Conde Nast defends Icelandic economy

Could the euro stabilise the Icelandic economy?In a satirical article published last week on Condé Nast, finance blogger Felix Salmon discusses the Icelandic economy and comes to some strong conclusions.

In the article, Salmon criticises a recent Financial Times piece which was critical of Iceland and the current state of its economy: “Robert Wade, in the FT, pulls no punches: ‘the size of the accumulated macroeconomic imbalances beggars belief,’ he says, but then just comes up with a list of percentages of GDP. In Iceland, anything looks big as a percentage of gross domestic product, because there’s very little produced domestically.”

Salmon believes that Icelandic businesses probably did borrow too much abroad to finance their international expansion – but also wonders if there was any other way.

The article concludes that Iceland’s biggest problem is having the smallest free-floating currency in the world, “which is easily buffeted by international capital flows going in and out of the carry trade”.

The carry trade is where investors buy money in low-interest currencies like the yen or the Swiss franc and invest it in high interest currencies like the Icelandic krona and Brazilian real.

In a previous article, Salmon wrote, “when the carry trade is unwound – and it always unwinds with a snap, never gradually – then Iceland is forced to implement extremely unpleasant pro-cyclical monetary policies to avert financial disaster.”

If Iceland had been a member of the euro, Salmon theorises, then it would have escaped its current woes altogether.

A February 2008 opinion poll showed that over 55 percent of Icelanders wish the country to begin negotiating for EU membership. The possibility of adopting the euro without joining the EU has been discussed, but largely dismissed over recent months.

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