A new article in the Wall Street Journal contends that Iceland’s crown has helped the country avoid some of the financial pitfalls now facing the rest of Europe.
Iceland is currently in the process of joining the European Union. While the decision will ultimately be left to the Icelandic people themselves when the referendum comes, many pro-EU voices argue that one of the main reasons for Iceland to join would be to have a more stable currency. The contention lies on the notion that the Icelandic crown, being as small as it is, is more likely to experience serious fluctuations from the smallest of ripples in the global financial market; if Iceland were to take up the euro, its currency would be less likely to experience this sort of instability.
However, with the EU experiencing financial troubles of its own right, many are beginning to question the wisdom of joining the organisation. A new article in the Wall Street Journal argues, in fact, that Iceland’s crown has done the country more good than harm in avoiding a lot of the mess that Europe is dealing with right now.
“Through having that flexibility, Iceland was able to make its exports more competitive,” said Cosimo Marasciulo, head of European government bonds and FX at Pioneer Investments. “So when domestic demand was suffering due to high unemployment, for example, it still had control over its exports and was able to offer cheaper goods and services.”
“This removed the negative effects from the financial shock, and this is clearly what is not happening in Europe right now,” he added.
Jamie Stuttard, head of international bond portfolio management at Fidelity Investments, said, “They have their own currency, and that means they were able to make that classic emerging market-style currency devaluation that we saw in Asia in 1997, in Latin America throughout the 1980s and to some extend in the early 2000s.”
More and more, the article contends, investors are starting to regain their trust in Iceland. Unemployment is slowly declining, the country was able to successfully issue its own sovereign bond, and Iceland’s CDS prices are now comparable to many mainland European countries. All of which, the article says, are factors that point to the Icelandic crown being more helpful than harmful for Iceland’s economy.
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