The Icelandic economy has “turned the corner”, allowing the government to focus on stimulating growth and restructure its debts, the country’s economy minister said yesterday.
The government expects the economy to grow by between 1% and 2% this year, but debt restructuring is essential to spurring growth any faster.
“Today we can say that we’ve managed to turn around the economy,”Arni Pall Arnason told Emerging Markets. “The main focus now is to start encouraging higher growth and to carry on with debt restructuring.”
His comments came at the end of an upbeat session for the island economy that saw two credit outlook upgrades in the past 10 days and plans to issue Iceland’s first Eurobond since 2006.
“Once we have the debt restructuring out of the way, companies can start investing again and move on,” Arnason said.
After facing financial ruin with the collapse of its outsized financial sector in the wake of the credit crunch in 2008, Iceland was forced to impose capital controls and restructure its debts.
The past two years have been tough, with dramatic cuts to public spending. But Arnason was proud of having maintained social solidarity throughout a painful crisis.
“We cut a cumulative 30% off the cost of public administration, but only 5% from support to the handicapped,” he said. “It was important at all times to prioritise social solidarity.”
Further growth will have to come from foreign direct investment. However, a resolution will be needed for the long-simmering dispute over Dutch and UK investors who lost their deposits in the Icesave savings bank.
“To get FDI, we need to get Icesave out of the way. We have to make it clear that Iceland always honours its obligations and always will,” he said
Arnason said that assets held by the remains of the collapsed high-interest deposit bank should be sufficient to reimburse “99% of Dutch and British depositors – not just the individuals who had deposit guarantees, but also the unguaranteed depositors like local authorities”.
The lesson of the crisis, he said, is that Iceland cannot move fast enough to join the eurozone.
“The case for a multinational currency is as strong as ever. Iceland’s experience in 2008 is a case in point: as a small, open, developed country with a very small currency, we were unable to keep up the defences we need to protect the public from currency volatility.”
He argues that the importance of the euro to the EU’s smaller member states is such that considerable sacrifices of sovereignty are worthwhile if they keep the project alive.
“The Icelandic experience shows that the lack of an institutional framework for financial discipline can be very costly,” Arnason said.
“One approach to that could be supranational control of fiscal decisions, but another approach could be [EU economic and monetary affairs commissioner] Olli Rehn’s idea of having a framework with countries taking reasoned decisions based on advice from their peers.”