“Black clouds” for Iceland’s economy

Ásgeir Jónsson, Reader in Economics at the University of Iceland.

Ásgeir Jónsson, Reader in Economics at the University of Iceland. Photo: Ómar

A tiny currency such as the Icelandic króna cannot – without some form of controls – give Icelanders stability, according to economist Ásgeir Jónsson.

Speaking at a finance conference for Icelandic municipalities on Friday, Jónsson suggested that the króna can never be a ‘free’ currency, despite government plans soon to lift the capital controls in place since November 2008.

Jónsson told listeners that domestic demand over the next 6-12 months will cause the economy to boom, but predicts this will then lead to overheating of the Icelandic economy.

Rising wages with no increase in productivity

“New collective wage agreements and continuing wage demands will lead to inflation – it’s not a question of ‘if’, but ‘when’ this will happen. On top of that, Icelandic competitiveness – brought about by the devaluation of the króna in 2008 – is quickly being eroded by rising wages with no accompanying rise in productivity.”

A new ‘stability tax’ on the estates of failed banks is set to bring the State ISK 500 billion (approx. €3.5 billion), and Jónsson recommends the money be used to reorganised Iceland’s financial system and adopt a new approach to monetary policy.

“On the other hand, these billions could be used to subject the economy to new upheavals, if the money is used to fuel populism and fund electoral pledges,” warned Jónsson.

“Black clouds are forming”

“This current period of growth will undoubtedly be the longest in Iceland’s history, but black clouds are forming,” was the ominous message. “All booms in Iceland since World War II have ended with devaluation and inflation, and this boom will be no exception.”

“The main problem with lifting capital controls is one in the heads of Icelanders themselves,” explained Jónsson to the captivated audience.

In Jónsson’s view, Icelanders seem psychologically incapable of linking high quality of life and stability with productivity and sensibility economic policy.

“A stable króna will only be achieved by keeping capital controls. Controls give the króna the stability of a large currency, enabling ordinary people to go about their business without being hostages to currency risk.”

Króna cannot give stability

Jónsson concluded that a tiny currency such as the Icelandic króna cannot – without some form of controls – give Icelanders stability, in the form of secure purchasing power, low inflation and stable debt.

“The biggest danger now is for a new Iceland to be built up on the false stability and security created by the capital controls. When it comes down to it, Icelanders will not want to get up out of their comfortable armchair.”

Weather

Clear sky

Today

-2 °C

Partly cloudy

Later today

4 °C

Cloudy

Tomorrow

1 °C