Iceland does it again. The small country's leaders continue to buck the trend by refusing to force citizens to pay for banks' losses. The latest news relates to the Icesave dispute. When Iceland's Landsbanki went bankrupt in 2008, Iceland declined to reimburse overseas depositors. The United Kingdom and the Netherlands subsequently stepped in and used their own money to reimburse Landisbanki depositors in their countries. They have been pressuring Iceland to repay their costs ever since. In the latest chapter of the Icesave saga, President Ólafur Ragnar Grímsson is putting the decision of whether to reimburse the United Kingdom and the Netherlands to a public referendum in Iceland, thereby giving citizens control over the outcome.
You can read more about the Icesave dispute at Wikipedia and Bloomberg
During the last few years of financial turmoil, Iceland has tended to protect taxpayers while forcing bank creditors to suffer losses. The economy has suffered, but has not been the victim of the sort of crippling collapse that leaders in Europe and the United States continue to insist would occur if we did not bailout banks. Unemployment in Iceland is still lower than it is in Ireland, where politicians have imposed severe hardship on taxpayers to keep banks afloat.
Showing posts with label Iceland. Show all posts
Showing posts with label Iceland. Show all posts
Monday, February 21, 2011
Monday, January 17, 2011
Krugman blames the Euro
In this weekend's New York Times Magazine, Paul Krugman offers his views on the European debt crisis. The thrust of his argument is that because Europe cannot devalue its currency - a point which is not altogether clear - its options are "Toughing it Out", "Debt Restructuing, "Full Argentina," and "Revived Europeansism." He concludes that Europe ought to seek a "Revived Europeansism," which means richer countries should give money to poorer countries. This seems unlikely given in current political climate. So, he seems to think that Europe will suffer some combination of debt restructuring and "Full Argentina." I will not attempt a full critique here - it would take too long. But I will highlight two major flaws in the Nobel Laureate's analysis. I believe Krugman's criticism of the European Currency Union is misguided and his assessment of how painful a European restructuring would be is exaggerated.
Krugman's comparison of Europe's monetary situation to that of Argentina at the turn of the century is unfair. Argentina had pegged its currency to the U.S. Dollar, meaning that it was essentially unable to control its own monetary policy. Krugman suggests that by adopting the Euro, member countries have likewise ceded their control over monetary policy, and are therefore unable to devalue their way out of the crisis. It is correct that countries that have adopted the Euro cannot unilaterally print Euros, but the European Central Bank can do just that. In fact, it has already done so, though not to as great an extent as Krugman probably prefers. Argentina, on the other hand, had no pragmatic means for creating U.S. dollars. Another crucial difference between Europe and Argentina is that the latter had promised the world that its currency could be exchanged for dollars at a fixed rate. As investors began to question its credibility on this promise, a run on the currency unfolded. Compounding Argentina's difficulties, the South American country had issued billions of bonds denominated in U.S. dollars. Europe has not fixed its currency to the dollar and most of its debt is denominated in Euros. Krugman's use of Argentine history to bolster his opposition to the European Currency Union is flawed.
Krugman also errs in his treatment of events in Iceland as they relate to Europe. Iceland decided not to bailout its banks during the current crisis. Investors suffered serious losses, but the economy did not collapse and appears to be rebounding quite well. At the same time, Iceland devalued its currency. Krugman says that the Icelandic path is appealing, but is unavailable to Europe because Europe cannot devalue its currency. However, he offers little evidence that devaluation of the currency has been important to Iceland's quick rebound. Although he claims that devaluation led to an increase in exports, the evidence does not support this conclusion. According to statistics at OECD.org, Iceland's exports did not expand any more than the exports from Eurozone members expanded. Iceland's recent success is a result of its refusal to save a banking sector that was too large for such a small country to bailout. Its ability to print money was of lesser consequence. The Icelandic path does indeed remain open to some European countries, particularly Ireland.
Krugman's comparison of Europe's monetary situation to that of Argentina at the turn of the century is unfair. Argentina had pegged its currency to the U.S. Dollar, meaning that it was essentially unable to control its own monetary policy. Krugman suggests that by adopting the Euro, member countries have likewise ceded their control over monetary policy, and are therefore unable to devalue their way out of the crisis. It is correct that countries that have adopted the Euro cannot unilaterally print Euros, but the European Central Bank can do just that. In fact, it has already done so, though not to as great an extent as Krugman probably prefers. Argentina, on the other hand, had no pragmatic means for creating U.S. dollars. Another crucial difference between Europe and Argentina is that the latter had promised the world that its currency could be exchanged for dollars at a fixed rate. As investors began to question its credibility on this promise, a run on the currency unfolded. Compounding Argentina's difficulties, the South American country had issued billions of bonds denominated in U.S. dollars. Europe has not fixed its currency to the dollar and most of its debt is denominated in Euros. Krugman's use of Argentine history to bolster his opposition to the European Currency Union is flawed.
Krugman also errs in his treatment of events in Iceland as they relate to Europe. Iceland decided not to bailout its banks during the current crisis. Investors suffered serious losses, but the economy did not collapse and appears to be rebounding quite well. At the same time, Iceland devalued its currency. Krugman says that the Icelandic path is appealing, but is unavailable to Europe because Europe cannot devalue its currency. However, he offers little evidence that devaluation of the currency has been important to Iceland's quick rebound. Although he claims that devaluation led to an increase in exports, the evidence does not support this conclusion. According to statistics at OECD.org, Iceland's exports did not expand any more than the exports from Eurozone members expanded. Iceland's recent success is a result of its refusal to save a banking sector that was too large for such a small country to bailout. Its ability to print money was of lesser consequence. The Icelandic path does indeed remain open to some European countries, particularly Ireland.
Subscribe to:
Posts (Atom)