Now, as Matthew Yglesias at Vox recently pointed out (bit.ly/1S4aXKX), Iceland is getting ready to lift its capital controls, and its experience since the financial crisis still seems remarkably good, considering the circumstances.
And, as Mr. Yglesias wrote, the interesting contrast is Ireland, which is now being hailed as a success story for austerity because the country’s economic situation eventually stopped getting worse and has lately been getting a little better. Talk about lowering the bar.
I suppose someone will ask about possible parallels with Greece. Well, if Greece is forced out of the euro, the country will be in a position to try an Iceland-style devaluation (and will surely impose capital controls). Whether this will work as well as it did in Iceland is an open question - for one thing, leaving the euro is very different from never having joined it, and I’m still hoping that the whole Grexit thing can be avoided.
For now, let’s just say that heterodoxy is sometimes much more effective than the orthodox will ever admit.
‘Grexit’ Crunch Time
Some readers have noted that I haven’t said much about the Greek crisis lately. Indeed. It’s crunch time, and right now everyone involved needs to engage in quiet, cool deliberation.
There’s really nothing more outsiders can say, at least in public, that we haven’t already said.
Comparisons with Ireland
On June 8, the government of Iceland announced that it would begin to lift the capital controls it imposed at the height of the global financial crisis in 2008.
Since that time, citizens and foreign investors have been unable to move assets out of the country, and currency exchange within Iceland has been tightly regulated. Despite the restrictive nature of such capital controls, many economists believe that they were instrumental in the nation’s economic recovery.
Unlike other countries, which bailed out their banks with public funds during the crisis, Iceland allowed its three largest banks to fail.
Also, Iceland’s own currency, the króna, was substantially devalued after 2008. With its currency worth less, prices in the import-dependent country rose, but its exports became sharply more competitive, and a boost in their production stimulated economic demand. Ultimately, Iceland experienced an economic contraction that was far shallower than those in many other nations, and Iceland has recovered far more swiftly.
Iceland’s success has prompted comparisons to Ireland’s recovery. Ireland faced a similar economic crisis but followed the recovery model favored by many policy elites and international creditors. Before 2008, Ireland’s banks, like Iceland’s, were largely unregulated and heavily leveraged with foreign assets. But during the crisis, as the banks teetered on the brink of collapse, the Irish government chose to bail them out by assuming their debt, leaving the country’s taxpayers on the hook for tens of billions of dollars in toxic assets.
In order to pay down the increased debt, Ireland instituted dramatic austerity measures, which sent the economy into a deep recession.
Though these measures have been loosened in recent years, Ireland’s unemployment rate remains at 9.8 percent, down from a high of 15.1 percent. Iceland, on the other hand, has experienced far less unemployment: The nation’s rate only rose to a high of 7.6 percent, and stands at 4.1 percent today.