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Monday, May 16, 2011

Iceland -“bankrupting yourself to recovery” -Nobel economics laureate Paul Krugman


Iceland Sets Sights on Euro Even as Bloc’s Debt Crisis Deepens

By Marianne Stigset and Omar R. Valdimarsson
May 16 (Bloomberg) -- Iceland is determined to join the euro as soon as it meets the bloc’s criteria for the currency switch, Foreign Minister Ossur Skarphedinsson said.

The Atlantic island, where krona losses helped generate a trade surplus that carried the economy out of its 2008 banking meltdown, will target the currency switch once it gains European Union membership, Skarphedinsson said in an interview in Greenland’s capital Nuuk.

Iceland is underlining its commitment to the euro as European finance ministers meet in Brussels for the latest round of talks to tackle the currency bloc’s debt crisis. Euro-skeptic parties in some of the region’s AAA rated nations including France and Finland have won support as voters balk at the prospect of funding more bailouts that many investors say may fail to prevent defaults.

“The top shots in the EU are busy trying to work out these problems,” Skarphedinsson said in the May 12 interview. “I have full faith that they will be able to do so.”

Iceland started EU accession talks last year and would need to wait about six or seven years before euro adoption could be achieved, Skarphedinsson said. Accession remains attractive even as the region’s debt crisis deepens because the turmoil is “a temporary situation,” he said. “I’m not too worried -- by then they will have sorted this out.”

Iceland’s financial collapse more than two years ago sent the krona tumbling 80 percent against the euro offshore after the island’s biggest banks were unable to secure short-term funding. The government took control of the lenders, splitting the foreign and domestic assets, heaping losses on international bondholders while maintaining local deposit and payment facilities.

EU Backbone
The central bank then imposed capital restrictions to stem the krona selloff that ensued. The measures were in contrast to those taken in Greece and Ireland, where EU bailout terms dictated bondholders be protected and euro membership prevented the trade benefit of currency depreciation.

Nobel economics laureate Paul Krugman has praised Iceland’s model, calling it “bankrupting yourself to recovery” in a Nov. 24 New York Times column. The island’s currency decline transformed at least six years of trade deficits into a surplus one year after its banks collapsed.

Still, Iceland might have fared better if it had been backed by the EU, Skarphedinsson said.
“The hard efforts that the EU is undertaking to shore up the finances of those countries in dire straits show that it is better to have the EU as your backbone than not,” he said.

Iceland’s economy will expand 1.5 percent this year and 2.6 percent in 2012, the Organization for Economic Cooperation and Development said in its latest set of forecasts in November. Ireland’s economy will grow 0.6 percent this year and 1.9 percent in 2012, the European Commission said on May 13. Greece’s economy will contract 3.5 percent in 2011 and grow 1.1 percent next year, it said.

To contact the reporters on this story: Marianne Stigset in Oslo at mstigset@bloomberg.netOmar R. Valdimarsson in Reykjavik valdimarsson@bloomberg.net.
To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Tasneem Brogger at tbrogger@bloomberg.net
Last Updated: May 15, 2011 20:01 EDT


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