Over the last 4 years the Icelandic economy has gone from financial disintegration to an emerging recovery and in doing so has taken a different policy stance than other economies faced with similar economic conditions.

1. Mark Johnston King’s College, Auckland October 2012
Iceland economy heating up
Over the last 4 years the Icelandic economy much cheaper especially within the tourism sector.
has gone from financial disintegration to an Unfortunately for those indebted euro currency
emerging recovery and in doing so has taken countries this policy is not an option.
a different policy stance than other economies
faced with similar economic conditions. How have they recovered?
Firstly, the government guaranteed the deposits of
At the height of the global financial crisis the Icelandic Icelandic citizens in the banks but this did not apply to
banks failed, the currency (the Krona) collapsed and foreign investors. The banks that held foreign assets
social unrest was the agenda of the day. The banks are currently being broken down and assets are being
in America that became “Too big to fail”, and were sold to pay off creditors. New banks have been
subsequently bailed out; but this was not an option created and capital controls have been established
for the Icelandic government and banks were allowed to curb money from leaving Iceland.
to collapse. In fact the banking system was so big that The weak Krona has been the catalyst to recovery and
the government didn’t have the reserves to bail it out – exports in fish, aluminum, and tourism are up by over
the three largest banks were worth approximately 10% from 2010. The fishing industry itself provides
10% of Iceland’s GDP. 40% of export earnings which equates to more than
Furthermore, it allowed the Krona to remain weak 12% of GDP and employs 7% of the labour force.
causing imported inflation but it made their exports Nevertheless, Iceland is still trying to cushion its

2. Mark Johnston King’s College, Auckland
economy from reliance on fisheries and therefore
manufacturing and service industries have become
sunrise industries even before the financial crisis. With
an abundant amount of geothermal and hydropower
sources and a growing aluminum sector economic
growth has started to recover. Furthermore with a
more environmentally friendly source of energy, data
centres have been keen to establish themselves in
Iceland.
However much of this recovery couldn’t have
happened without some external assistance. To
this end the IMF and other Nordic countries were
forthcoming with loans in order to try and stabilise
the already volatile economy.
Economic Indicators (ISK – Icelandic Krona)
Annual Rates 2009 Today –
Sept 2012
Unemployment 9.3% 4.8%
Inflation 18.6 4.3%
GDP -8.6% 0.5% Source: Washington Post
Current Account -140,000 -41,000
mil ISK mil ISK
Government Debt Final thought
as a % GDP 120% 127.3% Iceland hasn't fully recovered from the global financial
crisis. There is still high household debt and the
employment gains in fishing and tourism haven’t
The above table shows the problems that faced the
transferred to other parts of the economy. Nevertheless
Icelandic economy in 2009. With unemployment on
Iceland does have a certain amount of control of its
the rise and inflation at 18.6% there was not only
own economy in that it has its own: currency; central
stagflation but the government’s debt to GDP ratio
bank; monetary policy; rules on decision-making.
has continued to climb as officials protect the social
Maybe some euro countries wish they had the same
safety net. The Krona peaked against the US dollar
independence and could have if they leave the euro
in 2007 but crashed more than half its value in
zone.
2008. The recovery in its value has been a slow
process, although the weaker currency has helped
the Icelandic trade balance even though it is still in References
a deficit. This has been the catalyst to increased Iceland makes fledgling recovery from its economic
tourism numbers, bringing in more foreign currency. meltdown
Iceland's tourism board recorded 566,000 foreign Washington Post – January 17 2012
visitors last year, up 16% from 2010.