Iceland’s recovery

Iceland in 2008 was the first country to be hit by the global financial crisis, yet we now hear little about the country. Why? Primarily because it has fared better than Ireland, Spain and other countries that followed. Tiny Iceland (population 320,000), defying conventional wisdom, adopted what turned out to be wise policies following the spectacular collapse of its bloated banking sector.

While everyone else rushed to give taxpayers money to the banks, Iceland let them fail. While the bankers at the heart of the crisis were protected and in some cases rewarded in the US and Europe, in Iceland they were jailed and while the rest of Europe embarked on a social spending slashing binge, Iceland expanded its social safety net.  At the time, the consequences of these unconventional policies were warned against by many economists, who predicted punishment from global credit markets leading to bankruptcy and economic Armageddon. This has not been the case. ….

The message to take from Iceland’s experience is that contrary to what the majority of policy makers keep preaching to the public about austerity being the only way forward, there is a clear and credible alternative. While Iceland’s road to recovery will not necessarily be repeated to the same extent in other economies, due to the uniqueness of its crisis, its stance on several key policy decisions can be adhered to. Iceland’s policies centred on protecting its people, assisting indebted households and holding those responsible for the crisis to account and this has rescued its country from economic disaster.

Andrew Whitehead and Thomas Viegas, “Iceland: Coming in from the cold“, Perspective: Economics through younger eyes, 10 December 2012.

HT Mark Thoma

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