When the global economic crisis hit in 2008, Iceland suffered terribly—perhaps more than any other country. The savings of 50,000 people were wiped out, plunging Icelanders into debt and placing 25 percent of its homeowners in mortgage default.
Now, less than a decade later, the nation’s economy is booming. And this year it will become the first culturally European country that faced collapse to beat its pre-crisis peak of economic output.
That’s because it took a different approach. Instead of imposing devastating austerity measures and bailing out its banks, Iceland let its banks go bust and focused on social welfare policies. In March, the International Monetary Fund announced that the country had achieved economic recovery “without compromising its welfare model” of universal health care and education.
Iceland allowed those responsible for the crisis—its bankers—to be prosecuted as criminals. Again, a sharp contrast to the United States and elsewhere in Europe, where CEOs escaped punishment.
“Why should we have a part of our society that is not being policed or without responsibility?” asked special prosecutor Olafur Hauksson in the wake of the collapse. “It is dangerous that someone is too big to investigate—it gives a sense there is a safe haven.”
By refusing to allow its currency, the krona, to suffer ultra-low inflation to protect the assets of the rich—as in the rest of the West—Iceland let the krona tumble. The resulting inflation and higher prices have helped its export industries, unlike what happened in many European Union countries, which are contending with ongoing deflation.
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On Monday, Iceland’s Finance Minister Bjarni Benediktsson announced the introduction of a 39 percent tax on creditors seeking to reclaim assets from the country’s failed banks. As The Guardian explains, this is “an attempt to prevent foreign investors rushing en masse to withdraw billions currently frozen in Iceland’s financial system.”
This tax has been introduced as the country winds down capital controls imposed in response to the crisis. Again flouting free market orthodoxy, this move restricts Icelanders’ ability to move their money out of the country in order to protect the krona. Initially intended to expire after six months, the controls have been in place for more than six years.
As a result, it’s estimated that about 1,200 billion Icelandic krona have been frozen—the equivalent of $9 billion. If capital controls were removed, Iceland could face a spate of bankruptcies and problems with liquidity. “There is not sufficient foreign currency to release 1,200bn [krona] in foreign currency,” The Guardian quoted Benedikt Gíslason, an adviser to the government, as saying. “The Icelandic economy would not survive.”
All of these actions have, unsurprisingly, drawn the ire of other countries—in ideological and measurable ways. By refusing to honor bank guarantees given by British and Dutch investors in Icesave—a subsidiary of one of Iceland’s main banks, Landsbanki—Iceland created enemies of its European neighbors. But it has now repaid 85 percent of U.K. claims, and the Icelandic finance minister announced recently that all will be settled by the end of the year.
When asked why Iceland was enjoying such a strong recovery while everyone else is still mired in debt, President Olafur Ragnar Grimmson said in 2013:
“Why are the banks considered to be the holy churches of the modern economy? Why are private banks not like airlines and telecommunication companies and allowed to go bankrupt if they have been run in an irresponsible way? The theory that you have to bail out banks is a theory that you allow bankers enjoy for their own profit, their success, and then let ordinary people bear their failure through taxes and austerity. People in enlightened democracies are not going to accept that in the long run.”
There you have it. Instead of conceding to the crooks who made the mess, Iceland listened to its people. And the data speaks for itself.