Mixed feelings, but Iceland votes for shelter of the EU

Last year's disastrous banking collapse triggers a rethink in a once fiercely independent nation

Last week Iceland's lawmakers voted by a narrow margin to give up some of the country's cherished independence and to seek the shelter, and restrictions, of European Union membership.

The nation's buccaneering Viking spirit took a battering last year when its banking sector and currency collapsed as the volcanic island became an early casualty of the global economic crisis.

So, although many among the Iceland's 320,000 population have their doubts about joining the 27-nation EU – and potentially the euro currency – on Thursday, the legislature passed a bill authorising membership talks. The main party in the left-leaning government supports the move. Prime Minister Johanna Sigurdardottir has said that membership would provide a more stable exchange rate and lower interest rates.

Ms Sigurdardottir is keen to get on and submit a membership application to the EU by the end of July. A final decision to join the bloc would need approval by Icelanders in a referendum.

EU membership would, however, hit Iceland's fishing industry, one of the few sectors to have survived the financial crash and a symbol of national pride. If Iceland joined the EU, it would almost certainly have to sign up to its common fisheries policy, allowing other European fishermen access to its waters.

Bjarni Benediktsson, leader of the minority Independence Party and a former prime minister, has warned that Iceland should protect its interests.

"There are no credible reasons for Icelanders to give away full control of their natural resources," he says.

During days of heated debate on the EU bid in Iceland's pocket-sized parliament, the Althing, matters were often sidetracked by discussions on how, and if, Iceland would reimburse British and Dutch governments for compensation paid out to depositors of the failed Icesave internet bank. Civic Movement, a small opposition party, wants Iceland's government to renegotiate the terms of that repayment – a move that would infuriate Britain and the Netherlands, both EU members.

Iceland belongs to the European Economic Area, a trading bloc that allows Icelanders to live and work in the EU while leaving their country able to run its own agricultural, fishing and monetary policies. And, until recently, there was little support for closer ties with the EU. But last year's collapse of the banking system under the weight of huge debts amassed during years of light economic regulation shook Icelanders' belief in their financial systems.

First, the plummeting krona, and spiralling unemployment and inflation, forced the nation to seek a $10bn IMF-led bailout. Then, late last year, thousands of Icelanders held angry protests against the then pro-business government, clattering pots and kitchen utensils in what some called the "Saucepan Revolution". The government resigned and was replaced after a national election by a coalition of Sigurdardottir's Social Democrats and the Left-Greens.

A version of this article first appeared in Business Week magazine