The Economist: Lessons from Iceland for Ireland

A hat tip to the Peoples’ Movement for this article from The Economist (a must-read for everyone who says “thank goodness we’re not like Iceland…”) – Coming In From The Cold, Lessons from Iceland:

Iceland has been tough with creditors and kind to itself. Ireland may wish it had done the same.

The consoling thought for Ireland’s put-upon taxpayers has been “at least we’re not Iceland”, whose outsize banks failed spectacularly in 2008. But that comfort is fading.

Evidence of economic recovery in Iceland means the Irish can no longer persuade themselves that things are worse elsewhere.

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).

Iceland’s recuperation seems to offer two big lessons for Ireland and other troubled euro-zone countries. The first is that the extra cost to a country of not standing by its banks can be surprisingly small. Iceland let its banks fail and its GDP fell by 15% from its highest point before it reached bottom. Ireland “saved” its banks and saw its output drop by 14% from peak to trough.

A second lesson is that the benefits to a small country of being part of a big currency union are not all they were once cracked up to be. 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…

Read more.

This entry was posted in Bankers' Bailout, Budget, Debt Default/Restructuring, Economy, Euro / Sovereign Money, ireland, Leo Varadkar versus the World and tagged , . Bookmark the permalink.

One Response to The Economist: Lessons from Iceland for Ireland

  1. Pingback: What would happen if Ireland left the Euro? |

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