Introduction: The Collapse of Icesave
In 2006, Landsbanki – one of Iceland’s three major banks – officially announced the launch of a new project: Icesave. Icesave, a new brand to be operated by Landsbanki, was designed to offer online savings accounts with low commitment, ease of access, and high interest rates in both the United Kingdom and the Netherlands (Landsbanki Annual Report 2007). In the UK, the interest rates were higher than 6%10; in the Netherlands, 5.25%11.
As more evidence of the Icelandic banks’ extreme risk levels was revealed, however, fear consumed those who had deposits in Landsbanki. The speculation of the Icelandic banks, in conjunction with ensuing global financial crisis, sparked a run on the bank in the UK – a run on the bank that marked the demise of Landsbanki.
The Icelandic Parliament issued Act No. 125/2008 on October 6, 2008, in which the Icelandic government took Landsbanki under its control as a result of “unusual and extraordinary circumstances on the financial market.”18 The Icelandic Government also stated “that deposits in domestic commercial and savings banks and its branches in Iceland will be fully covered,” making no mention of the British or Dutch deposits in the Icesave accounts12.
On October 7, Landsbanki was placed on receivership by the Icelandic government. The FME, Iceland’s Financial Supervisory Authority, clearly stated that the objective of taking control of Landsbanki was “to guarantee a functioning domestic banking system.” The bank would operate as usual, and domestic deposits were fully guaranteed, but Iceland once again failed to make a mention the bank’s foreign deposits13. Iceland moved all of Landsbanki’s domestic assets and liabilities to a new government-owned bank, Nýi Landsbanki. The Icesave accounts and any other foreign assets and liabilities remained under the old Landsbanki, which now had to pay off €22.2 billion of liabilities with only €12.1 billion in assets14. The Icesave dispute had officially begun.
The EU’s relationship with Iceland
Though Iceland is rather alienated from the European Union geographically, it has had frequent political and financial involvement with the EU over the last 40 years. 54% of Iceland’s imports are from EU-member countries, and 76% of its exports go to EU-member countries16. Iceland is included in the Schengen area, an area of over 4 million square kilometres, which allows freedom of internal travel. Since Iceland is already in agreement with Schengen protocols, issues regarding common policies on the temporary entry of persons, harmonisation of external border controls, cross-border police and judicial co-operation are avoided. According to the European Commission’s Opinion on Iceland’s application for membership of the European Union, “the Commission recommends that negotiations for the accession to the European Union should be opened with Iceland.” The Commission formed its opinion by analyzing Iceland’s ability to satisfy three important economic and political conditions defined by the Copenhagen criteria:
1. Firstly, the new Member State must achieve “stability of institutions guaranteeing democracy, the rule of law, as well as human rights and respect for and protection of minorities.” 2. Secondly, the “existence of a functioning market economy and the capacity to cope with competitive pressure and market forces within the Union” must be present. 3. Thirdly, the country must have the “ability to take on obligations of membership including adherence to aims of political, economic and monetary union.” The political criteria were seen as satisfied overall, and the economic criteria and ability to adapt to the EU’s policies were also seen as generally satisfied, providing that Iceland “swiftly implements the necessary policy measures and structural reforms” 16.
However, Iceland’s recent financial crisis calls for a re-evaluation of the Commission’s opinion. Iceland’s dispute with the United...
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