Case of Ireland vs Iceland: Some lessons (Did Iceland do better as it had limited support of its central bank??)

Today is the day of results of Greece referendum which could change Europe and world polity in unimaginable ways. Few imagined that we could actually stare at a Greece exit from Europe. But we have it right here. Lot is being written and lot is going to follow. Keep tuned.

Meanwhile, an interesting (and updated) take on Ireland vs Iceland. Being a member of ECB, Ireland fared better in 2008 but Iceland did better over a long run as it did not have the support of a central bank!

The story of Iceland and Ireland in the first decade of the century offers some rather obvious lessons. The entry of global finance into a small open economy, especially if invited by the government through low taxes, regulation and supervision, can bring great riches in the short run but at a substantial cost. The real economy is distorted in an unsustainable way; ethics in both the business as well as the public sector suffer; white collar crimes arise; and the balance sheets of not only the private sector but also the public sector are put at risk when a crisis hits the world of global finance or traders become concerned about a particular country.

Differences in currency arrangements affected the mechanisms of the boom and the collapse; the current account deficit during the boom was greater in Iceland, real wages fell more in Iceland when the currency depreciated but unemployment rose less. Iceland’s banks collapsed because they did not have a lender of last resort in euros as did the Irish banks, but their collapse and the ensuing capital controls shifted the burden of debt restructuring onto foreign creditors to a much greater extent than in Ireland.

An interesting example of how a country actually is better off without central bank intervention. Most of Iceland focus has been on it not having Euro as currency.But not much attention on how its central bank was unable to create much further damage. It had a central bank but was unable to do anything given the huge size of the banking mess.

As Grrece looks at exit, so other members should also think through their options, Ironically, the events actually push more attention on members other than Greece. May be also evaluate the role of their central banks as well.

One Response to “Case of Ireland vs Iceland: Some lessons (Did Iceland do better as it had limited support of its central bank??)”

  1. anthonyhemm Says:

    Yeah independence does miracles indeed..

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