Iceland Isn’t Greece… It’s Worse [Global X Funds, iShares MSCI Emerging Markets Indx (ETF)]

icelandPeter Krauth: After printing $4 trillion since 2008, we’ve little to show for it.

Endless debates about the effectiveness of QE, or its lack thereof, haven’t spawned better decisions, especially in Europe. Think periphery nations like Greece, Spain, Portugal, and Italy.

Better yet, take a look at the stock market, where worries about Europe’s economy rattled investors. It’s certainly not a pretty picture…

Recently one European national leader offered a somewhat unique response for dealing with the financial crisis and debt bubble.

It appears an unorthodox, yet sound, approach on the surface. But when you scratch beneath, it turns out just the opposite is true.

Developed economies would do well to consider the true state of this country’s example of a “model” recovery before an even more catastrophic, debt-ridden future arrives, and erupts…

Iceland Isn’t Greece… It’s Worse

The country I’m talking about is Iceland.

With a population of just under 320,000, its economy lacks diversity, with fishing, aluminum, and energy as its dominant sectors.

Something it does have is the world’s oldest functioning legislative assembly, the Alþingi, established in the year 930. That’s a long time to have practiced democracy.

You’d expect that experience could have saved this tiny country’s economy, but as it turns out Iceland has a lot more in common with the birthplace of democracy: Greece.

And unfortunately, the parallels are eerily similar.

Greek households, it’s estimated, have lost $215 billion of wealth in the last seven years.  Unemployment still runs near 27% with 44% of incomes below the poverty line.

Debt to GDP currently sits at 175% (EU’s highest) and its latest annual deficit is 12.7%.

Bailed out by $332 billion in “rescue” loans from the European Union and International Monetary Fund, Greece is now saddled with a national debt of $470 billion. That’s nearly half a trillion dollars, for a nation whose economy represents 1.4% of the entire EU.

Most of that money, by the way, goes to repay mainly German and French banks that were highly invested in Greek debt. The country’s output has shrunk by a staggering 25% in the last six years.

This didn’t have to happen to Greece. So why did it?

When Greece over-borrowed and over-spent in the past, it had its own currency, the drachma.  So, floating exchange rates with other currencies effectively devalued the drachma, which decreased domestic demand for pricier imports. It also lowered the costs of Greek labor and exports, spurring foreign investment in the country, as well as tourism.

It was the free market at work – Adam Smith’s classic “invisible hand,” as it were. But now Greece is handcuffed with the euro as its currency. That’s a large reason things went south in Greece; devaluing its currency is no longer an option.

So the Greeks will instead suffer under austerity for years, perhaps generations, along with a shrinking economy and soaring unemployment.

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