Iceland Shows Other Europeans How to Survive Bankruptcy

Small Atlantic nation enjoys growth and employment gains after failing to rescue its banks. Mainland Europe remains stuck with stagnation, decline, and ruinous "rescue" packages.


Taxpayers in Europe (and the United States) who have been terrorized since 2008 by government officials warning about economic armageddon, catastrophe, and pestilence should look to tiny Iceland for a taste of how little there is to fear when the experts can't save the people

Christine Lagarde, managing director of the International Monetary Fund, recently branded Iceland's economic performance "impressive." In the last few years the small island in the north Atlantic has managed to shrink its deficit, reduce unemployment, and allow its economy to grow.

Meanwhile, on mainland Europe, there is hardly any economic growth to be seen, and countries that pledged to make necessary austerity reforms have almost certainly failed to do so.

Government growth, fiscal activism, and national resentment are the norm. Officials from the eurozone have been trying to help heavily-indebted nations like Greece, Portugal, and Italy avoid banking-system collapse and exit from the single currency. Were they to examine Iceland's example they might find that temporary financial collapse and monetary sovereignty provide a better roadmap to economic recovery than bailouts backed up by unpopular and unenforceable "austerity" conditions.

Iceland, like the rest of Europe, was faced with an almost unprecedented economic situation in 2008. Iceland's central bank tried to rescue some of the country's largest banks, bankrupting itself in the process. Iceland's largest banks held almost 10 times Iceland's GDP in assets (much of it foreign) in 2008. The central bank was forced to attempt the rescue after agreeing to guarantee future bailouts in 2001. With the central bank out of commission and a crippled financial sector, Iceland's GDP took a nosedive.

Because so many of the assets held by Icelandic banks were foreign, the diplomatic fallout was almost as severe as the economic one. The British prime minister at the time, Gordon Brown, invoked anti-terrorism legislation in a bid to freeze assets of one Icelandic bank in the United Kingdom.

Iceland's GDP per capita (in current U.S. dollars) was a little over $65,500 in 2007; in 2009 it was almost $38,000. It would be cruel to overlook the effect a sudden loss in wealth like this had on the average Icelander's economic well-being. Having investments you thought were safe vanish is unfortunate at best and tragic at worst. However, the economic future of young Icelanders will almost certainly be substantially better than that of their peers in Greece.

Icelanders will do better than Greeks precisely because financial institutions collapsed in Iceland, ironically in part because of mechanisms in place requiring bailouts from the Icelandic Central Bank. Economic collapse allowed for proper refinancing. Greece has suffered from too much attention, and because of all of that attention, the actual size of the Greek economy has been forgotten.

Greece's GDP is roughly the size of Maryland's, about $300 billion. The eurozone as a whole has a GDP of almost $12 trillion. Figures like these only highlight the strictly political motiviations behind the attempted rescue of Greece by the rest of the eurozone. Certainly, a Greek exit from the eurozone would be a major event. However, Iceland's example shows that letting financial institutions fail allows for strong and comparatively quick recoveries following a period of economic hardship.

Unsurprisingly, government attempts to fix the European financial crisis have made the situation worse and humiliated the most affected countries the most severely. Had Greece been left to default on its debt and leave the eurozone early, the effects, economic and political, would have been much less dire in comparison to the effect of a Greek exit now. What is forgotten about the example of Iceland is that although the initial international reaction to Iceland's collapse was anger, the country's reputation recovered. The animosity brewing between the Greeks and other Europeans (especially Germans) will not diminish within a matter of months. Too often the cultural changes that are happening in Europe are overshadowed by the economic fiasco.

The comparison between Greece and Iceland is not perfect. If Greek GDP, at $300 billion, puts it on par with the Old Line State, Iceland's, at just $15 billion, puts the island nation below even Vermont, the U.S. state with the lowest GDP. But so what? The economic stagnation caused by Too Big To Fail, of which the Euro "crisis" is only the most monstrous example, resulted from policymakers believing that the same math you know to be true at the local level does not apply at the macro level. The central bankers are wrong about that, and the example of Iceland provides Greece and the rest of mainland Europe with a valuable example.

Unfortunately, it looks like it will be a lesson learned in hindsight. How severe the effects of fiscal and monetary activism will be on the eurozone will depend in part on how quickly continental policymakers can abandon their political agenda and focus on the economics.  

NEXT: Illinois Top Dog in Governmental Bodies

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  1. Obviously, Icelandic Top Men are better than our Top Men. We have a Top Men gap. We must embark on a crash course to train a new breed of Top Men that will perform better than Iceland’s. I figure a billion should cover the cost of getting the infrastructure ready for the first class of the new and improved Top Men. Then we’ll need a continuing budget to make sure we don’t fall behind again, and the cost goes up if you want this done befor FY 2017. I’ll gladly take on this project, because I am, after all, a patriot who loves his country and doesn’t want to see us eclipsed by Iceland.

  2. Were they to examine Iceland’s example they might find that temporary financial collapse and monetary sovereignty

    What the fuck is wrong with you Feeney?

    Seriously how fucking well is “monetary sovereignty” working in the US? Or Britain?

    What currency you use is not the problem. The problem is over-spending and not paying off your debt, neither of which has anything to do with monetary sovereignty.

    1. I think the comment was intended to show that hitching your wagon to a bunch of others threatens to drag you with those fuckers when they cause instability in the now-broader scale bullshit fiat currency system you all share.

      1. As fiat currencies go the Euro is miles ahead of the US in terms of transparency and not doing stupid shit like turning on the printing presses to “stimulate” the economy.

        Of course it looks like it is about to give up on all that very soon.

        The only reason the Greek financial crisis is tied to the Euro is because Euro nations have volunteered to tie the two together.

        No idea why it is so hard for Feeney to acknowledge that simple fact.

        Every time a State in the US hits financial trouble there is never talk about the Dollar or kicking the state out of the dollar…why is the Euro so magically different?

        I will tell you why: cuz dipshits like Feeney want to tie the Euro and the financial crisis together.

        1. Of course they’re going to turn the presses on. That’s the whole reason to have a fiat currency.

          Just conjecture here, but it would seem to me that there’s some sort of process of influence of various member nations to get the ECB to act and do…something. Whereas California can’t simply ask the Fed to start buying its bonds to bail it out.

          1. Whereas California can’t simply ask the Fed to start buying its bonds to bail it out.

            In 2009 and 2010 there was lots of talk about states and cities hoping to get federal money to bail them out.

            In essence that is what happened with the stimulus and what Obama wanted to do with stimulus 2. In neither case was “Monetary Sovereignty” on the table.

            It is the Keynesians who want to inflate out of debt…one assumes that is exactly what Greece would try to do instead of paying its debts if it left the Euro. It is not me who keeps saying that Monetary Sovereignty is key to fixing the problem over and over again…it is Feeney who is saying it. One can only guess that he does think inflation can solve the problem.

          2. Of course they’re going to turn the presses on. That’s the whole reason to have a fiat currency.

            Not necessarily. Fiat currency has lots of advantages to a currency tied to a commodity that is prone to changes in supply and demand outside of the supply and demand of that currency. But yeah, with a fiat currency, if you can tie currency to a financial crisis it makes it all the more easy to dilute the value of the currency.

            One wonders why Feeney is so quick to help make that financial crisis/currency connection.

    2. If Greece left the Euro it would have to stop relying on bailouts.

      Sure, it could print money up the wazoo, but then it would be forced to deal with the inflation caused by the in isolation.

      With the ECB printing money they are essentially taxing Germany without their consent in order to bail out Greece. It’s just a different way of transferring wealth.

      “Monetary sovreignty” is an oblique way of cutting Greece’s umbilical cord and forcing it to confront its problems in a serious way.

      1. If Greece left the Euro it would have to stop relying on bailouts.

        Then why doesn’t Feeney say that? Also it can stop relying on bailout while it is in the Euro or the other members could simply stop bailing them out. At no point is leaving the Euro required.

        Again the connection between the financial crisis and the Euro is entirely voluntary and entirely manufactured.

        “Monetary sovreignty” is an oblique way of cutting Greece’s umbilical cord and forcing it to confront its problems in a serious way.

        Bullshit. “Monetary sovereignty” was used in the context of Iceland not Greece. Feeney wrote what he wrote for a reason that has meaning.
        If Feeney wanted to talk about cutting the bailout cord then he would have talked about the bailouts not about Greece leaving the Euro.

        1. When Greece defaults on its euro-denominated debt, which it will do in a heartbeat as soon as the bailout spigot goes dry, it will have to leave the euro to salvage what it can of its economy because it won’t be able to continue financing its debt and is thoroughly unable to pay it back under present conditions, which would be made even worse. If Greece was on its own currency system that wouldn’t mean dick to any of the rest of Europe except to the extent that reduced exports to Greece might cut into their GDP. Since they all share a monetary union and have sunk both bailout dollars and inflation into rescuing Greece, it matters. In that context, yes, the monetary union is a factor.

          1. When Greece defaults on its euro-denominated debt,…it will have to leave the euro to salvage what it can of its economy because it won’t be able to continue financing its debt and is thoroughly unable to pay it back under present conditions, which would be made even worse.

            The damage from all this has already happened. Weather Greece leaves the Euro or stays does not matter….i guess you could try to spread out that damage over time, but the net effect would be the same.

            Actually leaving the Euro would cost more cuz doing so costs money. you have to print money exchange everything from Euro to Greek currency, bunch of paper work etc…basically digging holes and filling them up again.

            I think the big confusion here is that many have fallin for he myth that money is this magical thing that produces wealth and prosperity through its very existence.

            Money does create wealth in that it allows me to take skills and trade them with little hassle. I can build stuff get money by selling them and use that money for goods and services i do not produce myself. It does not and cannot do anything more then that.

            So if there is any “value” in the market building up in currency beyond that it is all a phantom bubble.

            The reason Iceland came back so quick is not because money worked real hard…it is because the value was already there in the goods and services Iceland makes. The financial market is the frosting not the cake.

  3. Had Greece been left to default on its debt and leave the eurozone early

    You are a drooling imbecile Feeney. Why the fuck does Greece have to leave the eurozone (Euro currency I think you mean)? And how the fuck would it matter one way or the other?

    “OMG Maryland is in recession!!! I have a great idea lets fucking kick it out of the Dollar and make them print their own money. That will fucking fix it!!”


    Sadly you saying a default is necessary (why not simply cut spending to make the payments?) is the least stupid portion of the above statement.

    1. I hear what you’re saying, JC, but you may be overreacting a bit.

      I’ve skimmed the post, but isn’t it possible that Feeney is just pointing out that the trouble is not the Euro per se, but the fact that by joining the Union and accepting the Euro, you accept all the conditions that come with it.


      “OMG Maryland is in recession!!! I have a great idea lets fucking kick it out of the Dollar and make them print their own money. That will fucking fix it!!”

      There are people who are attempting to do just this on a very small, limited and sometimes considered illegal scale.

      1. A few months ago there was an article here (tim wrote it?) about how the currency and financial crises are not linked in anyway.

        Anyway I think i have the right to be upset as Feeney ruined a perfect opportunity to show how awesome letting troubled banks fail works.

        but isn’t it possible that Feeney is just pointing out that the trouble is not the Euro per se

        No. I quoted him twice saying that currency is central. “leave the eurozone early” and “monetary sovereignty” and one of those quotes had nothing to do with Greece but with Iceland, so this is not just about Eurozone rules.

        1. Good. I can feel your anger… Let the hate flow through you… Your hate has made you powerful.

  4. @Corning; actually, you misunderstood the author. He’s not blaming the Euro for Greece’s problem; he’s saying that the interference by other members of the Eurozone has been making the issue worse, just like when the US “bails out” many third-world nations by loaning them more money and sinking them deeper in debt and not really solving their problems. The common currency is just one more reason for Europe to not allow a default, because then they suffer for Greece’s mistake. Europe would likely let Greece stumble, fall, and pick itself back up if they had fewer direct ties.

    1. Then why did he say that “monetary sovereignty” was key for Iceland’s recovery?
      And how exactly does the Euro suffer if Greece fails?
      Oh yeah cuz the ECB used its money to bail them out…
      We can go around and around on this forever.

      The link between the financial crisis and the Euro is entirely voluntary and has nothing to do with fixing the problem.

      Greece owes money. They need to pay it or suffer default in order for them to recover. Notice how currency does not enter the picture of describing the problem or the solution…the only time currency enters the picture is when people want to invent unicorn riding Keynesian magical solutions to whisk the problem into outer-space.

      Feeney’s invented unicorn riding Keynesian magical solution is for Greece to leave the Euro (the Euro of course is less likely to inflate the currency then Greece is if it had its own currency)…after which Greece will get ponies I guess.

      By the way the only way the Euro will suffer is because of a lagging economy. Guess what? Greece is already there and being in or out of the Euro will not increase or decrease economic trade and activity. It is a shell game to think otherwise.

      1. Monetary sovereignty just gives Iceland more flexibility to set its own policy without outside pressure. If Greece were dealing with this same issue and were still under the drachma, do you honestly think the rest of Europe would have spent as much money as they have bailing them out and bending over backwards applying pressure to avoid default? It’s in that sense that the shared currency matters. It’s easier for Iceland to default than Greece because there aren’t 10 European heads of state looking over Iceland’s shoulder and insisting that it can’t default. And even if there were, at the end of the day, they don’t have any institutional authority to exercise.

        Yeah, the currency union is voluntary. Yeah, a Greek default is only an issue because the rest of the union makes it one. So what? It doesn’t change the fact Europe would probably be less concerned about Greece without that voluntary union.

  5. Corning, Feeney stated that if the Greeks had left the Eurozone early, as opposed to now or later, the consequences would have been less dire. He hasn’t offered it as a solution to the problem. Greece accepted a bailout that it would not have gotten had it left the Eurozone. This has piled more debt on top of what was already there, so the patient has been drip fed instead of being allowed to either recover on its own or simply die.

    Greece has, by following Eurozone rules, not been allowed to default. Had it left, and defaulted it wouldn’t have got the bailout it did and the Euro would be affected by the German, French, Italian and Portugese banks looking to fill a ?60 billion hole in their accounts. By staying in the euro it is effectively forced to take a bailout which is designed more to prevent the aforementioned banks from failing than anything else.

    The result may be the same in that the EU or ECB will likely bail out Greeces creditors anyway, but if Greece had left the Greeks would not be on the hook after defaulting and would have billions less debt than they do now. Because Greece doesn’t have sovereignty it can’t default.

    1. Because Greece doesn’t have sovereignty it can’t default.

      You are an insane person. Of course it can default…it just misses a payment on its debt obligations and it, by definition, has defaulted.

      1. You are an insane person.

        And you must be a liberal. Nobody else uses these kinds of opening lines in a presumably rational debate.

        You are right, Greece could default whether or not they left the Euro Zone. But if they did, all those Euro Peoples would be very Euro-enraged. And then they would fill Greece up with Euro Poop. Or some such.

        But this doesn’t mean the Greeks shouldn’t default anyway, I mean hey man bring it on.

        1. You must be new here. Tony is indeed insane, and he frequently spews absolutely absurd fantasies brought on by excessive jackboot-licking.


  6. European economy to recover ?

  7. Let’s yell at each other, because that always works. And let’s miss the point that by NOT yelling at the rest of the EU, letting some banks fail, and not inflating, Iceland is better off. Because missing the point is what Libertarians do best!

    1. Now now, they’re just trying to make sure they stay pure.

    2. I actually got that point…but Feeney ruined it with his bullshit.

  8. The question is whether Iceland’s economy has righted itself by embracing free-market practices and sound banking discipline, or merely appears to be rebounding because of a “bounce” in what must be a repeating cycle, to the extent that they cling to socialist and/or mercantile policies.

  9. Hold on a minute there… “FAILING to bail out their banks”?

    Refusing to shift losses from a failed business to the taxpayers isn’t a failure on the government’s part. The banks failed, and the losses should be borne by those who risked their money by depositing it without any thought to the banks’ solvency.


    1. +1

      It never fails to sadden me how people refuse to understand that there is (almost) never increased return without increased risk. If there’s one fact the average consumer of financial services needs to understand, that’s it. And yet the majority of people don’t.

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  12. This article glosses over the structural and institutional differences between Greece and Iceland. Greece has huge problems with tax evasion, large public debt, and the Euro. Iceland had fewer fundamental structural issues.

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  14. Above, you say, “Iceland’s largest banks held almost 10 percent of Iceland’s GDP in assets (much of it foreign) in 2008.” This should have read, “”Iceland’s largest banks held almost 10 times Iceland’s GDP in assets (much of it foreign) in 2008.”

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