From Iceland — Iceland's Economic Recovery A Lesson For Ireland

Iceland’s Economic Recovery A Lesson For Ireland

Published December 21, 2010

A new article in The Economist argues that Ireland could learn something from Iceland on how to handle financial difficulties.
The Economist points out, for one, that on the Misery Index (unemployment plus inflation), Iceland’s level of “misery” has been steadily declining, and this year went below Ireland’s, which is on its way up.
“Evidence of economic recovery in Iceland means the Irish can no longer persuade themselves that things are worse elsewhere,” the article says in part. “Figures released on December 7th showed that Iceland’s GDP rose by 1.2% in the third quarter (Ireland’s third-quarter GDP rose by 0.5%, according to figures published on December 16th). The Icelandic central bank’s benchmark interest rate has fallen to 4.5%, from a peak of 18%. The halving of the dollar value of the Icelandic krona at the height of the crisis pushed inflation as high as 18.6%. It has since fallen close to the central bank’s 2.5% target. The ‘misery index’, a crude grading that sums unemployment and inflation rates, suggests Iceland is now doing better than Ireland (see chart).”
The reason for this, the Economist argues: letting the banks fail, and not being a part of a larger currency.
On the first point, the article says that by not pouring public money into trying to rescue its banks, Iceland saved itself revenue that would have been tied up in them. Ireland has attempted to save its banks, but has yet to see any benefit from doing so.
At the same time, the euro is no longer seen as the magic solution to economic troubles, the articles states. “When panicky investors were rushing out of small currencies in the autumn of 2008, the euro seemed a haven. There was much talk in Iceland of fast-tracked membership of the European Union and, ultimately, the euro. Two years on, the euro looks more like a trap for countries struggling to regain export competitiveness. Greece and Ireland have lost the confidence of markets, even though both issue bonds in euros. Iceland’s voters are cooler about joining the EU and the euro.”
Not that either strategy is without its faults, of course. Iceland did not attempt to save its banks because it could not: the banks were several times greater than the GDP at the time of the crash. Furthermore, the article speculates that Icelanders might be more open to the euro if the economy of the EU were in better shape.
“Even so, that Iceland’s economy has done little worse than Ireland’s is still a triumph,” the article concludes. “It has been tough with its creditors and disregarded some international norms—and recovered. Ireland has stood by its banks to the benefit of the wider European banking system. Its reward has been ‘rescue’ loans at an interest rate that makes it hard to fix its finances. The next Irish government may look at Iceland and decide to play hardball with Europe.”

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