Iceland's EU referendum could reshape enlargement far beyond the North Atlantic

Iceland votes on August 29 on whether to restart European Union accession negotiations, and the result is genuinely uncertain. Opinion polls give the Yes camp a single-digit lead, but a large pool of undecided voters could swing either way. The stakes extend well beyond an island of fewer than 400,000 people.

This is not Reykjavik's first encounter with EU membership. Iceland applied in 2009, when the financial crisis had brought its banking sector to its knees, and opened negotiations the following year. By 2013 a new government put talks on hold. In 2015, Reykjavik told Brussels it should no longer be considered a candidate, though it never formally withdrew its application. Before suspending negotiations, Iceland had closed 11 of the 33 policy chapters that all candidate countries must complete.

A test of whether the EU still attracts the wealthy

For Brussels, the referendum is more than a bilateral question about one small country. Hallgrimur Oddsson, director of the think tank Evrópustraumar, which tracks EU-Icelandic relations, frames it as a wider reckoning: "The enlargement over the past decade and more has been pointing eastwards. In my mind, from the EU perspective, this is a sort of a test. To see if the EU is attractive enough for the wealthier northern countries that are now currently outside of the union to join."

The EU's enlargement debate has focused almost entirely on less wealthy countries in the Western Balkans and, more recently, Ukraine and Moldova. No country has joined since Croatia in 2013. If Iceland were to become a member, it would be the third richest in the bloc on a per capita basis and a net contributor to the EU budget, something none of the current candidate countries is expected to be. It would also be straightforward to absorb: Iceland is already part of the Schengen passport-free zone and, through the European Economic Area, applies large parts of the EU's internal market rules.

European diplomats, speaking off the record, acknowledge that an Icelandic Yes would deliver a morale boost to a bloc that has endured Brexit, sluggish growth in parts of the union, migration disputes and Russian hybrid threats. The symbolism of a wealthy country choosing to join matters precisely because recent enlargement has moved in the opposite direction: poorer countries seeking entry, and richer ones looking for opt-outs.

Fishing and farming: the domestic fault lines

The economic case for membership has resurfaced. Iceland grapples with high inflation, and the small, freely floating Icelandic krona has long been a source of price instability. Oddsson frames the question directly: "We have a small free-floating currency. And the question is, can we get that price stability and lower rates with the euro?"

But two policy areas put Iceland at odds with the EU from the start: fisheries and agriculture. Fishing accounts for roughly 10 per cent of Iceland's GDP and the industry carries political weight far beyond its economic share. Iceland's identity as a fishing nation shapes its politics, and the memory of the 1975-76 Cod War, when Reykjavik extended its exclusive fishing zone to 200 nautical miles and its coast guards cut the nets of British trawlers, remains vivid. That 200-mile limit later became the international norm codified by the United Nations.

The EU also observes the 200-mile zone, but with a critical difference: fishing vessels from one member state can operate in the waters of another. Iceland has no intention of granting European fleets greater access to its rich fishing grounds. Reykjavik would like a full opt-out from the Common Fisheries Policy, but France, Portugal and Spain are unlikely to accept such an exemption. A possible compromise would allow non-Icelandic vessels to catch some species, such as mackerel, while keeping cod and haddock off limits. Another option is a lengthy transition period, similar to what Ukraine's vast agricultural sector might eventually receive.

Agriculture is the other sore point. Farmers are a small group in Iceland but politically influential. Vilborg Asa Gudjonsdottir, a researcher at the University of Iceland, explains: "Farmers are worried that joining the EU would mean a loss for them. For example, we have protective tariffs on agricultural products and those would have to go if we joined the EU. What would that mean for their livelihoods and for their ability to continue to farm?"

A coalition split down the middle

Iceland's governing coalition is divided. The centre-left Social Democratic Alliance and the centrist Liberal Reform Party support restarting accession talks. The junior partner, the People's Party, opposes them. So does the entire opposition. If the referendum produces a Yes, the government will have a mandate to resume negotiations, but it will be navigating without a unified parliamentary majority behind it.

Gudjonsdottir captures the mood: "It's impossible to predict, because this is super close. And even those that were undecided a month ago and have decided what they're going to vote for today, these votes are splitting almost equally for the Yes and for the No side. So, I won't be making any predictions here."

Arctic security and the American question

Economic arguments are not the only force at work. Arctic security has become more pressing, with increased Russian submarine activity in the far north and transatlantic trade tensions sharpening. Steven Blockmans, deputy director of the International Center for Defense and Security, notes: "Arctic security has become a hot button issue. Of course, the saber rattling over Greenland and the fact that Trump confused Iceland for Greenland a couple of times, has not helped. That has put nerves on edge, and it's been seized upon by this pro-European coalition."

Iceland is the only NATO member without a standing army, protected under a 1951 defence agreement with the United States. Washington has not made any territorial claims regarding Iceland. But the broader pattern of uncertainty about American commitments in the region has pushed some Icelandic politicians and voters towards Brussels as an additional anchor.

Ripples in Oslo, Nuuk and Edinburgh

An Icelandic Yes would reverberate well beyond Reykjavik. Norway has rejected EU membership twice, in 1972 and 1994, and recent polls still show a majority against joining. But EU diplomats say Norwegian officials are in regular contact with Brussels about what Icelandic accession would mean for the European Economic Area, of which Norway, Iceland and Liechtenstein are members alongside the EU. If Iceland left the EEA to join the EU, the arrangement would look very different.

Further afield, Brussels believes Icelandic movement towards the EU could reopen discussions in Greenland, which left the European Economic Community in 1985, and in Scotland, which voted overwhelmingly to remain in the EU during the 2016 Brexit referendum. Both would raise politically sensitive questions: Greenland's status involves Copenhagen, and Scotland's involves London. Neither conversation is imminent, but both become more plausible if Iceland moves closer to the bloc.

Pairing with Montenegro

Brussels also sees a practical benefit in pairing Iceland's accession with a current candidate. The most obvious partner is Montenegro, which has closed 18 of the 33 negotiating chapters and is the furthest advanced among the existing candidates. Iceland had closed 11 chapters before suspending talks. If both countries made steady progress, Reykjavik and Podgorica could, in theory, reach membership around the end of this decade.

The logic for current member states is straightforward: they are keen to admit Iceland, which would be a net budget contributor, and pairing it with a Western Balkan candidate makes the wider enlargement package more palatable. For candidate countries in the Balkans and in Eastern Europe, an Icelandic Yes would demonstrate that enlargement is not a frozen process.

The constitutional hurdle

Even a Yes on August 29 does not make Icelandic EU membership inevitable. The result would only authorise the government to restart negotiations. Any final accession treaty would need to be approved in a second referendum.

Before that, Iceland's constitution would need to be amended to permit the transfer of sovereign powers to an international body. Under current rules, a constitutional amendment must be passed by the Althingi, then a general election must be held, and then the newly elected parliament must approve the same text unchanged. The next regular election is due no later than 2028, and the constitutional amendment process would itself trigger an election.