Ireland

Paul Krugman has an interesting blog on the New York Times website on austerity and growth in the eurozone. I thought it would be interesting to examine the question, using the latest data from the International Monetary Fund’s World Economic Outlook database.

I have defined the fiscal tightening as the percentage point change in the structural (or cyclically-adjusted) general government deficit from 2008, the year of the crisis, to the forecast for 2012. The assumption is that this change represents the results of policy, rather then cyclical effects. I have taken growth as being the proportional change in GDP from 2008 to 2012. 

Iceland was the first country devastated by the financial crisis. Lehman Brothers failed on September 15 2008. By October 9, its three big banks – Glitnir, Landesbanki and Kaupthing – had collapsed. The UK government seized Landesbanki UK under anti-terror laws, while Gordon Brown, the prime minister, threatened to seize Icelandic assets in the UK. On October 24, Iceland agreed a deal with the International Monetary Fund.

On October 27 2011, I attended a conference jointly organised by the IMF and the government of Iceland to celebrate Iceland’s graduation from the programme and evaluate the outcome of the rescue. I also moderated the final panel.

The programme remains controversial. Jón Daníelsson of the London School of Economics presented a critique during the conference. Others presented critiques from outside.

What happened to Iceland is clear: its banks ran amuck.