I was on The Young Turks with Cenk Uygur last night. You’ll have to trust me, because I’m not in the above video; that’s just Cenk’s setup. But I was there, talking about Iceland and how differently they have managed their economic crisis compared to the rest of the world.
Cenk wanted to compare it to the US, and certainly, they engaged in massive deleveraging for their citizens, in ways we have barely scratched here. But the banks in Iceland, which the government basically wiped out and took a major stake in (including sending their chief executives to jail), forgave mortgage debt on everything above 110% of home value. This totaled about $1.6 billion in debt relief in a country of only 320,000. It equals 13% of GDP, and it helped fully 1/4 of the country. This debt deleveraging allowed people to gather equity, it created a net wealth effect because they weren’t as burdened with debt, and it boosted spending. As a result, Iceland has come back much stronger than other Western countries. Their first-quarter 2012 growth stats are on pace for a 4.5% jump in GDP over the year.
But there’s another major reason that Iceland has fared better than its neighbors, one I didn’t get to talk about on the show. Iceland wasn’t in the euro. As a result, they had the ability to manage their own currency. And they predictably and smartly dropped the currency in value. Right now, the krona sits 20% below the euro, even as the euro has plummeted lately. And that makes Icelandic exports competitive, which includes tourism. They have not had to live with another country’s monetary policy.
What’s more, despite getting their own IMF bailout, they have not beat up their citizens with austerity to the exclusion of all other policies. They did engage in some mild cutbacks, but that got paired with the debt relief, as well as protection of welfare spending and a tax cut for the poorest citizens. This added credibility to their programs which countries like Greece have simply lost with their “all austerity, all the time” attitude. This is also a function of not being stuck in the euro, and having other options for their monetary policy as well as no constraint of a fiscal union.
So while Iceland is a recovery role model for Europe, as its Prime Minster said recently, that’s mainly because they don’t have all the contradictions of the Euro zone in terms of a monetary union. Germany and Greece will never agree on the correct monetary policy; there isn’t a mutually beneficial one that exists. Without transfer payments and evening out current account balances, the euro project cannot properly exist. The lesson of Iceland is that sovereign nations ought to be sovereign, so they can respond to crises accordingly.
Now, it’s possible to be a sovereign nation and have terrible economic policy weigh down your recovery, as in the case of Britain. So I don’t mean to discount Iceland’s excellent policies of forgiving private debt from homeowners, much of which was based on financial fraud, and jailing those responsible (over 200 executives and leaders, including the former Prime Minister). These, along with devaluation, really do constitute solid policies to attack the type of crisis in which they found themselves. But it wouldn’t have been possible without staying out of the euro.