Conclusions on Iceland
(extract from the Communication from the Commission to the Council and the European
Parliament "Enlargement Strategy and Main Challenges 2010-2011", COM(2010)660 final)
The first progress report on Iceland confirms the assessment of the Commission's Opinion of
February 2010 that Iceland meets the political criteria. Iceland is a functioning democracy
with strong institutions and deeply rooted traditions of representative democracy. The
country's judicial system is well established and the judiciary is of a high standard. As regards
human rights and the protection of minorities, Iceland continues to safeguard fundamental
rights and to ensure a high level of cooperation with international mechanisms for the
protection of human rights.
However, the Opinion also identified a number of shortcomings. The report confirms that
Iceland has taken some measures to address them.
As far as the political criteria is concerned, the coalition government remained stable over
the reporting period despite the difficult economic background and diverging views among
the Icelandic political forces and population on the prospect of EU accession However,
support for the accession process has increased at the end of the reporting period with a
majority in favour of conducting accession negotiations.
Some progress has been achieved in identifying those responsible actors for the collapse of
the Icelandic banking system and in addressing its political and administrative consequences.
This is a notable feature of the functioning of Icelandic democratic institutions. The report of
the independent Special Investigation Commission, published in April 2010, led to a number
of recommendations to stabilize the financial system and to increase its supervision. In
parallel, the Office of the Special Prosecutor continued to conduct a number of investigations
in the aftermath of the financial crisis.
Good progress was made to further improve the legal framework related to conflict of
interests and the financing of political parties. The Judiciary Act was amended to change the
rules on the appointment of judges with the aim of further strengthening the independence of
the judiciary. Implementation of the Special Investigation Commission recommendations, the
amended framework on conflict of interests as well as the revised procedures on judicial
appointments is underway. The impact of these measures will need to be reviewed at a later
stage.
Both government and parliament have continued to function well. The government took steps
to further strengthen the public administration. The negotiating committees in charge of
coordinating the overall accession process work smoothly.
The Council of Europe Framework Convention for the Protection of National Minorities
remains to be ratified.
The economy of Iceland went into a deep and long recession and prospects for even a mild
recovery remain uncertain. Unemployment has increased and public finances have suffered a
marked deterioration with higher fiscal deficits and a significant rise in the already high
public debt. On the other hand, inflation has been gradually and steadily coming down. A
prudent macroeconomic policy mix focuses one exchange rate stabilisation and fiscal
consolidation. A still dysfunctional financial sector and widespread private sector balance
sheet imbalances as well as a very high external debt represent key challenges. The IMF
programme has been on track.

EN

1 Error! Unknown document property name.

EN

As regards the economic criteria, Iceland can be considered a functioning market economy.
However, financial sector weaknesses and capital movement restrictions still impede an
efficient allocation of resources. Iceland could regain the capacity to cope with competitive
pressures and market forces within the single market over the medium term, provided that it
continues to address current structural weaknesses through appropriate macroeconomic
policies and structural reforms.
The policy response has by and large been appropriate and supportive to re-establish a higher
degree of macroeconomic stability, although prospects for a swift resumption of economic
growth remain uncertain. Fiscal consolidation continued; fiscal deficits have started to decline
and public debt has been restructured with a view to smoothing its profile and reducing
exchange rate risks. Inflation has come down and key policy interest rates have been
gradually lowered. A higher trade surplus has supported a slight appreciation of the domestic
currency. Foreign exchange reserves have increased, however this was achieved largely on
the basis of official external financing. The labour market remained flexible and participation
rates relatively high. The country enjoys good basic infrastructure, abundant natural
resources, and a well-educated population.
However, the economy is still struggling with the effects of the financial meltdown. Public
finances remain confronted with the challenge to implement severe spending cuts and suffer
from significant contingent liabilities related to financial sector distress, with a gross general
government debt level of almost 90% of GDP. Despite real wage adjustments, unemployment
has risen markedly. The reconstruction of the banking sector has progressed, but banks are
still suffering from weak asset quality which undermines their ability to finance the economy.
Widespread private sector balance sheet imbalances pose threats to financial stability. In
addition, Supreme Court rulings declaring foreign exchange indexed loans illegal created
uncertainty, notably on the treatment of corporate sector loans. This could further erode the
financial situation of domestic banks as they would have to shoulder the additional burden
instead of borrowers. The process of corporate sector debt restructuring has progressed slowly
and the debt overhang is limiting the scope for new investment, holding back the recovery.
Investment in large infrastructure projects is currently still under review because of political
discussions and lack of funding. The business environment remained hampered by capital
controls, relatively high interest rates and difficult access to financing, especially for SMEs.
In this first progress report, Iceland's ability to assume the obligations of membership was
assessed in light of its participation in the European Economic Area (EEA) and taking into
account the exemptions granted under the EEA. The overall level of preparedness to meet EU
acquis requirements remains good, in particular due to Iceland's participation in the European
Economic Area.
The Icesave dispute remains unresolved. The bill authorizing a state guarantee on the loans
granted by the governments of the UK and the Netherlands for the compensation they
provided to their citizens holding saving accounts in Icesave was rejected by referendum in
March 2010. The EFTA Surveillance Authority (ESA) send a letter of formal notice to the
Iceland government in May 2010, hereby taking the first step in an infringement procedure
against Iceland arguing that Iceland acted in breach of the Deposit Guarantee Scheme
Directive by leaving the depositors in Icesave's Dutch and UK branches without the minimum
guarantee. The European Commission shares the legal analysis of ESA. Negotiation efforts
between the representatives of the three governments did not yield a result yet.
Preparations to take on the obligations of membership in the medium term continued in areas
partly covered by the EEA as well as in chapters not covered by the EEA. Iceland continues
to be largely aligned and applies a substantial part of the acquis in the fields covered by the

EN

2 Error! Unknown document property name.

EN

EEA such as free movement of goods, freedom of movement of workers, right of
establishment and freedom to provide services, free movement of capital, public procurement,
company law, intellectual property law, competition, financial services and information
society and media.
However, efforts to further align with the EU acquis, in particular in areas not covered by the
EEA, and to ensure its implementation and enforcement need to continue. It should also be
noted that the following areas are likely to pose challenges in the accession process: financial
services, agriculture and rural development, fisheries, free movement of capital as well as
environment.
The government's efforts to address the fallout of the economic and financial crisis led to
significant budgetary cuts. Attention is needed to ensure that resources remain available for
the necessary preparations associated with the process of EU accession.
Iceland continues to be largely in line with the acquis in the area of free movement of goods.
However, some elements are not yet fully in place as far as horizontal measures and the old
approach product legislation are concerned.
A satisfactory level of alignment has been reached in the field of free movement of workers.
Preparations for the coordination of social security systems remain to be completed.
Legislation on the right of establishment and freedom to provide services is broadly in line
with the exception of the services and postal directives.
Iceland applies the acquis on free movement on capital, with some exceptions In close
cooperation with the IMF, the Icelandic authorities have committed to gradually remove
restrictions on capital movements and payments. Nevertheless, capital flow restrictions were
meanwhile extended until August 2011; the maximum amount of foreign currency that can be
bought for travel was reduced. Significant and sustained efforts are still needed to remove the
existing restrictions on capital movements, including foreign investment in fisheries.
Iceland has implemented the main body of the acquis on public procurement and overall
alignment is very good. However, the administrative capacity remains to be further enhanced
to ensure proper implementation of public procurement policies.
Good progress was made on company law. However, full alignment with accounting
standards is not achieved. Iceland continues to be largely in line with the acquis in the field of
intellectual property law but a comprehensive enforcement policy is needed.
Iceland has reached a high level of alignment regarding the competition acquis and the
relevant administrative structures are in place. The state aid measures taken in response to the
financial crisis remain to be assessed.
Full implementation of the acquis on financial services, together with a reinforced
supervisory framework, remains to be ensured. Implementation is not complete in some key
areas including insurance and securities markets.
Iceland has already reached a high level of alignment and applies a substantial part of the
acquis in the field of the information society and media However, the provisions of the
telecom reform, the audiovisual media services directive and the policies derived from the
recent adoption of the European Digital Agenda remain to be implemented.
Preparations in the field of agriculture and rural development have not started yet. The
establishment of structures to address changes in the administration, in particular the settingup of an EU-compliant paying agency and an integrated administration and control system
(IACS) remains to be addressed.

EN

3 Error! Unknown document property name.

EN

Some progress has been made on food safety, veterinary and phytosanitary policy, in
particular in transposing the legislation on general food safety. However, efforts are required
to strengthen the administrative and laboratories' capacities. Substantial differences from the
EU system remain as regards the hygiene package, plant protection products, novel food and
genetically modified food.
No new development can be reported in aligning with the EU common fisheries policy.
Particular attention needs to be paid to the internal market acquis regarding the right of
establishment, the freedom to provide services as well as the free movement of capital in the
fisheries production and processing sectors where the restrictions in place are not in line with
the acquis. Mechanisms for implementing and controlling Community support measures have
yet to be set up.
On transport, the restrictions to foreign investment in air and maritime transport remain in
force. Iceland has already reached a high level of alignment and applies a substantial part of
the acquis in the field of energy. Alignment with the acquis in the areas of oil stocks,
independence of regulatory authority and energy efficiency is moderately advanced.
No legislative developments can be reported in the area of taxation. Iceland has already
achieved a good level of administrative capacity. Nevertheless, liaison offices and IT
interconnectivity are still to be established.
Iceland is already highly in line with the acquis in economic and monetary policy. However,
several shortcomings still exist, in particular regarding full independence of the central bank
and the prohibition of monetary financing of the public sector.
As regards statistics, the availability of statistical data in line with EU methodology needs to
be improved in particular in business, macroeconomic and agriculture statistics. The
implementation of major planned statistical operations such as the farm structure survey and
the population and housing census is not guaranteed as human and financial resources have
been further cut down.
Iceland already implements substantial parts of the acquis related to social policy and
employment. However, a comprehensive employment strategy remains to be elaborated.
Against the difficult economic background, preparations in the area of enterprise and
industrial policy are well on track. Better access to finance for SMEs is an issue. Alignment
with EU standards on trans-European networks is high.
As regards regional policy and coordination of structural instruments, Iceland is at an early
stage of preparations for the implementation of the cohesion policy instruments. An
appropriate needs analysis, including the identification of the institutions responsible for the
implementation of the cohesion policy, remains to be performed.
Iceland's judiciary is of a high standard and Iceland provides for a high level of protection on
fundamental rights. Iceland has taken some measures to address the shortcomings identified
in the February 2010 Opinion in particular as regards the procedure of judicial appointments
and conflict of interest. However, implementation of these recommendations needs to be
further assessed. The legislation on citizens' rights and data protection is not yet in line with
the acquis.
Iceland applies the Schengen Agreement and has reached an advanced level of alignment with
the acquis in the field of justice, freedom and security. The legislation in some areas remains
to be brought fully in line with the acquis and relevant international instruments need to be
signed or ratified.

EN

4 Error! Unknown document property name.

EN

Iceland is well advanced for EU accession and integration into the European Research Area.
Alignment with EU standards in the field of education and culture is high. Iceland continued
to participate actively in the Open Method of Coordination in education as well as in
community programmes including Lifelong Learning, Youth in Action and Erasmus Mundus
programmes.
Environmental policy in Iceland is, to a large extent, aligned with the EU acquis through the
EEA agreement and further progress can be reported in the areas of air quality and sustainable
development. However, compliance with the climate change as well as the nature protection
acquis in particular as regards protection of whales, seals and wild birds as well as
conservation of natural habitats and of wild fauna and flora remains to be achieved. The
ratification of key multilateral environmental agreements is pending.
Iceland has already implemented a significant part of the acquis in the field of consumer and
health protection. However, the transposition of new acquis in the area of consumer
protection remains to be completed and the processing of RAPEX notifications needs further
streamlining.
The customs legislation of Iceland is, to a large extent, in line with the acquis. Significant
further approximation is needed in duty-free legislation and practices. Interconnectivity with
the EU IT systems remains to be ensured.
Some progress has been made in the field of external relations. Iceland started preparations to
assess its obligations relating to the need to amend or renounce its international agreements; it
also began preparations related to the common commercial policy. Measures remain to be
taken to ensure that Iceland's Official Development Assistance does not decline further.
Iceland has made good progress and reached an overall good level of alignment in the area of
foreign, security and defence policy.
As regards financial control, a gap assessment needs to be carried out in the areas of financial
management and control systems and internal and external audit to take into account
internationally accepted standards in force in the EU. Preparations regarding the protection of
the EU´s financial interests remain to be enhanced. There has been some progress in the area
of financial and budgetary provisions as Iceland has started to identify the required alignment
with the acquis.

EN

5 Error! Unknown document property name.

EN