No one disputes that the economic troubles of Iceland are largely the country’s fault. But there may be more to the story, at least in the view of Icelandic government, its citizens and even some outsiders. As grave as their situation already was, they say, Britain — their old friend, NATO ally and trading partner — made it immeasurably worse.
I actually sort of would dispute that the economic troubles of Iceland are largely the country’s fault. Being small is hard. Think of a small city who’s largest employer is a factory that makes airplane parts. Most people in the city don’t work at the factory. You’ve got kids and retirees and stay-at-home spouses. You’ve got some teachers, cops, firemen, librarians, postal workers, and bureaucrats. You’ve got banks and shops and restaurants and guys in the building trades. But the largest employer is the factory. And if the airplane industry suffers a severe downturn and needs to lay off workers and cancel shifts and bonuses, then that’ll be substantially less revenue for the stores and restaurants. People will have less cash on hand to pay for home repairs, and more time to try and do it themselves. So the shops and restaurants start cutting back on employment and hours. So their employees need to scale back their spending. And tax revenues go down, meaning less money for the public employees. All of which means even less revenue for the town’s stores. And down and down things will go until orders go up at the factory. Did the town government make some serious policy error? Well, probably they could have done something better, but fundamentally it’s in the nature of small places to be buffeted by trends that are too big for the city to control.
And the residents of our city can fairly easily try to find work elsewhere in the region and just accept a longer commute. Or they might move away. Or other firms might see costs declining in the city and decide to locate there.
Iceland is a small city of about 300,000 and though the country is open to trade, the nature of things is that it’s much more closed off from the outside world than an American town is from the rest of the country. A country like that isnisn’t big enough to have a balanced economy. They’ve got a fish-exporting industry, and then economies of scale dictate that if they manage to get successful in some sector of the global economy, that sector will come to dominate the country’s economy. For Iceland, it wasn’t a factory making airplane parts — it was banks. Run into a global banking slowdown, and the country is screwed. But it’s not clear what they could have done to stop this. Iceland’s banks were very big relative to Iceland but Iceland was far too small to alter the course of the global financial system.