You may have heard about Iceland’s toppling economy back in 2008. As one of the hardest-hit countries at the time, Iceland’s heavily criticized method to escape veritable economic demise actually did the trick.
Faced with the possibility of financial failure, Iceland had to think on its feet. Instead of bailing out banks USA-style, the country forgave mortgage debt for the population – and completely started over from square one.
A country with a small population of roughly 320,000 citizens, Iceland‘s entire banking structure “systemically failed” in the early days of the 2008 recession. Despite the fact that Iceland is still on the road to recovery, the country ranks high as a politically and economically stable nation. Their success over the last few years has been largely under-reported, and the story behind it is quite fascinating.
A Little Bit of Morality Goes A Long Way
Let’s face it: Icelanders are tough. They are entirely isolated, living in frozen tundra, perpetually enduring less-than-optimal weather patterns. While they are surrounded by epic natural beauty, these people aren’t spoiled; they’re tenacious.
Instead of allowing the criminals responsible for bank fraud to run free as the years passed by, Iceland thought it might be wise to actually indict bankers who committed serious financial crimes that contributed to the collapse. By paying off loans for consumers, forgiving homeowner debt (up to 110% of the property value), and throwing the offenders in prison, Iceland was able to bounce back. Now, its economy is “recovered” and is growing faster than both the US and European economies.
When Iceland’s President Olafur Ragnar Grimmson was asked whether or not other countries – Europe in particular – would succeed with Iceland’s “let the banks fail” policy, he stated the following:
“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.”
Grimmson’s “famous” reply to the controversial question, “What is the reason for Iceland’s recovery?” is most remarkable.
“We were wise enough not to follow the traditional prevailing orthodoxies of the Western financial world in the last 30 years. We introduced currency controls, we let the banks fail, we provided support for the poor, and we didn’t introduce austerity measures like you’re seeing in Europe.”
Picking Up the Pieces On the Road to Recovery
Of course, though, everything isn’t all rosy. Many Icelanders have two or three jobs to sustain themselves and their families post-2008, and a sudden spike in taxes – an inevitable result of letting the banks fail – made the burden even harder to bear.
Though unemployment is down (it’s less than 5% of the population), you could say that “Iceland is a victim of its own success.” Very high standards of living and 60-70 hour work weeks create a bit of a pinch in the pockets. Difficult challenges lie ahead, but whichever way you look at it, Iceland did avert a seemingly incurable catastrophe. The point is that Iceland was criticized for allowing the banks to fail – and we now know that the disparaging remarks from scathing critics were too quick to judge.
Since 2008, Iceland has added jobs to its tourism and green energy sectors. In fact, according to the Icelandic Tourism Board, foreign visitors increased last year by 15.9% – and travel now accounts for 5.9% of GDP.
However unorthodox in its method, Iceland’s “let it fail” policy resulted in jubilation. We can’t seek perfection in the years after a global financial collapse, but we can acknowledge nations who persevered with integrity.