Out of the Abyss: Looking for Lessons in Iceland’s Recovery

Published on Spiegel Online International, by Guido Mingels, January 10, 2014 (Photo Gallery).

In 2008, Iceland experienced one of the most dramatic crashes any country had ever seen. Since then, its recovery has been just as impressive. Are there lessons to be learned? SPIEGEL went to the island nation to find out … //

… The Economist:  

“At the beginning of the Icelandic Miracle was Germany, “says Ásgeir Jónsson, 43, in his office as he bends over a few diagrams. They all snap downward in the fall of 2008 before showing a gradual climb starting in 2010. But why Germany? Jónsson clearly enjoys the surprise on his guest’s face.

Jónsson was head economist for Kaupthing Bank, one of the three Icelandic banks that leveraged far too much debt and crashed overnight in 2008 following years of unprecedented growth. Billions evaporated instantly while hundreds of thousands of depositors and foreign investors feared they would lose their money. Jónsson’s job disappeared as well; with his newfound free time, he wrote the book “Why Iceland?: How One of the World’s Smallest Counties Became the Meltdown’s Biggest Casualty.”

It was German money, Jónsson says, that flowed the most freely following the liberalization of Icelandic banks in the 1990s. Still today, Germany is the country’s largest creditor, he says. In 2010, German banks had over €20 billion in open claims in Iceland. “Germany has a weakness for Iceland,” says Jónsson, who now works as an economics professor in Reykjavik. “Even Wagner borrowed from our legends for his operas,” he says. In 2012, the number of German tourists to Iceland, with 65,000 visitors, was in third place behind the US and Great Britain.

Iceland’s rapid return to health hinged on a series of measures that Nobel laureate Paul Krugman later referred to as “doing an Iceland.” Krugman, an admirer of Iceland’s dramatic comeback, has recommended a similar policy cocktail for other nations in crisis. The rules are as follows: Allow your ailing banks to collapse; devalue your currency if you have one of your own; introduce capital controls; and try to avoid paying back foreign debts.

That may sound like an extremely self-serving recipe — and it was. Whereas billions of public money was pumped into the banking system in Ireland so that financial institutions could pay back their creditors, Icelanders voted against this route in two separate referenda. They couldn’t see why they should pay for the greed of foreign investors who followed the Siren song of high interest rates to the island nation.

Jónsson only shakes his head wearily when asked if he has a guilty conscience. He claims to have been one of the few who warned of the currency bubble long before it burst. Now, he is excited about the country’s new opportunities, which are remarkably similar to the ones it has always had. “A hard-working populace. A healthy democracy. A high level of education. Tourism. Natural resources, such as wind, hydro-power and geothermal energy. And fisheries. What would we be without the fisheries?”

The Fisherman: … //

… The Investor:

With his untucked shirt, leather wristband and smile, Skúli Mogensen is considered to be one of Iceland’s wealthiest residents, and some say he’s also one of the coolest. Once a student of philosophy, he now founds companies and collects art. A series by prominent Danish-Icelandic artist Ólafur Elíasson called “Cars in Rivers” hangs on his office wall in Reykjavik. It features SUVs stuck in Icelandic rivers, while Icelanders try to pull them out — a symbol of the country’s hubris, but also its determination.

In October 2008, the same week that Iceland’s then-Prime Minister Geir Haarde called on the Almighty to protect the country in a television address, Mogensen sold his software company OZ Communications — based in Montreal, where Mogensen had been living for years — to Nokia. When he heard the news of the financial collapse back home, he says: “I knew I had to go home, that they could use me now. Me and my money.”

The 45-year-old invested in start-ups and founded discount airline Wow Air, which today brings tourists from 16 European cities to Reykjavik. Lying nearly horizontal in a leather chair, he continues: “I knew there are three major growth sectors in Iceland. First, fisheries, but that market is highly regulated. Second, tourism. The industry is currently growing by more than 20 percent per year. It’s crazy. Thus, the airline. Third, alternative energy. Iceland is the quintessential eco-country. That’s the reason for the bio-methanol thing.”

When it comes to energy technology, Icelanders are pretty spoiled. Instead of heating their water to shower, they have to cool it down to avoid burning themselves. Hot water is piped under the country’s sidewalks to keep them ice-free. And near the airport in Reykjavik there is a geothermal power plant that not only helped the country create its biggest tourist attraction, the Blue Lagoon geothermal spa, but also aided Mogensen in his most recent investment. The lagoon is full of fantastically blue, siliceous saltwater, the byproduct of the power plant next door. Carbon Recycling International, one-fourth of which is owned by Mogensen, uses another of the plant’s byproducts: carbon dioxide.

It sounds like a magic trick, and perhaps the elves and trolls that many Icelanders believe in are involved. A special process transforms the environmental killer CO2 into methanol, a green fuel. “In 2014 we want to produce 3 million liters per year,” or about 3 percent of that on the world market, he says.

Methanol can be mixed with conventional gasoline, and theoretically, production stations like Carbon Recycling International’s could be set up everywhere that CO2 is a byproduct. Renewable energy is thought to be Iceland’s big chance for future exports. So far, the country uses just 25 percent of its potential hydropower and geothermic energy. Thus, state-run energy firm Landsvirkjun wants to build the world’s longest submarine power cable to begin supplying the United Kingdom with green energy by 2020. By that time, Mogensen says, he believes that every car on Iceland’s roads will be powered by renewables, just like his off-road vehicle. “It runs completely on bio-methanol,” he says as he climbs in.

The Knitting and Sex Expert: … //

… The Minister: … //

… (full text).

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