 || 1 212.1

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

Infrastructure || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

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

Length of motorways (km) || || : || : || : || : || : || :

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

Innovation and research || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Spending on human resources (public expenditure on education in % of GDP) || || 7.0 || 7.4 || 7.6 || 7.8 || 7.6 || 7.2

\* Gross domestic expenditure on R&D in % of GDP || || 3.0 || 2.7 || 2.3 || 3.1 || : || :

Percentage of households who have Internet access at home (%) || || : || 84.0 || 88.0 || 90.0 || 92.0 || 93.0

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

Environment || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

\* Greenhouse gas emissions, CO2 equivalent (tons, 1990=100) || || 108.8 || 130.6 || 141.6 || 134.2 || 129.7 || :

Energy intensity of the economy (kg of oil equivalent per 1000 euro GDP) || || 342.6 || : || : || : || : || :

Electricity generated from renewable sources in % of gross electricity consumption || || 100.0 || 100.0 || 100.0 || 100.0 || 100.0 || 100.0

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

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

Energy || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

Primary production of all energy products (thousand TOE) || || 2 451 || 3 946 || 4 397 || 4 819 || : || :

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

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

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

Net imports of all energy products (thousand TOE) || || 947 || : || : || : || : || :

Gross inland energy consumption (thousand TOE) || || 3 397 || 4 912 || 5 235 || 5 645 || 5 588 || 5 624

Electricity generation (thousand GWh) || || 8.0 || 12.0 || 16.5 || 16.8 || 17.1 || 17.2

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

Agriculture || Note || 2001 || 2007 || 2008 || 2009 || 2010 || 2011

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

Total utilised agricultural area (thousand hectare) || 6) || 1326e || 1332e || 1334e || 1335e || 1336p || 1336p

Livestock: cattle (thousand heads, end of period) || || 70 || 71 || 72 || 73 || 74 || 74

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

Livestock: sheep and goats (thousand heads, end of period) || || 474 || 455 || 458 || 470 || 480 || 476

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

Crop production: cereals (including rice) (thousand tonnes, harvested production) || || 4 || 11 || 15 || 17 || 13 || 10p

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

Crop production: vegetables (thousand tonnes, harvested production) || || : || 5 || 5 || 5 || 5 || 6

: =
not available

- =
not applicable

p =
provisional

f =
forecast

e =
estimated value

b =
break in series

c =
confidential value

\* =
Europe 2020 indicator

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

Footnotes:

1)            2000
- 2009, data according to Nace Rev. 1.1.

2)            2000
- 2009, fishing (predominantly marine fishing) represents 77% (in 2008) of this
share.

3)            2007
- 2011, lending of DMBs to residents and loans of Central bank to Non-bank
institutions.

4)            Year
average.

5)            2001
- 2010, average annual exchange rate and end of period exchange rate as
published by the Central Bank of Iceland (midrate).

6)            Based
on preliminary results from the Farm structure survey (FSS).

7)            Figures
from 2011 data collection corrected as they were given in thousand EUR instead
of million EUR.

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

[2]               Enlargement Strategy and Main Challenges 2012–2013,
COM(2012) 600.

[3]               Measured when using the cross-default rate. When
measured without the cross-default rate, the NPL ratio stood at 11.8% at
end-2011.

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