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Monday, June 15, 2015

For the ECB Iceland is a Sore Point

      My buddy and longtime reader, Greg, kind of reminded me in the comments section of my previous piece about Iceland and austerity. You have everyone arguing what Iceland's remarkably quick recovery proves-after all they had just about the worst banking crisis in the world.

      http://diaryofarepublicanhater.blogspot.com/2015/06/sumners-constantly-moving-goalposts-on.html

      Yglesias and Krugman have pointed out that the Icelanders didn't do what the EU wanted-harsh austerity.

      Sumner came back and rather absurdly tried to claim that in fact Iceland did lots and lots of austerity based on the public debt to GDP ratio falling from 102% in 2012 to 86% now. This is absurd on many levels. First of all this drop in public debt begun years after the recession was over. The whole Keynesian point is you don't want austerity in the middle of a recession.

      In any case, Keynesians also point out that there is a denominator in the ratio too. If you raise GDP the ratio will decrease as well even if the level of debt remains constant. In any case, 86% still is just 4% less than the magic 90% debt level that Rogoff and Reinhart had claimed would mean the sky is falling-and was the whole point of austerity in the first place. In the terms of R&R, 86% would still be dangerously high.

    However, Greg highlights something that none of the debate around Iceland has really taken not of: Iceland left the Euro. Yet the sky didn't fall, quite the contrary. This could be the real lesson, the one that the Greeks ought to look at. Yes, there might have been some pain in leaving the Euro but it wasn't too bad and now they are in such good shape that everyone wants to embrace the 'Iceland model' and claim it as their own.

   So can the Greeks follow in Iceland's footsteps? Or would leaving for them be much more painful than Iceland-whose leave proved idyllic?  I think this is a very important question with the talks between Greece and the ECB again hitting a wall.

   http://www.theguardian.com/business/live/2015/jun/03/greek-creditors-bailout-terms-tsipras-ecb-draghi-live

      

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