Klaipėdos universitetas

The 2008 global economic and financial crisis hit hard in Iceland and Latvia. Economic developments prior to the crisis, as well as response to the crisis were, however, different in these two countries, yielding different results. Both countries received assistance from the International Monetary Fund (IMF) during the crisis and the IMF has labeled their reform programs as success stories. This article reviews and evaluates the post crisis situation in Iceland and Latvia, both in terms economic performance, as well as social progress. It also discusses how other countries, as well a multilateral institutions, may have influenced the reform programs in Iceland and Latvia.

Iceland is a small, resource rich country in Europe that is highly dependent on foreign trade. According to the World Bank classifications, Iceland is a high income economy, but with a population of a little bit more than 300 thousand inhabitants, is the smallest economy within the Organization for Economic Co-operation and Development (OECD). Iceland is highly dependent on foreign trade, especially on trade with the European Union, where economic and political integration is evolving and the question about the most feasible level of participation is a future challenge for the country. Iceland is a member of the European Free Trade Association (EFTA), the European Economic Area (EEA) and the Schengen area, and the European Union (EU) candidate country until recently, when its government decided to withdraw its EU membership application. Currently, the EEA agreement ensures Iceland access to the EU common market. The question remains, what is the most feasible arrangement for Iceland’s prosperity in the long term? Should it continue to rely on the current arrangement? Should it seek the EU membership in the future and, perhaps, subsequently become part of the Euro Area? What are the possible benefits and disadvantages for Iceland joining the EU and the Euro Area?

The 2008 global economic and financial crisis hit hard in Iceland. During the crisis its three largest banks all collapsed in just a few days with severe consequences for the economy and the people. Prior to the crisis, Iceland, a high income OECD country, had experienced strong growth and unprecedented expansion in overseas investments and activities, especially in the financial sector. This article focuses on the actions of the international community when the Icelandic authorities, during a period of great uncertainty, sought assistance to protect the Icelandic economy before the banking system fell. The methodology used in this article is the case study method. Compared to other research methods, a case study enables the researcher to examine the issues involved in greater depth. Arguably, the governments of the Netherlands and the UK tried to fake reality by suggesting that the Icelandic government, i.e. Icelandic taxpayers, should be made responsible for paying the debts of private banks. The EFTA Court ruling confirms that Iceland did not have this responsibility. In retrospect one can argue that the EU showed dishonesty by supporting the Netherlands and the UK in demanding a sovereign guarantee for failed private banks. The Icelandic banking expansion exposed weaknesses in EU integration and may also confirm a certain incompetence within the EU in designing an EU-wide banking system.