The forgotten Icelandic meltdown

Amid Greece's financial fiasco and the Iceland volcano, Iceland's own financial crisis and runaway inflation has been forgotten. It's a shame, because it holds many lessons for Greece – and others.

Brynjar Gunnarsson/AP/File
Around 150 people crowd into the reception of the Central Bank of Iceland, during that country's financial crisis, as seen in this 2008 file photo. The global credit crunch brought down the country's three main banks, many businesses failed, unemployment rose, prices shot up, and the value of the country's currency, the krona, plummeted. It offers many lessons for Greece.

These days, when media focus is on the panic surrounding Greek debt, the Icelandic drama is largely forgotten. When Iceland is mentioned it is usually related to the recent Volcano eruption, and not its 2008 meltdown and its repercussions. But the problems have not disappeared, contrary to the presictions of prominent pro-inflationist columnists.

Consider first of all the collapse in real wages for Icelandic workers. Average hourly earnings rose in nominal terms by 3.6% between March 2009 and March 2010, after having risen by 5.5% between March 2008 and March 2009. As a result the cumulative 2 year increase is 9.3%, not so bad, eh?

Or actually, yes, it is bad, since consumer prices rose 11.6% between March 2009 and March 2010, after having risen by 19.9% between March 2008 and March 2009.

As a result, real wages fell 7.2% in the latest year, after having fallen 12% during the previous year, for a cumulative 2 year decline of 18.3%.

An 18.3% decline in real hourly earnings would by itself be more than bad enough, but it gets worse as Icelandic workers that have kept their jobs have also seen a decline in the number of hours they get to work, meaning that their real weekly/monthly pay declined even more. With the average work week declining by 5.5%, from 41.9 to 39.6 hours, this implies a decline in real earnings for workers who have kept their jobs of 22.8%.

And it gets even worse if you consider that the employment rate fell from 81.3% in 2007 to 75.1% in 2009. Add that into the equation, and you'll find that the average real pay of all people in Iceland fell by as much as 28.7%.

And note that all of these numbers reflect on the situation before the Volcano eruption (whose effect on the Icelandic economy is unclear, but probably negative), so it can't be blamed on that.

The lesson here is that having your own currency, and the ability and will to seriously debase its value, is not something which will enable you to escape negative consequences of economic mismanagement, as some claim is the conclusion to be reached from the Greek debt panic.

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