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
percent of 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.