Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/108250 
Authors: 
Year of Publication: 
2012
Series/Report no.: 
IEHAS Discussion Papers No. MT-DP - 2012/2
Publisher: 
Hungarian Academy of Sciences, Institute of Economics, Centre for Economic and Regional Studies, Budapest
Abstract: 
Iceland, Ireland and Latvia experienced similar developments before the crisis, such as sharp increases in banks' balance sheets and the expansion of the construction sector. However the impact of the crisis was different: Latvia was hit harder than any other country in the world. Ireland also suffered heavily, while Iceland came out from the crisis with the smallest fall in employment, despite the greatest shock to the financial system. There were marked differences in policy mix: currency collapse in Iceland but not in Latvia, letting banks fail in Iceland but not in Ireland, and the introduction of strict capital controls only in Iceland. The speed of fiscal consolidation was fastest in Latvia and slowest in Ireland. Economic recovery has started in all three countries and there are several encouraging signals. The programme targets in terms of fiscal adjustment, structural reforms and financial reform are on track in all three countries. Iceland seems to have the right policy mix. Internal devaluation in Ireland and Latvia through wage cuts did not work, because privatesector wages hardly changed. The productivity increase was significant in Ireland and moderate in Latvia, yet was the result of a greater fall in employment than the fall in output, with harmful social consequences. The experience with the collapse of the gigantic Icelandic banking system suggests that letting banks fail when they had a faulty business model is the right choice. There is a strong case for a European banking federation.
Subjects: 
banking crisis
banking sector restructuring
economic recovery
currency devaluation
internal devaluation
capital controls
fiscal adjustment
JEL: 
F31
F32
J30
O40
ISBN: 
978-615-5024-93-1
Document Type: 
Working Paper

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