Iceland and Euro Adoption: Effects on international trade

Abstract

This thesis explores the potential effects of euro adoption on Iceland’s international trade. The central question is whether switching from the króna to the euro would enhance trade with European partners, and what the associated trade-offs might be. A dual-method approach is used: a gravity model estimates the impact of joining the eurozone on trade flows, while qualitative interviews with economists, politicians, and policy experts provide context and institutional insight. The gravity model indicates that eurozone membership is commonly associated with a significant increase in bilateral trade, up to 35% in some cases, mainly due to reduced transaction complexity and currency risk. For Iceland, however, the implications go beyond trade volume. Giving up monetary sovereignty would remove tools the country has relied on in times of domestic economic shocks. These findings do not offer a conclusion, but rather open space for more focused and evidence-based discussion about what is gained and what is lost in moving toward the euro.