By Stine Jacobsen
COPENHAGEN, June 16 (Reuters) - Iceland should join the European Union to help it boost its economy, stand up to larger trade partners and withstand Arctic rivalry, the island's finance minister told Reuters, ahead of a public vote on whether to restart talks with Brussels.
Iceland, a NATO member with no standing army situated at one of the North Atlantic's most strategically vital chokepoints, will vote on whether to restart EU membership negotiations on August 29.
The ballot is not
a vote on membership itself and any deal would require a second referendum. Reykjavik abandoned previous negotiations in 2013 when a Eurosceptic government took power.
"I think that both our economic interests and our security interests are well served by membership," Finance Minister Dadi Mar Kristofersson, whose party recommends a 'yes,' told Reuters.
"The core values of a small open economy are always going to be free trade and a rules-based order, because we do not have the capacity to defend our interests by force."
U.S. A KEY PARTNER BUT ITS GREENLAND POLICY RAISED CONCERNS
Kristofersson said a bilateral defence agreement with the United States from 1951 and NATO membership remained the foundation of Iceland's security.
But he said Trump's threats to acquire Greenland had changed the calculation to a certain extent.
The standoff triggered one of the sharpest transatlantic confrontations in years, with the EU threatening sweeping economic retaliation against Washington.
The U.S. believes its sphere of influence stretches beyond Iceland and Greenland, he said. "And that is not going to change."
For Iceland, which sits between Greenland and Europe at one of the Atlantic's most monitored stretches of ocean, the episode underlined its strategic importance.
"We are the unsinkable aircraft carrier and we will remain the unsinkable aircraft carrier," he said.
Gylfi Zoega, a professor of economics at the University of Iceland, said changes that might have unfolded over a decade had been compressed into 18 months under the Trump administration.
"Europe is on its own. And then we have to decide whether to be a U.S. military base important for the defence of the U.S. homeland or be part of Europe. And that's the big question," he said.
With just 400,000 people, Iceland would be the smallest country in a bloc of 450 million. For the EU, its strategic location and its rich fishing waters make it an attractive candidate though Brussels has been careful not to be seen to be campaigning ahead of the vote.
THE ECONOMIC QUESTION
Iceland is the most expensive country in the world, according to analysis by Viska, Iceland's largest academic union, and has a central bank rate of 7.75%. The island, whose volcanic landscapes featured in the HBO series Game of Thrones, lives off fish, aluminium and tourism.
Central Bank Governor Asgeir Jonsson recently cited lower transaction costs, greater competition and lower interest rates as benefits of euro adoption while warning the transition could be inflationary and deep labour market reform would be required regardless.
Kristofersson said EU membership could bring interest rates down.
"Iceland will never become cheap, but ... it might become cheaper," he said.
He said the Icelandic crown currency was very small and susceptible to volatility, and that membership would open up three options: keeping it floating freely, pegging it to the euro or adopting it outright.
Opponents argue Iceland already enjoys single market access through the European Economic Area without the costs and obligations of full membership, and that a permanent fisheries exemption from Brussels would be difficult to achieve. Fishing is crucial to Iceland's economy and national identity and the industry fears that joining the EU's Common Fisheries Policy could mean opening Icelandic waters to foreign fleets.
(Reporting by Stine Jacobsen; Editing by Alexandra Hudson)
