Iceland survived by taking over the domestic units of its banks and leaving the foreign creditors to bear losses. An 80 percent slump in the krona against the euro offshore in 2008 sent the trade deficit into surplus within months, while government spending cuts helped rein in the budget. Iceland will post a shortfall of 1.4 percent of gross domestic product next year after 2011’s 2.7 percent deficit, the Organization for Economic Cooperation and Development said on May 25.
Instead of bailing out its banks using taxpayer funds like the United States did, Iceland let its bank default.
Some economists, such as Joseph Stiglitz and Paul Krugman, now think that letting the banks default was the right thing to do for Iceland’s economy, and some see it as a model for other debt-stricken European nations.
Here’s the 5 year view of it’s currency vs the USD:
Pretty good, huh? It’s more or less doubled.
Of course, that’s the key difference, the 500,000 Icelanders have their own currency, the 11, 283,000 million Greeks no longer do. (nor do the 60 million Italians, 46 million in Spain, etc etc) So, with Germany and France controlling the currency, they can’t follow that route.
And, there’s no painless way for these countries to go back to their own currencies–really there may be no way at all to go back, painful or otherwise; they’re probably stuck in the zone, if they were ever to go back to their own currencies, it would only be after the Germans have carried off everything that wasn’t tied down, and most stuff that was too. How would the Parthenon look on the Rhine?
When all is said and done, what we’re watching play out is a bloodless war- perhaps planned a decade or decades ago.
Where the economic powers of France and Germany, etc. (and likely also the UK and maybe US to some extent) will take the actual assets of the south, leaving those countries poor, with no assets, and in perpetual debt. I suspect that then we’ll see a two tier euro zone-where the borders are no longer so open, but ‘guest worker’ programs will return as the broke and out of work of the south, compete for subsistence wage jobs in the northern zone, or maybe no wages at home. More or less, then, a return to the 1980s.