Iceland's CAP dilemma

Voting intentions are on a knife edge as Iceland heads for its referendum on whether even to restart talks with the EU on membership.  Security and economics are drivers for change and the future of the fishing industry is vital.   However, agriculture is also a key issue.

Farming is ingrained in the Icelandic sense of national identity — in the 1970s there were about three sheep for every person — but it has been in decline. In the early 2000s, farms shuttered, young people moved to Reykjavik for higher-paying jobs and immigration surged. The number of humans overtook sheep in 2021.

“A hundred years ago, almost all people in Iceland were either fishermen or farmers,” according to Steinthor Arnarsson, a sheep farmer located in Burdardalur, northwest Iceland, whose family have been sheep farmers “all the way back”.

There has been talk of driving tractors into Reykjavik in protest. “If we’re going to become European farmers we should start acting like them,” Arnarsson joked to the Sunday Times.

Their main concern is that joining the single market will leave farmers priced out by cheap goods from the EU. They also fear that there will end up being fewer, bigger farms, consolidated around the capital, leaving rural communities diminished.

Others argue that EU subsidies would mean Icelandic farmers end up benefiting, and that membership of the bloc could also help to improve crumbling infrastructure in the country. Potholes are regularly mentioned.

Herdis Gunnarsdottir owns a dairy farm in Egilstad in the remote east of Iceland. She fears that her farm, with 80 cows (“big for Iceland”) won’t be able to compete with milk from industrial farms in the Netherlands, for example.   But transporting milk from the Netherlands to Iceland would be expensive, and Icelanders might prefer their home product.

 

CAP will be tricky subject if Iceland joins EU

The news that Iceland is to hold a referendum on joining the EU in August reminds us that, apart from fisheries, agriculture is likely to be one of the most difficult topics in any negotiations.   Iceland has a producer subsidy equivalent three times the OECD average and farmers on average receive nearly half their income from the state.

It is a small and shrinking sector, but is cherished and has some interesting innovations such as using geothermal power to grow tomatoes.   Cucumbers and herbs are also produced in this way all year round.

The sheep sector is unsurprisingly the largest and there is some dairy production.

The iceing on the cake

With the approval by the Icelandic Parliament of arrangements to pay back money owed by failed Icelandic banks to depositors in the UK and the Netherlands, the way is now clear for Iceland's application to join the EU to proceed.

The opening of negotiations has already been approved by the Parliament, but membership would have to be approved by a national referendum and approval rates have been dropping sharply as the nation's population consider that they have been harshly treated by the international community for the failures of a few financiers.

Fish is normally seen as the main obstacle to Icelandic membership, but agriculture also poses many challenges. Iceland has a PSE of around 70 per cent, one of the highest in the OECD (along with Norway and Switzerland, although reforms have been introduced in the latter country) and twice the OECD average. The OECD has commented that since the last 1980s there has been limited progress in policy reform with only a slight drop in levels of producer support.

Sheep farming has been the main activity, but this has been in decline. Scarcely any crops are grown in the country. There are around five hundred dairy farms, presumably to ensure a liquid milk supply given the country's isolation. At least until recently, dairy prices were still administered.

The EU's net trade balance with Iceland is just over €150m for agricultural and food exports. The value of EU food exports has risen 25 per cent in the last four years. However, there is a trade deficit of more than €1bn in fish products.

In any negotiations account has to be taken of Iceland's special circumstances in terms of climate and location. There is no doubt that agriculture as well as fish is a sensitive subject in terms of the already wounded national pride of the Icelandic nation. The main potential gain for Iceland is membership of the euro and relief for their own battered currency.

We shall be paying special attention to negotiations as they proceed.