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Iceland Economic Environment Analysis

In: Business and Management

Submitted By jeane214
Words 1558
Pages 7
ICELAND: EXCHANGE RATES, BoP & the FINANCIAL CRISIS

From Riches to Rags and Back Again
Since Iceland's financial crash in 2008, the country has been floundering to get back on its feet. The fall this charming and chilly land experienced was nothing short of spectacular – with GDP contracting 12.5% from 2007 to 2010 i and unemployment peaking at 9.4% in 2007 and culminating in a total government collapse on January 27, 2009.ii Altogether, the banks – who owed more than six times the country's GDP in debtiii - defaulted on 85 billion,iv leaving the previously affluent residents angry and afraid. Since that time, the country has taken drastic measures to right the economic situation, and while Iceland is not yet out of danger, the economic future is certainly looking hopeful. How was this tiny country, against all odds, able to crawl back from the brink of disaster?

Looking Back
First, let's back up and take a look at Iceland's recent economic history. The 1990s, Iceland's golden days, combined free-market and capitalist principles with a robust welfare system. At the time, this produced strong economic growth plus low unemployment and a relatively even distribution of income. As a result, Iceland was rated as "having one of the world's highest levels of economic freedom as well as civil freedoms."v In the second quarter of 1998, the GDP growth rate reached 10.20%.vi (For comparison purposes, the current GDP growth rate in the US is 2.4%.vii) Iceland's ability to sustain this expansionary period through the 90's and early 2000's was due to the deregulation and privatization of the banks as well as Iceland's decision to join the EU Single Market in 1994. The single market enabled goods and services to move easily across borders bolstering Iceland's aggregate demand, most notably in the fishing industry. By 2000, marine products accounted for more than 70% of...

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