The recent OECD* survey on the Icelandic economy paints a rosey picture when you consider what has happened to its economy over the last 3 years. Iceland’s approach has been different to that of the US and Euro Zone counterparts. Instead of introducing policies of quantitative easing and bailouts of banking institutions the Icelandic authorities allowed its banks to fail. Foreign debt, which totaled US$62 billion, left the country with no real choice but to default on the banks’ creditors. This policy has been called “Bankrupting your way to recovery”. In a recent radio interview on the BBC Iceland’s president Olafur Ragnar Grimsson said that Iceland’s approach is about much more than getting the banking sector operational but affirming the will of the people over the financial institutions. Iceland’s GDP for the last quarter is 2% and unemployment is at 5.8% – the latter being high by Icelandic standards.
Compared with the likes of Greece and Ireland who have gone through similar debt problems the one key option with is not open to its eurozone counterparts is that Iceland had its own currency the Krona. As the economy and banking system collapsed so did its currency which has its advantages and disadvanatges.
* The price of visiting Iceland has effectivley halved – Reykjavik was seen as one of the most expensive places to visit as a tourist
* As most of Iceland’s consumer goods are imported this has meant higher prices of cars, food, electronics etc.
Should Greece and Ireland learn from this? According to Stephanie Flanders – BBC Economics Correspondent – Greece already had huge amounts of debt before the crisis unfolded and it doesn’t hold much relevance as Iceland had no public debt at this time. However Ireland, like Iceland, had handled its public finances well but its financial framework poorly.
*Organisation for Economic Cooperation and Development – The OECD provides a forum in which governments can work together to share experiences and seek solutions to common problems.