“Although the Icelandic football team has fallen out of the World Cup in Russia, fans can be proud of the bravery of their national team. However, they are even prouder of how quickly and spectacularly their country has emerged from the crisis. Reforms, the unprecedented willingness to work and... the eruption of the Eyjafjallajökull volcano all helped,” writes Marcin Lipka, Conotoxia Senior Analyst helped.
Iceland ended its previous decade in a huge economic collapse. The entire banking sector of the island went bankrupt, unemployment and public debt rose several times, the country's creditworthiness collapsed and controls on the movement of capital had to be put in place. Such an explosive mixture usually results in long-term crisis. How is it possible that today, after only a few years, the inhabitants of an island bordering the Arctic Circle earn an income per capita higher than that of the Swiss?
Banks almost flooded the island
In 2008, the country with its population of slightly more than 300 thousand became one of the centres of the global economic crisis. The inadequately supervised banking sector, whose assets (loans) grew seven times over five years (2003-2008) and exceeded the GDP nine times, became insolvent within one week, although it had the highest possible rating of triple A(Aaa) one and a half years earlier.
The whole history of business relations between banks and fake companies, which were aimed at hiding the actual financial situation and avoiding capital requirements of the three leading institutions in the country, is well described in the study ‘The Rise, the Fall, and the Resurrection of Iceland’ prepared by economists from Yale and Brown University and the Central Bank of Iceland.
The nationalisation of banks and their restructuring caused an explosion of domestic debt from 27% to almost 100% GDP. Many years of investigation resulted in the fact, that many people in the financial sector were sentenced to unconditional imprisonment. It is possible that severe penalties for the main culprits provided a good basis for the later development of the state.
And the volcano saved it
Before the crisis, in addition to the financial sector, which had grown to its limits, Iceland was mainly dependent on fishing and aluminium smelters, which were prosperous thanks to cheap and renewable electricity - geothermal and hydropower. In the first few years after the economic downturn, another important factor for economic success could be observed - the explosion of tourism revenues.
This was partly due to the weakening of the Icelandic krona (the euro rose from 80 to 180 ISK). However, the eruption of the Eyjafjallajökull volcano might play a key role. The gigantic volcanic ash cloud paralysed air traffic in Europe, but at the same time this country was a hot topic across practically the whole world for weeks.
The Icelandic Ministry of Tourism used this amazing media exhibition to prepare the 'Inspired by Iceland' campaign. It showed how much the ‘Land of Fire and Ice’ has to offer, emphasizing that Iceland can be attractive not only in the summer, as most tourists thought, but also in the other seasons of the year.
A study data made by the European Commission (‘Iceland: High Growth, Low Inflation and Current Account Surpluses’) show that by 2010 the number of tourists arriving in Iceland was more or less constant and amounted to about 500 thousand annually. In the following years, however, it increased almost five times and reached a record 2.25 million in 2017. This is 7 times more than the population of Iceland.
From 2005 to 2016, the share of tourist services in profits from exports increased from 8% to 25%, thus surpassing aluminium and fishery.
Does work mean wealth?
Iceland learnt the lessons of the financial crisis and took the opportunity to promote its tourist attractions. However, it was possible to overcome the crisis by the fact that, the island's inhabitants did not become greedy for success over the new source of income. The lesson of a decade ago provided that consumption as a percentage of GDP fell all the time and savings rose. This made it possible to maintain a current account surplus, even though the deficit was gigantic before the crisis (15-20 percent GDP).
Another element contributing to Iceland's success, which is often overlooked in studies, is the labour market. Economic activity of Icelanders (percentage of people having a job or looking for one in the population), regardless of their age, is the highest among the countries surveyed. For people aged 15-64 it is 88% (OECD data). This is 20 percentage points more than in Poland. Among people aged 15-24 it amounts to 81.7% (in Poland it is 34.8%), and for those over 65 years - less than 40% (in Poland it is 8 times less, i.e. 5%).
According to Eurostat data, the estimated length of working life in Iceland is 47.4 years (the highest in the countries surveyed) for the current 15-year-old, while for a 15-year-old Pole it is only 33.
Skillful use of opportunities
Icelanders managed to turn the economic deadlock into a success. At present, their economy is balanced, there is no financial sector that is growing, inflation is being kept in check and the country is making huge profits from tourism.
This, combined with the culture of long time staying on the labour market and cheap electricity, allows us to obtain an average annual salary per capita (OECD data) of USD 90,000, which exceeds, among other things, Swiss earnings (USD 88,000).