Iceland minister says adopting euro logical step

STOCKHOLM, Feb 12 (Reuters) - Iceland’s new commerce minister said on Thursday the adoption of the euro was a more logical path towards restoring financial stability than currency cooperation with Norway.

Iceland’s economy collapsed in October after its top commercial banks failed under the weight of foreign debts and trade in its currency effectively ceased.

In an interview with Reuters TV, Iceland’s minister of business affairs, Gylfi Magnusson, noted that joining the EU was a controversial idea, particularly because of its fisheries policy which many Icelanders would not want to subscribe to.

“But if we want a credible currency with a credible central bank to back it up then the euro seems to be the most logical option,” he said.

“There may be other options including some sort of arrangement with Norway, but that seems like more of a long shot in my view.”

Iceland’s new prime minister has said joining the EU and then adopting the euro was the best way to revive the economy.

Norway’s finance minister and her Icelandic counterpart discussed possible closer currency cooperation last week.

Magnusson, a University of Iceland economics professor, was appointed this month after a government comprised of the Social Democrats and the Left-Greens was formed. This followed the collapse of a previous centre-right coalition.

The Social Democrats favour joining the EU and adopting the euro. The Left-Greens have been more cautious about membership.

Magnusson, who is not affiliated to any party, said it might take time before Iceland was ready for the euro, but joining the European Exchange Rate Mechanism could be a key first step.

“We probably want to do a bit of house-cleaning and do things properly by first joining the exchange mechanism ... where we basically align our economy including interest rates and inflation more with that of the euro zone.”

This, he said, would give the economy badly needed credibility. “Just being on the way to the euro, through the front door, would actually send a very strong signal. It would probably calm markets now.”

It would be best to leave up to markets to determine what would be an acceptable exchange rate range at which to join the ERM, he said. (Writing by Anna Ringstrom; editing by Robert Woodward)