Iceland suffered an economic crash in 2007 with GDP falling nearly 40% between 2007 and 2009. Iceland has since recovered all the lost growth and more, by allowing the broken old economy to fail and rebuilding a sustainable green economy. With the current state of world economies, Iceland provides valuable lessons for a sustainable green economic recovery.
The financial crash hit Iceland particularly hard resulting in the default of all three of the country’s main commercial banks. The Icelandic currency crashed, unemployment soared and the stock market was wiped out. This was not a mere recession but a complete depression. (Wikipedia defines a depression as an extreme recession lasting three or more years with a fall of over 10% in GDP).
So how did Iceland recover from its depression? Unlike other Western economies, the Icelandic government let its three major banks: Kaupthing, Glitnir and Landsbakinn fail. It cleaned up the banking sector and went after reckless bankers, with prison sentences for fraud. The Icelandic government took control of the financial sector. The high level of debt held by Iceland meant that they had to focus on the domestic economy for recovery. Capital Controls after the crash made Iceland unattractive to multinational companies focusing on international markets.
Domestic production of energy, domestic production of food and an eco tourism industry were the three main pillars for the new economy.
These sectors did not have the high paying salaries offered by the financial sector, but were sustainable and not liable to crashes. Today Iceland has a steady 3% annual GDP growth and less than 5% unemployment.
Today almost 100% of Iceland’s electricity and heat is generated from domestic renewable sources. Shifting from sending money overseas to pay for coal to being self sufficient saved Iceland half of its GDP. The energy shift turned Iceland into a magnet for large foreign investment. Data storage centres and IT brands relocated due to the availability of clean energy at fixed prices.
To enhance the country’s food security the farmers capitalised on local greenhouse cultivation methods. Iceland is now the home of the largest glass enclosed banana plantation in Europe and is seeking the title of the largest exporter of organic tomatoes in Europe !
A country with such epic natural beauty as Iceland will inevitably attract ecotourism. But Iceland takes it a step further by linking some of its most-popular attractions with the green economy. The Blue Lagoon sees more than 600,000 visitors and is just an overflow of hot water from the Svartsengi geothermal plant. It didn’t exist 30 years ago.
Moreover, Icelandic researchers, engineers, and scientists are involved in fruitful sustainable development projects in more than 40 countries around the world. Obviously, this small nation has big things to say on sustainable energy.
What relevance does the Icelandic experience have for today’s economic situation. Firstly the UK economy is much more reliant on its financial sector than Iceland was. This leaves the UK economy particularly vulnerable to any economic shock.
In European banking there is an unwillingness to accept losses. Central banks in the UK and US respond to crises by printing money. This is not something that Iceland could do, they had to face the reality.
Whilst many would argue that we are facing a health crisis and not a financial crisis, the level of bankruptcies and businesses closing will in turn relate to higher non performing loans and pressure on the financial system. Rising unemployment, high government debt levels will all need to be addressed.
A more balanced domestic focused economy may have to be the way forward for the UK, particularly with the additional pressure of BREXIT.
Coronavirus could provide the right timing for government to intervene and re-direct the economy to a sustainable and green future for the next generations.
Rebel Economics 