Iceland's Recovery Highlights Europe's Failure

It is rare that you get to see the effects of differing economic theories played out in concurrent real world scenarios, but that is exactly what we have been able to observe when we compare the response to the 2008 financial crises of Iceland and the European Union.  Iceland did everything that the Davos elites said not to do – it prosecuted bank executives, nationalized its big banks, and let all those that did not serve the domestic economy fail; it imposed capital controls, restricting the ability of foreign investors to withdraw money from the country while at the same time restricting local banks and pension funds from investing overseas; it raised interest rates up to nearly 18% and devalued its currency but offset that tight monetary policy with loose fiscal policy that relieved households of debt incurred by the financial crisis. Contrast this with the EU which did everything in its power to keep its banks afloat; let the bankers off scot free; cut interest rates to zero; insisted on strict fiscal austerity; and, because of the common currency, made it impossible for countries like Greece to devalue the currency and reduce its debt burden. 

And the results couldn’t be more striking. Iceland’s GDP is expected to grow by about 4% this year and next. Its external debt has been reduced to easily manageable levels, interest rates are down to below 6%, and it is running a current account surplus. Its official unemployment rate is down to 3.7% as of April of this year.  Any country in Europe would give its eye teeth for results like that. Compare that to poor Greece whose debt burden will consume about 60% of its GDP by 2040 and whose current unemployment rate is 25% and is not expected to get below 10% for another 25 years. Think about those numbers – they are staggering.

Now the elites’ response to Iceland’s success has been to say that things will go horribly wrong when the capital controls are lifted. Foreigners will take their money out of the country as quickly as possible, devaluing the currency and forcing interest rates to rise and making it more difficult for the country to service its debts while creating runaway inflation as imports become more expensive. Rather, it looks like the opposite may in fact occur. Foreigners are interested in investing in Iceland, attracted by higher interest rates and growth prospects. We will have a pretty definitive answer as to which of these scenarios will come to pass shortly as Iceland plans to lift the capital controls in the next few months. But I’m betting foreign capital will return to Iceland quite readily – where else can you earn over 5% on your money these days.

Assuming the lifting of capital controls goes relatively smoothly, you have to wonder when the citizens of the EU will look at Iceland’s success and say why not us.  The EU is already under enormous strain and Iceland’s success further highlights the failures of the EU economic elites to provide any effective recovery from the 2008 collapse.