Iceland has been characterized by many as the example for countries affected by the economic crisis- and not unfairly so. Within a relatively short time period and through strong policy actions and reforms, the small country of northern Europe has overcome the nightmare of the Memorandum.
The economic crash that the country suffered was unprecedented and yet eight years later it shows an impressive recovery to the point that many speak of the “Icelandic miracle.”
ITIMES and Giorgos Fokianos spoke with the Finance Minister of the country, Bjarni Benediktsson, looking for the “magic formula” of Icelanders.
Iceland, in contrast to other European countries, which suffered from the economic crisis, refused to bear the cost of banks. 8 years later, do you consider that this choice was correct and fruitful?
“You said that we refused to bear the cost of the banks, but what we really did was to refuse to take on the private debt of the banks. Most definitely, this was the right decision at the time and has proven to be critical for Iceland.”
How costly has the crisis been for the society of Iceland and what measures did you take to protect the low-paid?
“Well, it was a very costly adjustment for Iceland. The real exchange rate for the currency fell significantly, with artefacts for the households, because of inflation, index loans, but also for the businesses because a lot of them were financing themselves in foreign currencies. So, the adjustment was very hard. However, with lower exchange rates, Iceland’s contractual laws increased dramatically, almost overnight. Therefore, we were able to maintain a relatively high level of employment, in contrast to many Euro countries, and managed to protect the low income families, relying on our social security system, unemployment benefits and to a certain extent all measures, such as taxes.”
Can you tell me why Iceland succeeded, where other countries, like Greece, had failed?
“First of all, when entering into the crisis years, Iceland had a very low public debt. The problem was its private debt. So, with low public debt ratios we were able to take on the IMF programme and finance the public measures needed at the time. It was critical that we introduced the emergency law and refused to take on the private debt of the banks. Having our own currency was crucial, as it kept unemployment rates low. We saved a lot of jobs and competitiveness of our export industry was enhanced immediately. I think it was a combination of a few matters. Surely, having our own currency helped to the adjustment. Nobody came lightly out of the crisis years. There is no easy solution to the international financial crisis, so it was never expected that Iceland nor any other country would come easily out of it. But high public debt and common currency can be a very dangerous combination, as we have seen in Southern European countries.”
So, it must be very difficult for another European country to follow the same path as Iceland did.
“Yes, because by having a common currency, you decide to take the adjustments through the labour market and we had the option to adjust the exchange rate, something that a common currency country cannot do.”
Can you name some of the problems that Iceland must solve in order to recover completely?
“We believe that all direct fiscal costs for restructuring our banking system will be repaid through the measures already introduced. The final step towards full recovery is to lift the capital controls- and we are on a good track. I’m very optimistic that we will succeed in doing so this year.”
Since the global economic crisis has striked, most countries decided to implement austerity measures in order to deal with it. Do you agree with that?
“I think it was unavoidable in many cases. Common austerity measures were necessary, especially for the Euro countries. However, it is always a question of balance and how fast and to what extent you can adjust to austerity measures. Low interest rates can be of assistance and certainly you don’t want to make things more difficult by introducing austerity measures which aren’t socially and politically reinforceable or sustainable. In this regard, you have to look at each and every country’s special circumstances. In Iceland, we need to introduce austerity measures and on the 1st of January, 2016, we introduced new fiscal rules in order to control debt and expenditure.”
A comparable country to Iceland is Cyprus, which has a very big economic problem. They signed a bailout programme which ends this month. What do they need to do in order to recover?
“I don’t want to become an expert in other countries’ special economic tasks and challenges, but as a general rule, you’d always want to nurture the exporting industries of your country ; come up with a plan to make fiscal policies sustainable ; not delay in dealing with endline problems in public finances. You must address them early on. I like to look at different examples in and outside the Eurozone and compare how economies succeed in dealing with economic slowdown. I think what we have in front of us is now is an extremely valuable example, that we can learn from, with regards to open policy, monetary policy and fiscal issues; what does it mean for a country to participate in a common currency ; what challenges and benefits are there for nations who don’t participate. There is no easy or simple solution that’s best for all countries. I believe that for the Icelandic interests, it’s best to stay outside of the common currency.”
What’s the relationship between Iceland and the EU and why did your country drop the bid for membership in them Union?
“It was a mistake and it has been acknowledged by the parties responsible for the bid, because there never was sufficient political support for the bid. As things stand today, it does not serve the Icelandic interests to become a full member of the EU. However, we do want to maintain our close relationship with the Union through the economic area, where we are full members of the internal market. I believe that our participation in the market has benefited Iceland and we will continue to do so.”