Vulnerabilities and Opportunities
Edited by Harald Baldersheim and Michael Keating
Chapter 3: Do small states need shelter? The economic and political turmoil in Iceland
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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