The Faeroe Islands: land, people, politics, economy

Situated roughly half way between Scotland and Iceland in the Northeast Atlantic, the Faeroe Islands are an archipelago of 18 mountainous islands, with a total land area of some 1400 sq. km, a sea area of 274,000 sq. km and a population of just over 47,000.

The Faeroe Islands is a part of the Kingdom of Denmark. According to Article 1 of the Danish Constitution it applies to all parts of the Realm, including the Faeroes, which means that the Faeroe Islands are viewed as integral and equal part of the Kingdom of Denmark. A more than proportionate quota of two seats in the Danish Folketing is reserved for the representatives elected on the Faeroe Islands. As a self-governing territory under the sovereignty of the Kingdom of Denmark, the Faeroe Islands legislate and govern a wide range of areas in accordance with the Home Rule Act of 1948. The islands' official status changed from 'county of Denmark' to 'self-governing community within the Kingdom of Denmark'. Under the Home Rule Act a framework for extensive self-government had been established, so the Faeroese oversaw their own affairs inasmuch as their decisions did not affect Denmark.

The Faeroe Islands are integrated into the general organization of the Danish police force and the judicial structure. For example, the Faeroes has their own criminal code, which is, however, almost identical to the Danish one. Decisions taken by the courts on the Faeroes Islands may be appealed to the Court of Appeal in Copenhagen[1].

As a main principle, the Danish Constitution stipulates that the foreign and security interests of all parts of the Kingdom of Denmark are the responsibility of the Danish government. To safeguard the foreign policy interests of all parts of the Kingdom, a close and continuous co-operation exist between the Danish government and Faeroese home rule government.

The Faeroe Islands postponed an attempt to hold a referendum for full independence in 2001 after then Prime Minister Nyrup Rasmussen declared he would halt Danish aid after four years if they went their own way. This financial lifeline is vital for the Faeroese economy but although Nyrup Rasmussen's determined approach drew condemnation from the islanders, he was backed by a majority of the Danish parliament.[2] Efforts by the Faeroese to re-open negotiations with Denmark have continued, but their chances of gaining independence are small. Moreover, until now the political majority in the Løgtingið has been in favour of upholding the ties with Denmark.

The political and constitutional relations between Denmark and the Faeroe Islands have proven to be very flexible and strong. Though Denmark since 1973 is a member of the European Union, the Faeroe Islands have chosen to remain completely outside the EU. Article 299 (6a) of the Treaty establishing the European Community states that “this Treaty shall not apply to the Faeroe Islands.” Thus, from a legal point of view, this created a strange situation in which one part of the Realm (i.e. Denmark) is a part of the European Union, while two other parts (the Faeroes and Greenland) and are not. Moreover, a protocol to the treaty of accession of Denmark to the European Communities stipulates that Danish nationals residing in the Faeroe Islands are not to be considered as Danish nationals within the meaning of the treaties. Hence, Danish people living in the Faeroes are not citizens of the European Union. Faeroese relations with the EU are therefore governed by special bilateral agreements. Should the Faeroe Islands decide to join the EU, this would necessitate a renewed application of the procedure enshrined in the Article 20[3] of the Danish Constitution and would receive the full support of Denmark.

This all means that the Faeroes being a part of the Kingdom of Denmark is being regarded as a third country in an EU context, and the formal relationship is regulated by two bilateral agreements – a Free Trade Agreement and a  Bilateral Fisheries Agreement.

As the Faeroe Islands have chosen not to be a part of Denmark’s membership of the European Union, they negotiate their own agreements with the EU and other countries, in consultation and cooperation with the Danish foreign ministry. The Faeroes receive very substantial economic support from Denmark, even though some of the expenditure returns to Denmark through the sale of goods and generation of other commercial activities and jobs in Denmark.

Fisheries as  the Main Factor of the Faeroese Economy  and Bilateral Fisheries Agreement between the Faeroe Islands and the European Union.

With an economy overwhelmingly dependent on the fishing and aquaculture industries, the Faeroes are aware of the need to strengthen Faeroese capacity to deal with the challenges of a globalized world. Largely all other commerce in the Faeroes derives from the fishing industry. Agriculture, mainly synonymous with sheep-raising, is of merely marginal significance. In the waters around the Faeroe Islands, fishing is carried out with trawlers, which supply fish for the filet factories on land.

However, discovery of oil on the British side of the boundary line between the Shetland Islands and the Faeroe Islands has stimulated interest in prospecting for oil in the Faeroese marine territories. The first test drilling took place in 2001.

Enhancing economic independence of the Faeroes is a key factor in ensuring sustainable development and stimulating economic diversity. The growing depletion of fish stock makes it very difficult to gain complete economic independence from Denmark. Fisheries products counts for approximately 98% of the Faeroese export, 80 per cent of which go to the EU[4], and therefore the most important single source of income for the Faeroes. The Faeroese economy is thus very sensitive to the international market for fish. Consequently, the export income can fluctuate significantly from one year to the next because of changes in catch and price, and these fluctuations spread quickly throughout the economy.

The fishing fleet today consists of about 189 vessels with a total tonnage of 68,500 GRT (2002).[5] They range from small wooden coastal vessels to sophisticated factory trawlers. These vessels mostly fish around the Faeroes, but about 40% of the fish that the Faeroese export comes from international or foreign waters.

The sea farming industry is a relatively new industry in the Faeroe Islands. It started in the early 1980s. Production has been volatile over the years. In 2002 its export value corresponded to 23% of the total export.[6] The Faeroes has implemented foreign ownership restrictions on the aquaculture industry. Foreign interests could thereby not own more than 33 per cent of the shares in Faeroes aquaculture companies. The regulations have nevertheless not prevented Norwegian Pan Fish in having the right to control about half of the Faeroe Islands' production, together with their co-operating partners in Vestlax.[7] However, in 2004 this restriction was removed for the Faeroese fish farming industry.

It has been decided to establish around the Faeroe Islands, with effect from 1 January 1977, a fishery zone extending to 200 nautical miles off the coast within which the Faeroe Islands exercises sovereign rights for the purpose of exploring, exploiting, conserving and managing the living resources thereof and that the Community has agreed that the limits of the fishery zones of its Member States (hereinafter referred to as the area of fisheries jurisdiction of the Community) shall extend up to 200 nautical miles, fishing within these limits being subject to the common fishery policy of the Community[8].

These include the conservation and management of living marine resources within the 200-mile fisheries zone, sub-surface resources, trade, fiscal, industrial and environmental policies, transport, communications, culture, education and research.

The Agreement on fisheries between the European Economic Community, of the one part, and the Government of Denmark and the Home Government of the Faeroe Islands, of the other part recognizes the status of the Faeroe Islands as a self-governing integral part of one of the Member States of the Community.

Under the Agreement each Party of it shall grant access to fishing vessels of the other Party to fish within its area of fisheries jurisdiction in accordance with the provisions set out in the Agreement.

It is stated in the Agreement that each Party annually determines for its area of fisheries jurisdiction. The basis of such determination is the need for rational management of the living resources. According to the provisions of Article 2 the total allowable catch for individual stocks or complexes of stocks is defined taking into account the best scientific evidence available to it, the interdependence of stocks, the work of appropriate international organizations and other relevant factors. After appropriate consultations, allotments for fishing vessels of the other Party and the areas within which these allotments may be fished. The Parties of the Agreement aim to balance their fishing possibilities in their respective fishery zones, taking into account the habitual catches of both Parties. The level of fisheries taken by each Party shall not be of such a nature as to jeopardize the full exercise of the fishing rights allocated under the Agreement.

It may be required by each Party that fishing in its area of fisheries jurisdiction by fishing vessels of the other Party shall be subject to license. In this case, the competent authority of each Party communicates in due time to the other Party the name, registration number, and other relevant particulars of the fishing vessels which shall be eligible to fish within the area of fisheries jurisdiction of the other Party. The second Party thereupon issues such licenses in a manner commensurate with the possibilities for fishing granted under the provisions of Article 2

As to Article 6 the Parties undertake to cooperate to ensure proper management and conservation of the living resources of the sea, and to facilitate the necessary scientific research in this respect, in particular with regard to:

a.     stocks occurring within the areas of fisheries jurisdiction of both Parties, with a view to achieving, as far as practicable, harmonization of measures for the regulation of fisheries in respect of such stocks;

b.      stocks of common interest occurring within the areas of fisheries jurisdiction of both Parties and in the areas beyond and adjacent to those areas.

However, like other peripheral fisheries dependent communities bordering upon the North Atlantic, the Faeroese have not found it compatible with their vital interests to become subject to the Common Fisheries Policy. The main reason is that the Common Fisheries Policy is far from the main principles of the European Union that is the principles of free trade and level playing field for competition. The root of the problem is that the European Union does not regard fisheries processes as industrial processes but rather link them with agriculture closely related to social policy and regional policy. The Council of Ministers in the European Union decides upon total allowable catches that are far above the scientific advice. The effect is that the very sustainability of a high number of stocks is brought under threat. State subsidies in the European Union have encouraged investments that will not and cannot pay off. The result of state subsidies is an inefficient fishing industry.

The fishing fleet in the European Union is too large and too expensive. State subsidies have aggravated the situation and damaged natural competition. State subsidies that encourage investment should be abolished. The European Union is based on using economic tools to reach political goals. The Common Fisheries Policy turns these principles around when it is used to gain control over the resources of new entrants.[9] The demand from the European Union that the countries in the North Atlantic, including the Faeroe Islands, should give up control over their fisheries resources upon joining the Union is a demand for them to go back into the past.

Trade Agreements between the Faeroes and the EU

In 1974, Løgtingið decided by an unanimous vote not to apply for EU membership. Article 3 (1)[10] of the EU’s Customs Code, as amended, specifically excludes the Faeroe Islands from the customs territory of the European Union.

The EU membership is a potential threat to efficient management of the stock of fish in Faeroese waters (within the 200-mile limit). Instead, an interim Trade Agreement was concluded between the Faeroes and the EC. The trade agreement was fundamentally a free trade agreement and as such reported to GATT by the EU. This Trade Agreement was replaced in 1991 by a formal agreement on trade between the Faeroes and the EEC, which was a mutual Trade Agreement of the type made between EEC and the EFTA countries in the 1970s. As a condition of the 1991 trade agreement, the Faeroe Islands in 1993 implemented a value-added tax regime and excise duties replaced the fiscal import duties on some consumption items. The value-added tax (VAT) now stands at 25%.[11] This Free Trade Agreement between the Faeroes and the EC agreement was revised in 1996, and in 1998, after negotiations between the Parties, protocol 1 on market access was replaced. A new agreement concluded between the Faeroese Government and the EU invalidates the following sections of the trade agreement: price arrangements, reference ceilings for export, restrictions on salmon, statistics control and other product specific agreements.

This Agreement applies to products originating in the Community or the Faeroes:

     a.  which fall within Chapters 25 to 97 of the Harmonized System, other than those listed in Annex II to the Treaty establishing the European Community, and other than those listed in Annex I to this Agreement;

b.  which are specified in Protocols 1, 2 and 4 to this Agreement, with due regard to the arrangements provided for in those Protocols.

Obviously, with the revised protocol 1, most of the original restrictions were removed, letting the Faeroes export most of its fish products to the EU market without restrictions. However, EU still has quantitative restrictions on some areas of vital importance for the Faeroese industry. The revision of the Trade Agreement also made it in better keeping with the WTO rules.

On February 1st 2001 a new veterinary Protocol, which constitutes as a part of the Trade Agreement, with the EU was enforced, and the Faeroes were thereby guaranteed access to the most important market. Under the Protocol the Faeroe Islands undertake to apply the relevant Community rules to accept of live animals and animal products originating from the EU, imports from third countries and undertake to send to the territory of the European Community only live animals and animal products in conformity with the conditions laid down in this Decision. The Faeroe Islands agree to apply, in the future, the conditions for imports from third countries fixed by European Community legislation for third country imports.

Concerning fish diseases (in particular, infectious salmon anaemia, ISA) the Faeroe Islands implemented Council Directive 82/894/EEC. The arrangement for the participation of the Faeroe Islands in the animal diseases computerised system (ADNS) is to be established by Commission and Faeroe Islands officials.[12] ISA is the biggest disease problem in the fish farming industry in general and in the Faeroe Islands in particular. Outbreaks of this virus result in losses related to disruptions in production and forced harvesting of fish in contaminated sites. The first outbreak of the ISA happened in the Faeroes in 2000 and was followed by a further five in 2001.[13] The Norwegian salmon farming giant Pan Fish had outbreaks in two of their sites in the Faeroes in both 2002 and 2003.[14] In the Faeroe Islands the authorities have now prepared national plan for combating the disease, which involve vaccination in the area at risk. An effective vaccine against ISA has also been developed, but the industry is awaiting approval from the EU.[15] So, the Faeroes will be the first country in the world to vaccinate against ISA.

The free trade agreement with the EU has eliminated tariffs on Faeroese processed fish exports to the EU (except for shrimp), but there is still concern by some Faeroese fish processors that because the Faeroes is outside the EU, some EU companies may still try to reduce Faeroese competition by promoting non-tariff barriers. This is one of the arguments for Faeroese membership in the EU, but a stronger counter-argument is that membership in the EU will considerably reduce the country’s control over its fishing stocks. One factor weighing against processing in the Faeroes is that a processing plant, e.g. in Denmark, can deliver processed fish to the large European market more quickly than can a processing factory in the Faeroes.

With the signing of the new free trade agreement between the Faeroes and the EU, the Faeroes no longer faces significant impediments to selling processed exports to the EU. Previously, 60% of the value of Faeroese exports (largely fish and fish products) were affected by high tariffs and/or quotas and were thus constrained in entering the EU market. With the new agreement that level has fallen to about 3%-5% (i.e. some 95-97% of all Faeroese exports are listed as free trade), with the principal export affected being shrimp.[16] Thus, Faeroese processed pelagic and demersal fish can now enter the EU market without impediments as can the processed salmon from the aquaculture industry in the Faeroes. One constraint in the new agreement is that in the event of a shortfall of its fish supply, the Faeroes cannot buy fish from another country such as Norway and on-sell it in the EU market without attracting tariffs.

On 28th of November 2003 the Faeroe Islands and the EU made an agreement on Faeroese membership in the Pan-European System of Cumulation of Origin. This was a positive breakthrough in the negotiations with the EU, and for the Faeroese industry and society as a whole.

Because of the trade agreement concluded with the EU, the Faeroese Customs Act is based on the international Customs Cooperation Council’s (CCC) Harmonized Commodity Description and Coding System and customs duties are based on the EU GATT rates.[17]

Conclusion: Iceland’s Model instead of the EU Membership

The Faeroes rejected membership in the EU. Instead, the Faeroe Islands negotiated two agreements with the EU, one on fisheries – which provides for access by the EU and the Faeroes to each others' coastal waters to fish – and the other on trade – which broadly provides for the abolition of customs duties and quantitative restrictions in trade between the EU and the Faeroe Islands. The Faeroes is “strategically located” close to the Northern EU market with convenient regional and international air links with the EU and Iceland.

The further development of the relations between the Faeroe Islands and the EU could be seen from the different perspectives, however taking into account the structure of the Faeroese economy completely dependent on the fishing and aquaculture industries. From the one side, membership in the EU for the Faeroe Islands should not be dismissed out of hand publicly. An on-going effort should be made to ensure that membership in the EU is appraised on an annual basis. But the North Atlantic States, such as the Faeroe Islands, depend upon fisheries for a living. They have managed to build sustainable fisheries with an efficient industry. It is impossible for them to give up control over the fisheries resource to enter into a system of the Common Fisheries Policy which has proven itself unable to manage its own resources.

However, it seems that Iceland is the best proxy for the Faeroes and in particular for Faeroese economy. Certainly, Iceland is larger, but it is a fishing-based economy. While fishing is less of a component of GDP now than in the past, it dominated the economy in the earlier period. Furthermore, Iceland is a welfare state that costs about half of the other Nordic welfare states. Using Iceland as a model for the Faeroese welfare state is viable not only because of the success of the Icelandic model, but also because of the similarity of the two economies. For instance, in 1998, about 73% of Iceland’s merchandise exports and about 50% of total exports were accounted by fishing and fish processing, versus 99% of total exports in the Faeroes.

The Faeroes should follow the example of Iceland and adopt the EU legislation on the treatment of foreign investment, with a few caveats to protect Faeroese sensitivities in the fishing sector. This would send a positive signal to all foreign investors. Review of the legislation created by Iceland will be helpful for the Faeroe Islands to promote the development of a stock exchange, bond and bills markets, mutual funds, the role of banks, brokers etc and appropriate responsibilities.

[1] B. Dahl, T.Melchior, L.A.Rehof, D.Tamm (eds). Danish Law in a European Prospective. P.509.

[2] Link2 Exports – http://www.link2exports.co.uk/regions.asp?lsid=1969&pid=1453. – 23.05.2005.

[3] (1) Powers vested in the authorities of the Realm under this Constitutional Act may, to such extent as shall be provided by statute, be delegated to international authorities set up by mutual agreement with other states for the promotion of international rules of law and cooperation.

  (2) For the enactment of a Bill dealing with the above, a majority of five-sixths of the members of the Folketing shall be required. If this majority is not obtained, whereas the majority required for the passing of ordinary Bills is obtained, and if the Government maintains it, the Bill shall be submitted to the electorate for approval or rejection in accordance with the rules for referenda laid down in section 42.

[4] The largest export markets are Great Britain (24%), Denmark(21%), Spain (12%), France (8%) and Germany (6%) – Prospect Føroya Landsstýri November 2003. P.19.

[5] The Faeroese Securities Market – http://vmf.fo/EN/category.aspx?catID=89. – 27.05.2005.

[6] Ibid.

[7] Pan Fish’s operations in the Faeroe Islands are managed by P/F Vestsalmon – through a management contract between all of the companies in the Vestlax group and the Laksåling group (Pan Fish). Pan Fish ASA owns 67% of this company. The remaining 33% is owned by their close collaborative partners in the Faeroe Islands.

[8] Preamble of the Agreement on fisheries between the EEC, of the one part, and the Government of Denmark and the Home Government of the Faeroe Islands, of the other part.

[9] Speech of Mr. Halldór Ásgrímsson (took over as Iceland's Prime Minister on September 15th 2004) on the opening of the conference "An Ocean of Opportunities" in Akureyri, Iceland, hosted by ISB on September 8th 2004  – http://www.framsokn.is/framsokn/frettir/utanrikismal/?ew_news_onlyarea=&ew_news_onlyposition=10&cat_id=12104&ew_10_a_id=86643.  – 26.05.2005.