Faroe Business Report — The International Review of Faroe Islands Industry and Trade - Faroe Business Report — The International Review of Faroe Islands Industry and Trade

Building the Northwest

As Iceland and the Faroes begin to exploit the potential of a new economic union between the two countries, the Hoyvík Agreement is seen as the charter for a redoubtable economic zone, as solid and as formidable as the basalt that forms the very heart of the Faroes.

Enniberg is one of those imposing, larger-than-life natural wonders that leaves the senses a bit dizzy. Its massiveness rises out of the sea to a numbing 754 meters (2474 feet) and one is left benumbed pondering what tremendous forces must have thrust it soaring into the air to stand sentinel over the northern reaches of the Faroe archipelago. Some 60 million years ago the earth opened and Enniberg’s basalt foundations were laid down upon the existing continent, long before there was even a drop of water in the North Atlantic Ocean. Eons passed. Tropical forests came and went. Ice ages came and went. Eventually, pressures great and small tipped the remnants of the gigantic Faroe plateau and Enniberg rose out of the sea like some mighty ship’s bow. Today, the waves churn and swirl around the monumental sea cliff in dazzling displays of foam and froth. Enniberg is definitely the highest sea cliff in Europe — some would even say the world — and it seems to be charging through the seas, leading the entire archipelago northward, onward to Iceland.

Indeed, the two countries are striving to merge. Not geologically, of course, but in truth, the two countries are moving closer and closer economically, as pressures great and small, again, impact the destiny of the Faroes. As legend has it, a giant from Iceland once tried to drag the entire archipelago back home, so smitten was he with its beauty. Alas, his nocturnal adventure was spoiled by the rising sun, which swiftly turned him into stone for attempting such a brazen act. What giants of old could not achieve has nevertheless come about. Forced to address the collective economic future of the region, both the Faroes and Iceland agreed that it was timely to join forces to enhance the region’s comparative competitive advantage and the two countries struck a deal that no doubt will play a decisive role in the destiny of the two countries, especially for the Faroes. Such a venturesome initiative is indeed reminiscent of the exploits and resourcefulness of Magnus Heinason and Nólsoyar Pall, both national Faroese folk heroes, who, each in his turn, contributed to the economic advancement of the Faroes.

The Faroes sits alone and isolated in the mid-most heart of the North Atlantic, essentially equidistant from Iceland, Norway and Scotland, home to some 48,000 people. According to tradition, adventuresome Vikings from Western Norway and settlements in the UK and Ireland founded the Faroes early in the 9th century. Early on, trade flourished with Norway and the population grew. By the end of the 13th century, there were some 4,000 people spread about the Faroes. Yet, inexplicably the Faroes plunged into economic chaos in the 14th century. Perhaps it was the Black Death; there are certainly legendary accounts that tell of whole villages being wiped out.

By 1361, Hanseatic merchants had gained access to the trade routes in the North Atlantic from the Norwegian king, but still the Faroes remained isolated and forgotten. Even though traditionally aligned with Norway, the Faroes eventually fell under the rule of the Danish king. On several occasions, he tried in vain to give them away to Henry VIII in exchange for loans to keep his government afloat. In 1529, the Danish king succeeded eventually in gaining 100 marks a year for the Faroes from two merchants in Hamburg. These merchants proceeded to demand both taxes and enforcement of a trade monopoly. Times, to say the least, were hard.


Trade monopoly until 1846: The Reformation in 1536 began to unravel the cultural foundations of the Faroese. Political and economic control was secured in the Danish crown. Danish became the language of the church and government and Faroese was relegated to the home. There was a reprise of sorts in 1579 when the existing trade monopoly was given to Magnus Heinason, an intrepid adventurer and a native of the Faroes. He pledged to rid the Faroes of pirates and built the fort that protects the harbour of Tórshavn, the capital of the Faroes, even to this day. Much beloved by King Frederik II, Heinason was decidedly the enemy as far as Danish officialdom was concerned and upon the death of Frederick II, they had him summarily tried and beheaded in 1589. In true bureaucratic fashion, a full pardon was eventually granted in due time upon appeal.

Eventually, in 1619 the official trade route shifted from Bergen to Copenhagen. Smuggling was rampant, as one could well imagine, even though officially all trade flowed through the trade monopoly. Eventually, the Danish king, perhaps again in need of funds, transferred the Faroes in fief to one Christoffer Gabel, who ruled the Faroes with an iron, albeit distant, fist. The Danish king allowed Gabel both economic and political control of the Faroes, which flowed to his son, Frederick, upon Gabel’s death. During this period, the prices of imported goods soared, while exports fetched next to nothing. Protestations to the Danish king were greeted with but little response.

Finally, upon the death of Frederick Gabel, the king intervened and dispatched a royal commission to investigate conditions in the Faroes. Seizing upon the opportunity, the Danish king took over the trade monopoly himself in 1709. War was rampant at this time and the king needed a steady supply of woolen stockings for his navy and army. The frames used by the Faroese to produce these stockings are still to be found in the national museum, testament to the harsh reality of a trade monopoly that limited the economic growth of the Faroes and held it ransom for the meager supply of foodstuffs and other goods the king exchanged for his woolen stockings.

Nonetheless, conditions were better under the royal trade monopoly than under that of the Gabel family. However, governmental control was again consolidated in Denmark and the Faroese were restricted in their efforts to expand trade or to promote the economic advancement of the country as a whole. Reportedly people on the remoter islands perished from starvation even though food was available in Tórshavn. Eventually, the king espoused an even crueler law in league with the farmers he had appointed to run the huge farms the crown confiscated from the Catholic Church following the Reformation. In 1777, the king introduced the ‘slave law’, so-called because anyone who wished to marry had to own land able to support a family. This was nigh unto impossible and the population stagnated. The slave law as well forced those who wished to leave the Faroes to pay a huge, impossible sum. In the end, the able-bodied men had no choice but to be conscripted for the fields and the fishing boats. Others toiled at tasks for the trade monopoly, moving trade goods on and off the ships. Deplorable as it sounds, this law was not repealed until 1846.


New era: During this period, there was one bright economic star—Nólsoyar Páll. Born and bred on the island of Nólsoy (which protects the harbor of Tórshavn), he boldly took the step of becoming the second Faroese to own an ocean-going ship. Not since Magnus Heinason, some 200 years previously, had a native-Faroese owned such a ship. He engaged in ferrying goods from the American colonies, transshipping the goods in the Faroes and then slipping them into England, which at the time placed heavy import duties on goods from America. He was the undisputed champion of free trade, as one might imagine. He even successfully convinced the Danish authorities, as well as the Faroese themselves, of the advantages of free trade.

Legislation was set to be introduced on 1 January 1796, only to be forestalled by the Napoleonic Wars. Alas, again, the need for stockings outweighed any other local economic considerations. Nólsoyar Páll perished at sea in 1809, some would offer under mysterious circumstances, en route to the Faroes with a load of grain, which no doubt was not destined for the storehouses of the royal trade monopoly in Tórshavn.

Early in the 1830s, interest in fishing grew. Following a sojourn to the Scottish isles in 1839, the Faroese returned with an enthusiasm for fishing that has become the hallmark of the country. By the 1840s, fish comprised some 40 percent of the total export. Faroese wool was still in demand and still lived up to its name as Faroese gold, but obviously times were changing. By the 1850s, most Faroese were involved with the export of fish in one way or another, a fact that is still the norm today.

Venturing out to Scotland was the tipping point for the Faroese. The times demanded a new reality. Soon thereafter, the trade monopoly collapsed and was officially ended on 1 January 1856. Toward the close of 2006, the Faroese celebrated the end of the monopoly by marking the 150th anniversary of its demise. Almost at the same time as it was celebrating the end of this infamous period in Faroese history, the country marked the beginning of a new era with the announcement of the free trade agreement with Iceland, which hopefully will prove to be a similar major turning point in the economic vitality of the country.


Learning from Iceland: Upwards of 97 percent of the Faroese export is fish and fish products, a fact that is both good and bad. An economy based for the most part on a single raw resource stands in peril. The vagaries of a single marketplace alone can determine the economic strength of the whole country. In the late 1980s, by way of illustration, the Faroes boasted one of the highest per capita incomes in the world, due in large measure to outstanding fish catches and soaring market prices, only to be plunged into the depths of depression in the early 1990s when the catches evaporated and prices dwindled to the ridiculous.

Following these disastrous events and fully conscious of the necessity to expand the Faroese economy and to ensure its stability long-term, the Faroese government launched initiatives to become more integrated economically with its surrounding neighbors and the EU itself.

Because of concern over fishing rights within its territorial waters, the Faroes has remained outside of the European Union. Neither is it a member of the European Free Trade Association, better known as EFTA, the economic confederation comprised of Iceland, Norway, Liechtenstein and Switzerland. As a consequence, the Faroes must tediously negotiate its own trade relationships with the EU and with the countries in EFTA. It has come a long way in this regard, however, and meets annually with delegations from the EU to address a wide range of issues, including trade quotas (mostly for fish and related products) and the free movement of people and capital. The Faroes has also negotiated observer status with EFTA and is aggressively seeking full membership in EFTA.

Yet, the signing of the so-called Hoyvík Free Trade Agreement with Iceland has opened up a new window of downright exuberant economic opportunity for both countries. The agreement entered into effect on 1 November 2006 and as a consequence ushered in a new era of collaboration between the two countries on the so-called ‘four freedoms’ — the free flow of goods, services, capital and people between the two countries.

Initially, when the agreement was being negotiated many in the Faroes considered such an agreement to be just another trade monopoly, only this time with our Viking kindred to the north. Icelandic companies had long been interested in Faroes and had been doing deals for years, especially in the fishing industry. Without a doubt, the Icelanders have the money and the international experience to capitalize on good business opportunities in the Faroes. The international Icelandic shipping company, Eimskip, is certainly one example. Eimskip, long established in the Faroes, recently absorbed the Faroese freight company, Faroe Ship, into its operations in the Faroes. Kaupthing Bank is another key example. Several years ago, it entered the Faroese financial market in a joint venture with Föroya Sparikassi. Recently, Sparikassi left the venture and Kaupthing moved to a new location and now offers investment banking services, commercial loans and property and asset management expertise. Föroya Sparikassi certainly learned a great deal from this venture as well. It subsequently expanded internationally by purchasing a bank in Denmark while acquiring the majority of the shares of an Icelandic savings bank, and is now known as Eik Bank with assets of some 12 billion dkk (1.61bn eur), with before tax profits in 2006 of some 307 million dkk (41m eur).


Proud ancestors: This type of economic expansion and fiscally sound development is exactly what the Hoyvík Free Trade Agreement anticipated and encourages. In many ways, it affords the Faroese the opportunity to experiment with expansion into a receptive market and culture, as a stepping-stone to other even more sophisticated ventures in Europe and the rest of the world. At the same time, it opens the potential for Icelandic investment in the Faroes, not only of capital, but also of international market expertise.

Now goods and services for the most part flow between the two countries without any burdensome tariffs. A joint committee has been established to review the technical issues that are part and parcel of merging the laws and regulations of two countries so that trade can flow as easily as possible and the potential of such a free trade agreement can emerge for businesses in both countries.

What is most important for the Faroese, however, is the potential to learn about international expansion and the nurturing of businesses flung about the planet. The Faroese have but little experience in operating multinational businesses. Many of the subsidiaries that Faroese companies do operate abroad are located in Denmark. The Hoyvík Free Trade Agreement enables the Faroese to branch out, to become more competitive and to collaborate effectively with Icelandic companies in ventures both locally and internationally. In essence, the Faroes and Iceland will become one rather large and viable market. The existence of such a market will no doubt strengthen the region’s comparative advantage, as the two countries jointly attempt to attract international business to the area, as well as take jointly developed initiatives worldwide that have been market-tested in the new Iceland-Faroe marketplace.

The pursuit of international free trade is again emerging as the dominant economic theme in the Faroes. Magnus Heinason and Nólsoyar Páll would be deservedly proud that their fledgling efforts have finally begun to bear fruit.