Five years ago economists started telling a now tired joke: what´s the difference between Iceland and Ireland? Six months and one letter.
The punch line was a wakeup call of sorts to Irish citizens. Iceland´s banking system was in freefall, collapsing under the weight of bad loans it made during the boom. Things were so bad that not even the government of Iceland or its central bank had sufficient means to save the banks. (Think about that for a moment: the institution that has the power to unilaterally print money at almost no cost was unable to even print up a sufficient amount to keep the banks solvent!)
Iceland´s banks went under, if mostly by necessity lacking anyone large enough to save them. Ireland, as it turns out, wasn´t so lucky. Both the EU and the IMF stepped in to keep it afloat. The result is a debt burden unlike any other in the developed world for the small Emerald Isle. (Excluding the domestic debts, each Irish citizen now owes about $75,000 to a foreigner because of these forced bailouts.)
In a new post over at the Institute of Economic Affairs, I discuss the good, the bad and the ugly of each country´s policy responses. The short story is that both countries enacted some good policies and some not so good ones as well. Ireland had a softer landing, but at the cost of sluggish long-term growth under its debt burden. Iceland crashed hard because of its broken and failed financial system. This did allow, on the plus side, for the rot of the financial system to be flushed away to allow for more sustainable growth to resume.
In addition to that post, interested readers can find out more through my just published Economic Affairs journal article comparing these policies, “Separating the Wheat from the Chaff: Icelandic and Irish Policy Responses to the Crisis.” (pdf)