To many, the Greek debt crisis is becoming more like a chronic disease than a crisis, because it seems it just won’t end and is going to haunt the country for many years to come.
So, is there any once-and-for-all solution to the misery of Greece, apart from withdrawing from the eurozone or begging its creditors to write off its debt?
Some academics suggested Greece follow the “Iceland model” as a way out.
In 2008, Iceland went through a serious credit crisis.
The country almost went bankrupt overnight.
At that time Iceland was as desperate as Greece is today.
However, Iceland’s government took decisive action, declaring its banks insolvent and announcing a one-off default on foreign loans.
Now seven years have passed, and Iceland has fully recovered from its financial turmoil.
Back in 2011, when the first wave of the European debt crisis occurred in Portugal, Italy, Greece and Spain, the Nobel Prize-winning economists Joseph Stiglitz and Paul Krugman suggested that the PIGS follow the Iceland model, which they believed would be much more effective than never-ending bailouts by the International Monetary Fund and the European Union.
However, the Iceland model is often oversimplified.
Studies often overlooked the unique background of the country, which calls into question whether its successful experience can be duplicated in Greece.
The major difference between Iceland and Greece is that Iceland is neither an EU nor eurozone member, and therefore it retains a lot more monetary and financial autonomy than Greece, giving it much more freedom to maneuver.
For example, shortly after the outbreak of Iceland’s credit crisis in 2008, the country’s central bank quickly imposed strict regulations on the exchange rate of the krona against other currencies to avoid fluctuations.
It implemented capital controls, preventing almost US$9 billion worth of capital from fleeing offshore.
Iceland’s government even refused to accept responsibility for the losses of foreign investors and holders of savings accounts.
In contrast, since Greece is a member of the eurozone, it has lost its monetary autonomy.
Therefore, there is nothing much it can do.
Moreover, there is little room for maneuver for the Greek government in terms of controlling capital flows and foreign exchange rates, because such measures are against the EU treaty.
Even if Greece finally withdrew from the eurozone and re-established its own currency, who on earth would have confidence in that currency?
On the other hand, apart from having received a loan of US$2.1 billion from the IMF by agreeing to cut its spending by 3-5 percent, Iceland’s government reached agreements on currency swaps with some of the major central banks in northern Europe, providing strong support for the country to stabilize its foreign reserves and get financing from the international market.
As far as Greece is concerned, after it accepted the euro as its currency, it basically turned over its power to exercise currency swaps to the European Central Bank, leaving it with no other monetary tool.
Since Greece has lost its power to control its own monetary policy, it is quite unlikely that Iceland’s miracle will reoccur in Greece.
This article first appeared in the Hong Kong Economic Journal on Sept. 9.
Translation by Alan Lee
[Chinese version 中文版]
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