Iceland’s political meltdown

I must said when I see the events that are presently unfolding in Iceland I am very much reminded of that week in October 2008 when the entire Icelandic banking sector basically collapsed.
What we are seeing now is not necessarily an economic shock – I actually don’t think so – but it seems like a total collapse of the established political party structure in Iceland.
Things are changing minute by minute and the whole thing is quite surreal. I am not going to make any predictions about how this will end but Prime Minister Sigmundur Gunnlaugsson will soon by former Prime Minister.
It is only a matter of time before we have early elections and the big winner undoubtedly will be the Pirate Party. The only question will just how much support PP will get.
I still don’t think that PP will get a majority on it is own, but given the party was polling 35-36% in the opinion polls last week we could soon see support above 40%.
Iceland had a financial meltdown in 2008. Today it is a political meltdown. Will it also be a political revolution?
Update: The Icelandic PM has now stepped down.

This is how pathetic Danish growth has been

Take a look at the graph below. It is the level of real GDP in Denmark during the 1930s and over the past decade.

Real GDP Denmark 1930s and now

There is no way around it – over the past decade – from 2006 until 2016 – growth has been pathetic in Denmark. It has been a decade to total stagnation in the Danish economy.

Compare that to the Great Depression years. Growth was buoyant in the late 1920s and in fact the shock in 1929 did not have a big impact on Danish growth. However, GDP dropped in 1932 when the Great Depression really came to Europe a result of the Austro-German banking crisis, but from 1933 Danish growth once again rebounded.

So what is the difference between now and then? Well, a very clear difference is the monetary reaction to the crisis then and now.

In 2008 the Danish central bank hiked interest rates and intervened in the currency markets to maintain the peg of the Danish krone to the euro and in 2011 imported ECB’s catastrophic interest rate hikes.

During the Great Depression the Danish central bank on the other hand twice devalued the krone. First in 1931 when Denmark effectively floated the krone in 1931 and followed the UK’s decision to give up the Gold Standard and then later again in 1933 as apart of the so-called Kanslergade Agreement devalued the krone against the British pound. These two rounds of monetary easing effectively saved Denmark from the Great Depression.

Unfortunately we have not seen the same kind of monetary easing over the past decade and as a result the economic performance has been extremely weak.

However, it is not all monetary policy. In fact there is very good reason to believe that Denmark is also struggling with major structural challenges – particularly a very large public sector and the highest taxes in the world.

So if Danish policy makers fundamentally wanted to address the growth crisis then the response should be a combination of a change in the monetary policy regime – a floating exchange rates as Sweden, Norway and Iceland – and a substantial reduction in the size of the public sector. However, I might as well dream on – it is never going to happen.

 

 

 

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