Lowering regulatory barriers to competition — especially in the important tourism and construction sectors, but also in agriculture and energy — and easing restrictions on foreign-owned firms would help to diversify the economy and drive growth. Patents and trademark applications are below the EU average, and the share of high-tech goods in total exports is relatively low. Iceland relies far more on renewable geothermal and hydropower energy than any other OECD country.
Even so, per capita greenhouse gas emissions are above the OECD average, partly because of emission-intensive aluminium smeltering. Along the waterfront, cranes work around the clock as giant architectural projects constantly pop out of the ground: concert halls, convention centres, housing complexes, business establishments and luxury hotels.
But that's far from the only reason. In the few short years since Iceland sank into one of the deepest financial crises any European country has seen in modern time, it has already managed to climb out of its mountains of losses and swing into actual profit.
Although the , strong population has had to live through crippling austerity, most of the measures imposed stand in stark contrast to those adopted by other crisis-hit countries.
Exchange and capital controls have been in place for almost 10 years now. Having come through the crisis a decade ago, Iceland is now enjoying an economic revival, with technology, renewable energy and tourism replacing the unsustainable boom in banking.
Visitor numbers have quadrupled and output per head is among the strongest in Europe. The employment rate is the highest in the world. Touring a room with thousands of box-sized supercomputers — LEDs blinking and cooled by the arctic wind, each consuming more energy from geothermal and hydroelectric power than the average household — would suggest quite a lot has happened in a decade.
But we need to diversify further to make the economy more stable. There could hardly have been a more unlikely victim of the financial crisis than a country of about , inhabitants — equivalent to the population of Bradford — occupying a volcanic island midway between Europe and North America. Despite being a tiny island, home to only , people, the krona became a major trading currency, surging by an astonishing percent between and With much higher interest levels than those offered in their domestic markets, traders from the around the world flocked to the Nordic island.
They borrowed in dollars, converted them into krona and then made a sizeable profit from bond acquisitions. This was further exacerbated by poor-quality lending books, which included large shares of zero coupon loans that were extended to holding companies. The banks had insufficient equity buffers to meet inevitable losses, and their liabilities had risen to more than 20 times the budget of the Icelandic state. To make matters worse, liabilities were mainly denominated in foreign currency.
A luxury complex comprising shops and restaurants, which was due to be constructed around the hall, never came to fruition. Drastic measures As the banks had become too big to save, the authorities decided to let them fail. Within days, the krona collapsed.
Over 80 percent of the Icelandic financial system buckled and almost all businesses on the island were bankrupted. The stock market fell by around 95 percent, interest payments on loans soared to more than percent, over 60 percent of bank assets were written off within a few months after the banks collapsed, and interest rates were hiked up to 18 percent in order to curb inflation rates.
In the years that have followed, the Icelandic Government has gradually reduced interest rates, progressively falling to 4. Although the banks themselves were not being bailed out, the government needed an injection of capital in order to stay afloat. With this, the government was able to protect domestic deposits and also keep the currency from devaluing even further. In a testament to its impressive economic growth within such a relatively short timeframe, Iceland began repayments to the IMF earlier than scheduled, beginning in with 20 percent of the loan.
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