There have been innumerable debates on the effectiveness of QE or rather the lack of effectiveness. What is QE? Quantitative easing (QE) is a type of monetary policy used by central banks to stimulate the economy when standard monetary policy has become ineffective. However, these debates have not brought about any decisions that can be said to be better, especially in the European region. A glance at the stock market is more than enough to understand the economic crisis that has got all investors scared.
One national leader from Europe had recently made a proposal, which seems a bit unique at first glance, to deal with the debt bubble and the financial crisis. On the surface, the proposal does seem to be sound even though it looks rather unorthodox. The problems begin to appear when you dig a little deeper. Once you do so, you will realize that the proposal will end up doing the exact opposite of what it wants to do.
Developed economies need to consider the actual economic state of Iceland as an example of recovery before a bigger catastrophe strikes the market and the future becomes black with debt.
Iceland has a total population of less than 320,000. The economy of this country is by no means diverse. The dominant economic sectors are energy, fishing and aluminum. Iceland is also home to the oldest functioning legislative assembly in the world called the Alþingi which was founded in the year of 930. Unfortunately, their experience was not enough to save the economy of Iceland. Instead, Iceland has ended up becoming another Greece. The parallels are too similar to ignore.
In the last 7 years, Greek households have lost around $215 billion as per estimates. Even today, the unemployment percentage in the country is 27%. 44% of the incomes fall below the poverty line. The current debt of Greece to GDP is 175% which is the highest in the European Union and the annual deficit is 12.7%. The International Monetary Fund and the European Union have already given $332 billion as loans to rescue the economy of Greece. This has caused the national debt of Greece to rise to $470 billion. This is unimaginable for a country whose economy is only 1.4% of the entire European Union. Majority of this money has gone as payments to French and German banks which had high investments in the debt of Greece. In just six years, the output of Greece has decreased by 25%.
What Happened to Iceland?
In Iceland, the situation was almost a reversal of the scenario in Greece. Overextended Icelandic banks began to collapse due to their mortgage assets which had inflated greatly. In just a short period of time, the financial sector decreased by four-fifths of its size. Iceland let the banks fail and began to impose capital controls instead. Bank debt held by foreigners was sacrificed. Iceland could do what it wanted as it was not a part of the European Union. It could default and devalue to restore its problem as it had its own currency – the krona.
This scenario had been used by Greece in the past. However, it is no longer an option.