Following the 2008 financial crisis, I consumed information on how it happened and why and which countries and their respective governments it would effect the most. Those especially exposed economies profiled in Michael Lewis’ book “Boomerang: Travels in the New Third World” included Iceland and Greece. That was published in 2011. A lot has happened since.
Seven years ago Iceland essentially went bust after it relaxed its rules overseeing banks and the largest of those subsequently collapsed. In all, it saw about $100 billion in banking losses, which, as Lewis points out, is “roughly $330,000 for every Icelandic man, woman and child.” This in a country of roughly 300,000 citizens.
Meanwhile, in Greece, the recession arrived and has never subsided. In the aftermath of the crisis when the country was unable to pay its bills, officials with the International Monetary Fund (IMF) looked at its books. What they found was astounding. Greece’s public sector was simply unsustainable and functioning amid a culture of bribes. In contrast to Iceland, “in Greece the banks didn’t sink the country,” Lewis wrote. “The country sank the banks.”
Now fast-forward to present day. Two countries that were essentially bankrupt have taken two far different paths.
In Iceland, after the stock market there fell 95 percent, the government implemented strict capital controls, prohibited its citizens from buying foreign stocks and currency and sent several bankers to jail.
As Jenny Anderson wrote in the New York Times, “Iceland was willing to prescribe itself tough medicine to repair its tattered reputation.”
And it has largely worked. Iceland’s economy is growing, buoyed by an increase in tourism, and the jobless rate in that country is about 4 percent. Now it is considering lifting some of its capital controls, which, despite their apparent effectiveness, have hurt local businesses. It’s a remarkable turnaround.
Iceland, of course, is not Greece. It’s much smaller and perhaps more importantly has its own currency, whereas Greece is tied to the euro – for now. But even if it leaves the currency and returns to the drachma, Greece faces more of an uphill battle in getting its finances in order.
The problems in this nation of 11 million are systematic and widespread. Not only are Greece’s government agencies, such as its schools, more bloated than its European counterparts, they are more inefficient. Equally problematic is that Greek taxpayers have a long tradition of not paying taxes.
Since Greece has failed to pay its bills, the rest of Europe has loaned it money under the condition that it implement austerity measures – basically raise taxes and cut spending. This hasn’t worked. Compounding Greece’s opposition to its lenders’ demands is a jobless rate hovering around 25 percent, which is much higher among younger Greeks.
Now the relationship between Greece and the rest of Europe is at a breaking point. Over the weekend, in a hastily arranged vote called by government officials, Greeks decisively rejected the terms of receiving another loan.
Whether Greece actually leaves (or is kicked out of) the currency union remains to be seen. It missed its 1.6 billion euro payment last week. The IMF says it won’t loan it any more money. The country has exhausted most of its options and goodwill. It may want to look to Iceland for some “tough medicine.”