How Iceland Got Its Groove Back
Letting its banks perish worked out for island nation
By Kevin Spak,  Newser Staff
Posted Jan 17, 2012 12:33 PM CST
The Icelandic parliament building in Reykjavik pictured on Wednesday Jan. 28 2009.   (AP Photo/Brynjar Gauti)

(Newser) – Don't look now, but Iceland's economy is growing. Tourism is up, the standard of living remains high, and unemployment is down to 7%. "For a country whose entire financial system collapsed, Iceland is doing remarkably well," the IMF's mission chief there tells the Washington Post. Why? In part because Iceland charted a unique course through the financial crisis: It let its big banks default and its currency collapse, and poured money into its economy and social safety net, raising taxes on the wealthy to do so.

Those moves were born in part out of necessity—the government simply couldn't bail out banks that large—and other countries couldn't necessarily do the same. Countries like Greece and Italy can't just let their currency plummet, for instance, because it's tied to the euro. But Iceland's devalued currency made its goods cheap, with exports and tourism each up 11% last year. "What we had before was some sort of irrational exuberance," one Icelandic economist says. "That has left, and maybe that's a good thing."