Standard caveat for this post: Iceland’s economy is far smaller and more homogenous than the United States – as are its banks.
Iceland was one of the first economies to truly go up in flames in the wake of the Lehman collapse – but it was followed quickly and for some of the same reasons by other countries. In fact, such calamities threatened to happen nearly everywhere, and the worldwide economy entered a general slump.
Two years later, though, there’s a sharp difference between the fate of the real economy in other countries which were hard-hit by the financial near-collapse of late ‘08, such as Greece, Ireland and even right here, and the real economy in Iceland today. The New York Times explains:
Iceland emerged from recession in the third quarter, official data showed Tuesday, returning to growth for the first time since its financial system collapsed at the height of the crisis in 2008.
Iceland’s real gross domestic product grew by 1.2 percent in the July-September period from the previous quarter, the first quarterly increase since the same period in 2008. Iceland entered a slump after its overleveraged financial sector collapsed in the wake of Lehman Brothers’ bankruptcy.
What accounts for the striking difference? The group of people Iceland chose to allow to shoulder the burden of the problems:
Like Ireland and Greece, Iceland has taken a large dose of austerity measures to rebuild its economy. Unlike Ireland and Greece, however, Iceland allowed private banks to fail, and its currency, the krona, has declined by about 46 percent against the dollar since the start of 2008.
“Excluding the financial system, the real economy is doing well,” Arsaell Valfells, a professor of business and finance at the University of Iceland, said in telephone interview. Retail spending was still shrinking, he said, but the export sector, consisting mainly of fish, aluminum and tourism, was improving. (emphasis mine)
Imagine that. In Iceland – contrary to both Ireland and the United States (where a 9.8% unemployment rate continues to haunt both President Obama and the Democrats’ reelection chances and, of course, those tens of millions of people who remain out of work) – the people who are hurting in Iceland (and elsewhere) are the investors, bankers and bondholders, not the working people who are the true engine of the economy. Continue reading