Tatiana Dementieva
What is the least pleasant surprise for retired people amid crisis? Pension cuts. Strange as it may seem, but we cannot say that about Iceland, which was among the first European countries to feel the burden of the global financial crisis and is now successfully recovering from it.
How is Iceland fighting the consequences of the crisis? How do antic-crisis measures affect the citizens? Why aren’t they as indignant at austerity as the citizens of southern eurozone states?
Fighting Crises: Icelandic Style
According to Eugene Olkhovsky, ’s leading expert, the success of those who were the first to come in and out of the crisis presents special interest to researchers and politicians as it allows them to understand the efficiency behind the measures used to overcome the crisis.
Not so long ago, Maxim Sukhorukov published an article on http://slon.ru. The title of the article reads: “Why do Icelanders feel happy about 50% pension cuts?”
The article tells us about the fact that Iceland was the first country to enter the crisis with serious economic problems, far more serious that those seen in today’s eurozone. In September 2008, Iceland’s public debt was equal to €90bn or roughly €300.000 per capita! Its stock indices collapsed by 90% while the national GDP lost 10% in 2 years. The rate of unemployment boosted by as much as 12%. This was followed by endless protests, change of power, preliminary elections. It sounds familiar to Greeks and other debt-ridden southern European nations.
However, for some miraculous reason, the situation has changed dramatically since then. Today’s Iceland is a country with a growing economy, export and income. The rate of unemployment is declining. People feel happier. They don’t protest anymore.
Yet, the author says, it was not preliminary election or anti-corruption measures that saved Iceland from going broke. According to the author, the following 3 steps saved the day:
· Easier credit payments
· Mortgage loan write-down
· Credit payment restructuring (increasing the payback period and reducing the interest rate).
Yet, the major step was the 50% devaluation of the national currency – the Icelandic Krona. By the way, the ISK exchange rate is still twice as low as before the crisis:
This allowed the local government to stimulate export and income growth (export accounts for 60% of Iceland’s GDP) and simultaneously cut social benefits almost by 50% less painfully.
Can Icelandic Success Be Exported To Other Crisis-Ridden Countries?
According to Eugene Olkhovsky, Iceland’s success cannot be easily exported to other crisis-ridden nations.
On the one hand, it is obvious that devaluation is more effective than direct cuts in social benefits. On the other hand, this scenario is unacceptable for the eurozone. In order it implement it, eurozone members should leave the currency union first. Moreover, devaluation itself, without extra steps mentioned above, is inefficient.
There is some more factors to consider:
Iceland is a tiny export-oriented state. In this aspect, devaluation was a really efficient tool of economic regulation there because it stimulated export.
Iceland got almost no financial support from the EU and international financial institutions, which allowed it to avoid the vicious circle of constant borrowing and to curb the growth of the public debt.
Iceland is a non-EU member. Therefore, it doesn’t obey to the union’s discriminatory quota system, which would otherwise kill the core of the Icelandic economy – fishing.
But Iceland seems to be working towards entering the EU. At this point, it is hard to estimate how EU membership may influence Iceland’s economy. However, experts say that the very fact that Iceland wasn’t a EU member during the crisis helped it to overcome the crisis.
Therefore, we can conclude that the eurozone cannot copy Iceland’s crisis-fighting experience and will have to rely on other methods…
Tatiana Dementieva
