Iceland and Ireland, Eight Years On

REUTERS/Bob Strong

thor gylfason is a professor of economics at the University of Iceland and was elected to Iceland’s Constitutional Assembly in 2010.

Published August 25, 2016.

thorvaldur gylfason on Twitter


In the Spring 2013 issue of the Review, Thor Gylfason, a professor of economics at the University of Iceland, contrasted the fate of two countries’ economies in the wake of the 2008 financial crisis and the collapse of their banking systems. Here, he brings the tale up to date.

Iceland’s financial system, you may not remember, blew apart in spectacular fashion, with the country’s banks left owing their creditors (mostly European) roughly seven (!!) times the GDP. Ireland’s banks also collapsed under the weight of bad debt during the financial crisis, but the government ultimately taxed its citizens to pay back every creditor. Who ended up ahead, and why?

The big complication for Ireland (which dogs Greece today) was its ties to both the European Union and the Eurozone; Iceland was bound by neither. See, the told-you-so crowd crowed, Iceland was able to dig its way out by a combination of devaluation of its currency that sparked a tourist boom and flat-out rejection of public responsibility of its private banks’ debt obligations. Not so fast, said others: Ireland did have the advantage of easy access to the European Central Bank and the rest of the EU’s financial rescue apparatus. Hence, in a fashion, the differing fortunes of the economies comes about as close as you can get to a controlled experiment in political economy.

What, then, happened? From peak to trough 2007-2010, per capita GDP in terms of purchasing power fell by about 11 percent in Ireland and 9 percent in Iceland. Since the trough in 2010, per capita GDP has risen by 16 percent in Ireland and 12 percent in Iceland. In purely material terms, Ireland’s living standard is still about one-sixth higher than that of Iceland.

So, by this measure, Ireland and Iceland weathered their crises with broadly similar outcomes. The fact that Ireland has much higher unemployment than Iceland today is hardly relevant since that has been the case for decades, and wasn’t affected by the crash and its aftermath.

Arguably, GDP per hour worked — labor productivity — is a better measure of overall economic performance than GDP per person. And here, Ireland shines. Between 2007 and 2016, GDP per hour worked rose from $59 to $74 in Ireland compared to $41 to $44 in Iceland. Putting it another way, labor productivity grew by 26 percent in Ireland compared to a modest 7 percent in Iceland.

Both countries, incidentally, managed recovery without much collateral social damage. In its most recent ranking (2014), the UN Human Development Index, which reflects the education and health of the population as well as real per capita income, placed Ireland 6th in the world and Iceland a still-high 16th.

Ireland recovered after a lot of belt-tightening. Iceland speeded recovery through a massive influx of tourist revenue attracted by a 50 percent decline in the value of the Icelandic króna. Both countries received significant help from multilateral lenders. But over the decade, Ireland’s EU membership and commitment to the euro apparently counted for more than Iceland’s ability to let its currency sink.

Actually, it’s a bit more complicated. Ireland’s taxpayers footed the bill for making the banks’ creditors whole, while (with IMF approval) Iceland repudiated the debts. Repayment was possible in Ireland because, relative to GDP, the debts of the Irish banks to their foreign creditors were much lower than the debts of the Icelandic banks. From this perspective, the more relevant comparison is Iceland and Greece. The latter emerged from the financial wreckage of 2008 with foreign debts that were almost as unpayable as Iceland’s. But the Eurozone and EU have remained determined to squeeze the last drop from the desiccated lemon.

One last point here. Iceland’s post-crash history differs from Ireland’s and that of other crash victims in that the perpetrators of financial crimes were not all allowed to walk away scot-free. The Supreme Court of Iceland has thus far sentenced 27 bankers (plus one cabinet secretary) to prison terms averaging 2.5 years. In the United States and Europe, governments have punished the banks with fines but let the bankers walk – the practical equivalent of fining General Motors for speeding tickets earned by the reckless drivers of Corvettes.

Arguably, then, Icelanders, who lost a lot of wealth thanks to the transgressions of their bankers, obtained a sort of closure, while their Irish counterparts did not. Perhaps more important, Iceland’s bankers are more apt to think twice before betting the future of their country on a roll of the dice. Irish bankers… not so much.