Iceland and the wonders of competitive currency devaluation

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Ambrose Evans-Pritchard has a good piece on Iceland out today at the Telegraph. The main point of his article is that Iceland is emerging from crisis and depression in a relatively healthy state due to a fifty percent currency devaluation.  While, GDP will shrink by 7% this year in Iceland, Ireland, Latvia, Estonia and many other European countries will fare far worse.  When you look at unemployment, Iceland looks good yet again. 

Is this the way forward for the likes of Lithuania?  Apparently not because the Baltics want into the Euro come depression or high water.  In the case of Spain or Ireland, they are already in.  America certainly wishes it could depreciate the currency as well.  But, since its main problem on the currency front is in Asia and those currencies are mostly pegged, the U.S. couldn’t really organize a devaluation, even it wanted.  Moreover, competitive currency devaluation is an outlet only for small countries – Iceland: yes, Switzerland: perhaps, America: forget about it.  That would certainly trigger major retaliation.

But for small Latvia, here’s what you might get.

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The krona has fallen by half against the euro since the `New Viking’ trio of Landsbanki, Glitnir, and Kaupthing strayed out of their depth and brought down Iceland’s financial system.

Nothing is cheap, but prices have come within reach. Reykjavik’s cafés are packed with euro-youth, at last able to afford a taste of all-night dancing at this Arctic Ibiza…

In one sense it was a terrifying shock for the 310,000 inhabitants of this Norse-Celtic outpost of lava rock to see their currency, banks, and global image crash in a single week last autumn. Yet nothing has really changed.

"Everything still feels normal. The services of the state are intact. The swimming pool is open. You can still have a decent heart attack in Iceland," said Mr Magnason.

"Friends who lost jobs in banking have already found new work, and you could say the krona has worked as a buffer for us. We all went down together, and that has led to healthier recession without mass unemployment."

The jobless rate has risen to 9.1pc. This is below the eurozone average of 9.5pc, and is stabilising much earlier…

The OECD expects Iceland’s economy to shrink 7pc this year. This is much better than Ireland at minus 9.8pc, and recovery will come sooner. So next time you hear the Sacra Congregatio of the euro faith incant yet again that EMU saved Ireland from a terrible fate, know that they deceive only themselves…

It is those caught in a deflation trap with fixed exchange rates that face slow asphyxiation, and deeper social damage. Youth unemployment is already 34pc in Spain, 28pc in Latvia, 25pc in Italy, 24pc in Greece, and rising…

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Evans-Pritchard is a well-known Eurosceptic, so you can understand that his view is bound to be slanted.  Nevertheless, he makes some good points here.  And Latvia, in particular, is the nation for which this story is most relevant.  But there are certainly others.

More at the link below.

Source

Iceland’s krona proves the magic wand as Europe ails – Ambrose Evans-Pritchard, Telegraph

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