Small States in the Modern World

Small States in the Modern World

Vulnerabilities and Opportunities

Edited by Harald Baldersheim and Michael Keating

Small States in the Modern World comprehensively assesses the different modes of adaptation by small states in response to the security and economic vulnerabilities posed by global change. It uses a diverse collection of case studies to explore the complexities of change and to place them in their temporal and geographical context.

Chapter 3: Do small states need shelter? The economic and political turmoil in Iceland

Baldur Thorhallsson

Subjects: politics and public policy, international politics, political economy, urban and regional studies, regional studies


Iceland was badly hit by the latest international economic crisis. No other European country experienced a currency crisis and the fall of practically all of its financial institutions at the same time. The depreciation of the kr—na substantially increased the debt burden borne by those households and firms that had borrowed in foreign currency – and many bond (account) holders lost their savings. Inflation rose to double figures, and unemployment reached levels similar to those of the Great Depression. This led to a societal and political crisis: violent protests on the streets of Reykjavik for the first time in over 50 years, the fall of the government, a general election and a dramatic drop in confidence (to record low levels) in politicians, the Althingi (the national parliament) and other public institutions. The question that arises is: Why was Iceland impacted so severely, economically and politically, by the crisis? Did the fact that Iceland is one of the smallest European states play a part in the sudden downturn? The aim of this chapter is to examine the position of Iceland in the new era of globalization and whether its smallness had something to do with how badly it was hit by the financial crisis.

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