An analysis piece contends that other countries can learn from Iceland’s recent economic upturn.
The article, published in The Independent, takes the angle that while Iceland’s economic collapse was remarkable, that “the economy that [former Prime Minister Geir H.] Haarde helped to wreck has fared surprisingly well since the bust.”
The latest report on Iceland by the International Monetary Fund shows that growth is resuming. GDP is expected to increase by a relatively healthy 2.5 per cent in 2011. The Icelandic public finances are on a sustainable path too with government debt projected to fall to 80 per cent of GDP in 2016.
The turnaround should not be exaggerated. Iceland is still more than 10 per cent below pre-crisis output levels. Unemployment remains at about 6.7 per cent, considerably higher than before 2007. The standard of living of most Icelanders is well down. Access to foreign currency is tightly controlled. And risks to recovery remain. Central bank interest rates are going up in order to curb inflation. This could stifle growth. Yet the fact remains that the outlook for the Icelandic economy is looking rather healthier than other distressed economies in Europe such as Greece, Portugal and Ireland.
The article believes four factors have been at play to account for this recovery.
First, Iceland has had friends in high places. Apart from the help of the International Monetary Fund – which concluded their work in Iceland last month – other Nordic countries have also lent a hand in the form of loans.
Second, the 50% chop in value that the Icelandic crown experienced after the crash did help in one oft-overlooked way: exports of aluminium and fish are now cheaper on the global market, increasing demand.
Third, Iceland allowed its banks to fail rather than completely nationalising them. While this led to the notorious Icesave debacle, the plus side is that severe re-working of the banking system has led to Landsbanki announcing that their assets should more than cover what is owed for Icesave.
Fourth, Iceland has issued strict capital controls that forced the financial sector to do things differently. The author says that the comparison between Iceland and Ireland, “which assumed responsibility for all the liabilities of its bust banking sector, is stark. Thanks to Dublin’s blanket bailout, total government debt is now more than 100 per cent of GDP, four times pre-crisis levels. And Ireland’s reward from the markets has been a rise in the cost of insuring its sovereign bonds.”
The economic policy orthodoxy through this crisis – pushed by ratings agencies and European politicians alike – has demanded that national governments honour the debts of their banking sectors, protect their exchange rates, eschew capital movement restrictions, and impose massive austerity to earn back the confidence of bond markets. Much of that wisdom was ignored by Reykjavik. And the early signs are that Iceland is doing quite well as a result.