The Icelandic miracle

Der Spiegel has an interesting article about the “Icelandic miracle.

What happened in Iceland from 2008 to 2011 is regarded as one of the worst financial crises in history. It seems likely that never before had a country managed to amass such great sums of money per capita, only to lose it again in a short period of time. But Iceland, with a population of just 320,000, has also staged what appears to be the fastest recovery on record. Since 2011, the gross domestic product has been on the rise once again, most recently at 2 percent. What’s more, salaries are rising, the national debt is sinking and the government has paid off part of the billions in loans it received in 2008 from the International Monetary Fund ahead of schedule. It’s a sign of confidence.

So, asks the journalist, is there anything the rest of us can learn from that tiny country. Well, there is what Paul Krugman called “doing an Iceland”.

The rules are as follows: Allow your ailing banks to collapse; devalue your currency if you have one of your own; introduce capital controls; and try to avoid paying back foreign debts.

Is that a good idea?

That may sound like an extremely self-serving recipe — and it was. Whereas billions of public money was pumped into the banking system in Ireland so that financial institutions could pay back their creditors, Icelanders voted against this route in two separate referenda. They couldn’t see why they should pay for the greed of foreign investors who followed the Siren song of high interest rates to the island nation. Jónsson only shakes his head wearily when asked if he has a guilty conscience. He claims to have been one of the few who warned of the currency bubble long before it burst. Now, he is excited about the country’s new opportunities, which are remarkably similar to the ones it has always had. “A hard-working populace. A healthy democracy. A high level of education. Tourism. Natural resources, such as wind, hydro-power and geothermal energy. And fisheries. What would we be without the fisheries?”

Well, indeed, what would they do without fisheries or, come to think of it, without their own currency?