The Resilience of Iceland: Why It Recovered Rapidly from the 2008 Economic Crisis and Maintains Economic Stability Today

The Economic Recovery of Iceland from the Global Financial Crisis of 2008 is widely seen as an impressive example of how a small, open economy can recover from a severe economic depression as it did in the past. At the time when the crisis occurred in 2008, Iceland’s banks collapsed which resulted into almost recession. Its GPD contracted by more than 6% while unemployment .

However, after few years, not only did it begin recovery but showed some signs of economic resilience by outperforming many other larger more diversified economies at that particular time. This article discusses factors that influenced fast comeback of Iceland and how it sustained economic stability. Among the major influences were drastic policy interventions, flexible monetary system as well as bank sector restructuring along with strong social cohesion and public accountability among others.

1. Drastic Policy Interventions: Letting Banks Fail and Imposing Capital Controls.
   One crucial element behind Iceland’s fast turn-around following the crisis was government’s resolve of taking bold and unconventional measures to respond.Failing banks in regard to bailing them out was an action that the Icelandic government did not take since its three major commercial banks Glitnir, Kaupthing, and Landsbanki went down.This goes against what most countries did such as the US and many parts of Europe where taxpayers’ money was used to save distressed financial institutions.

By letting the banks go under, Iceland averted imposing upon its citizens huge debt obligation as well as prolonged period characterized with financial uncertainty. The losses were absorbed mainly by foreign debitors who invested heavily in Icelandic banks before the crisis happened. This decision however dented the reputation of Iceland in the global financial market temporarily but it enabled the country concentrate on developing her economy without suffering from unbearable debt.

Simultaneously, Iceland implemented tough capital controls that would stabilize her currency and prevent further capital outflow. Specifically, this measure restricted outflows of capital hence preventing sharp depreciation of króna which had already lost much value. This in turn helped the government to manage inflation as well as improve currency confidence by stabilizing exchange rates. So as it grew, Iceland could manage to start recouping courtesy of the controversial capital control.

2. Flexible Monetary Policy and the Depreciation of the Króna.
   Iceland’s flexible monetary system has been an additional factor that facilitated recovery in this country. Unlike many European states, Iceland had its currency known as Icelandic króna through which it could conduct an independent monetary policy. The abrupt downfall of Iceland’s currency following financial crisis enhanced global competitiveness levels of its exports at once. Devaluation led to country’s goods being cheap for other nations; thus stimulating demand for fishing industry, aluminum production as well as tourism all among others key export sectors.

This variation in exchange rates helped to stabilize the economy of Iceland. Of course, it resulted into increased price of imported products thereby increasing inflation for a moment but this was helpful for domestic export sector’s rejuvenation. The most significant beneficiaries of the cheap crown however were fisheries businesses since they could offer their catches at the world market at more competitive rates than before.

Moreover, to help it tide over this crisis, the Central Bank of Iceland (CBI) which is the central bank for Iceland relaxed its monetary stance at the same time that export-based industries gained from weaker krona via positive fiscal transfers. Initially aimed at checking inflation as well as stabilizing the currency value , so that when inflation was brought under control , the bank quickly shifted its position to accommodate these changes by lowering interest rates which could help boost domestic consumption. With such an approach to monetary policy, Iceland was able to navigate through the crisis while at the same time focusing on economic stability in the long term.

The Banking Industry Needs Overhaul and Restoration of Confidence
Iceland’s major banks failing was both a cause of the crisis and a turning point for the country’s economic recovery process. In response to the failure of its major commercial banks, which occurred soon after the collapse, Iceland carried out a complete overhaul of its financial sector. The collapsed banks’ domestic functions were taken over by new smaller ones while their international obligations were managed through insolvency.it was really taken care of by both home and foreign interest bodies such as International monetary Fund which was engaged in offering financial support and advisory services

One of the key aspects of this financial reformation in iceland was to prioritize national interest over that of foreign creditors .The administration aimed at maintaining the stability of the fresh banks on one hand, and ensuring that icelandic business people had access credit and households by doing so making them trust again on their own financial system and also paved way for the economic recovery later. The causes of the banking collapse were also investigated, and some bankers were prosecuted for their involvement in the crisis, a move that enhanced transparency and accountability in the country.

Again, iceland’s financial sector underwent massive down scaling and was focused on serving domestic needs as opposed to engaging in risky overseas business expansions. Consequentially, New regulations were implemented to make them less prone to get into the same situation in future crises. This led to a more stable primarily locally oriented financial system shored up by the new restructured banking system.

Social Cohesion and Public Accountability
Equally important, Iceland’s healing process was grounded on strong social unity along with shared accountability among her individuals following aftereffects of depression Social groups within Iceland taking initiative by protesting all over the streets as one ; demanding accountability in politics and economics alike showed these unique factors behind society’s fight towards full recovery. Eventually, due to the pressure of mass rallies under the slogan “kitchenware revolution” during 2008–2009 period triggered resignation then election another government committed solving deep-rooted crisis problems.

Additionally, all citizens actively participate in governing through various mechanisms provided under Icelandic political system and government made an effort to involve citizens into decision-making processes on various issues concerning their welfare. A good example in this regard is the establishment of a constitutional assembly that failed in its attempt to draft a constitution that would suit all Icelanders. Moreover, there were social assistance programs introduced for families affected by the recession which included debt relief programs.

Therefore the onus on social cohesion and public accountability was vital in averting violent demonstrations thus enabling the political stability being maintained amidst an economic turmoil period and therefore helped in keeping societal peace. With this more inclusive economic model based on collective responsibility that was thus established, Iceland managed to reconstruct the economy.

Tourism Growth in Iceland and Economy Diversification
Iceland saw its economy experience a boom in tourism post the financial crisis of 2008 which played an instrumental role in rebounding the shatters. The country boasts stunning natural beauty which includes glaciers, volcanoes and hot springs and attracted millions due to this while its currency was relatively weak making it an affordable destination foreign tourists. On one hand, rapid tourism industry growth has led to an increase of employment opportunities and consequently also raised GDP levels besides helping cushion off some lost ground through falling financial services industry while boosting fresh sources for foreign exchange generation.

Equally, tourism has emerged as a sector of growth for the government which has been battling with making it out from over-reliance on fishing and aluminum production. Nonetheless, while Iceland remains heavily reliant on tourism as its economic mainstay, other sectors such as renewable energy, IT and biotechnology are gradually being developed. This move has contributed to increasing economic flexibility and cushioning the economy from external shocks.

In conclusion, Iceland’s quick recovery following the global financial crisis of 2008 has been largely due to policy measures that were promptly taken, elasticity of money structure, banking sector rebuilding, community strength and industrial diversification. By letting its banks go under, putting up capital controls and taking practical steps in handling the economy, Iceland managed to stabilize it and get people’s faith restored into finance again. For several years now after this period, considering the present state of affairs, the country has maintained economic stability and ridden over crises because it could adjust to the changing economic situations while it also emphasized on social accountability and maintained social cohesion during and after the crisis. In dealing with economic challenges, nations can learn important lessons from Iceland based on the importance of adaptability, openness, transparency as well as solidarity in dealing with financial crises.