Matt Yglesias

McDonald’s Withdraws from Iceland

The three McDonald’s outlets operating in Iceland are going to close shop, victims of the collapse in the value of Iceland’s currency.

Subway, Reykjavik, Iceland (my photo, available under cc license)

When I was in Nizhny Novgorod in 1998 when Russia defaulted on its debt, I remember a McDonald’s guy explaining to me that the company tried, when feasible, to make sure that expenses and purchases were happening in the same country. So you buy Russian potatoes with rubles and sell french fries in Russian cities for rubles. Icelandic agriculture isn’t going to be able to work as a McDonald’s supplier (great butter, though) so presumably they were importing tons of stuff and thus exposed to a great deal of currency risk. Perhaps if Iceland joins the EU and adopts the Euro, they’ll get their McDonald’s back.

Meanwhile, I wonder about other fast food outlets. The American fast food chain I went to in Iceland was Subway. Are they still there?

Where Is Scandinavia

Freshly returned from a great trip to Scandinavia, I can’t help but enjoy the FuckYeahScandinavia tumblr that I was first shown this morning. That said, no fan of northern Europe can avoid observing that several of the countries the tumblr covers aren’t technically “Scandinavian.” Americans often find this a bit confusing but Scandinavia, strictly speaking, only refers to Denmark, Sweden, and Norway. If you want to add in Iceland and Finland and miscellaneous extra territories (Åland, Faeroe Islands, Greenland) the word you’re looking for is “Nordic.”

I don’t totally understand why the distinction has been drawn this way—but roughly the point is that Finnish is a very different language from the others and that Iceland is clearly a geographically distinct phenomenon from the rest.

The larger point, however, is that the giant phone in this Robyn video is totally awesome. I also like that in Sweden health care is “under democratic control and financed on the basis of solidarity.”

Iceland on the Mend

Storkur, Iceland (my photo, available under cc license)

I’ve been saying that for all the gloating people did last fall over Iceland’s collapse, that the country was actually in pretty good shape. Yves Smith observes, for example, that a small open economy like Iceland’s can just nationalize its banks and devalue its currency and put itself on the road to recovery. That’s not a fun thing to experience, but it’s a lot better than what Spain and Ireland are looking at—a sustained period of double-digit unemployment and round after round of nominal wage cuts.

Meanwhile, the other thing I’ve been saying is that currency issues aside, the fundamentals in Iceland are strong. It’s a small, quiet, peaceful, homogenous country full of healthy and well-educated people. When the global economy comes back, they’re as well-positioned as anyone else to take advantage of whatever opportunities present themselves.

Iceland Takes New Steps Toward EU Membership

James Joyner writes about Iceland’s continued march to EU membership. This is brought about in part because the financial meltdown has made EU membership look better on the merits, in part because the financial meltdown has brought left-wing parties to power, and in part because the financial meltdown has just changed public opinion. Still, mass opinion is rarely all that Europhilic and there remains some chance that the public will reject accession in a referendum. EU leaders, meanwhile, seem to be welcoming the idea of expansion to a tiny rich country after so many contentious fights about the accession of medium-sized medium-income Eastern European countries.

The EU has a ton of problems, running the gamut from a nutty decision-making structure to the fact that voters seem to hate it. But when you step back and think about it, it’s really an enormous human achievement relative to where things were 60 or 70 years ago or to what anyone would have thought possible back then. And for all its problems, the EU keeps moving by fits and starts to become both broader and deeper and I see no real reason to think either trend will actually reverse. Most likely, some of the problems will get resolved and that, combined with generational turnover, will build a more EU-friendly public in the future.

Bullish on Iceland

By coincidence, two great articles on Iceland’s economic collapse came out this week. The one by Michael Lewis is funnier and available for free online so it’s been more widely linked, but the one by Ian Parker is more evocative and does more to explain what actually happened. But running through both articles is, I think, a kind of telling shadenfreude at the island’s downfall. It’s nice for us, as Americans, to spend time thinking about Iceland—a country that seemingly screwed the pooch on the great credit boom more than we did.

Nevertheless, when you step back and think about it, though Iceland’s in for some rocky times in the near future, so are we all. And in a lot of ways, Iceland’s pretty well-situated for the future.

At the end of the day, they have a well-educated, healthy population a decent infrastructure and an absence of obvious pressing social problems. It’s a small, quiet, peaceful, orderly country that will suffer through the downturn and take advantage of business opportunities when the global economy revives. The United States is neither small nor quiet nor orderly. You could imagine the hard-fought crime control gains of the 1990s being totally reversed by a years-long recession, and you could imagine that pushing one or more cities into a downward spiral from which there’s little prospect of return.

Speaking of which, there are substantially more people living in Detroit than there are people living in Iceland, and it’s not at all clear—even on the most plausible possible optimistic assumptions about the economy—how their situations are ever going to be turned around. That’s a tale of collapse really worth dwelling on.

Resigning in Iceland

Prime Minister Geir Haarde resigns due to the collapse of his coalition following the breakdown of the Icelandic economy. I’m a little confused as to why the early elections have been called for May 9. It seems that given the nature of the situation, Icelanders could use early elections to happen really early — like sometime in mid-to-late February. The ability to call early elections when incumbents have been discredited is one of the strengths of these kind of systems of government, but you may as well use the power to actually avoid America-style “months of drifting aimlessly.” But the election date was set a couple of days ago, so maybe as a result of the decision to resign it can be moved up even further. I’ll admit that I’m not entirely familiar with Icelandic constitutional procedures.

The Bjork Fund

Björk, by far the world’s most famous Icelander, is launching a new venture capital fund hoping to save her economically distressed island home: “Audur Capital will oversee the fund’s day-to-day dealings, directing an initial investment of 100m Icelandic krona (£575,000) toward sustainable, environmentally-friendly businesses.” Given Iceland’s very high level of human capital and the currently near-worthless state of its currency, I think investing in new Icelandic business seems like a decent bet. The trouble, however, is the same as the trouble with everything these days — if everyone around the world is reducing their expenditures, then it’s just extremely difficult for any new business to succeed whether or not it has an underlying idea that’s sound.

At any rate, I like Björk’s pre-solo work with the Sugarcubes best, and the “Motorcrash” video gives you a taste of Iceland’s odd, tree-free landscape:

Also note that unlike some musicians, Björk isn’t just being pretentious in not having a last time — Icelandic people don’t have last names. Instead they operate with a first name and a patronymic based on their dad’s first name.

The Blame Iceland First Crowd

Via Atrios, this:

No one disputes that the economic troubles of Iceland are largely the country’s fault. But there may be more to the story, at least in the view of Icelandic government, its citizens and even some outsiders. As grave as their situation already was, they say, Britain — their old friend, NATO ally and trading partner — made it immeasurably worse.

I actually sort of would dispute that the economic troubles of Iceland are largely the country’s fault. Being small is hard. Think of a small city who’s largest employer is a factory that makes airplane parts. Most people in the city don’t work at the factory. You’ve got kids and retirees and stay-at-home spouses. You’ve got some teachers, cops, firemen, librarians, postal workers, and bureaucrats. You’ve got banks and shops and restaurants and guys in the building trades. But the largest employer is the factory. And if the airplane industry suffers a severe downturn and needs to lay off workers and cancel shifts and bonuses, then that’ll be substantially less revenue for the stores and restaurants. People will have less cash on hand to pay for home repairs, and more time to try and do it themselves. So the shops and restaurants start cutting back on employment and hours. So their employees need to scale back their spending. And tax revenues go down, meaning less money for the public employees. All of which means even less revenue for the town’s stores. And down and down things will go until orders go up at the factory. Did the town government make some serious policy error? Well, probably they could have done something better, but fundamentally it’s in the nature of small places to be buffeted by trends that are too big for the city to control.

And the residents of our city can fairly easily try to find work elsewhere in the region and just accept a longer commute. Or they might move away. Or other firms might see costs declining in the city and decide to locate there.

Iceland is a small city of about 300,000 and though the country is open to trade, the nature of things is that it’s much more closed off from the outside world than an American town is from the rest of the country. A country like that isnisn’t big enough to have a balanced economy. They’ve got a fish-exporting industry, and then economies of scale dictate that if they manage to get successful in some sector of the global economy, that sector will come to dominate the country’s economy. For Iceland, it wasn’t a factory making airplane parts — it was banks. Run into a global banking slowdown, and the country is screwed. But it’s not clear what they could have done to stop this. Iceland’s banks were very big relative to Iceland but Iceland was far too small to alter the course of the global financial system.

A Rescue for Iceland

Iceland to get an IMF rescue package. This happens to third world countries every now and again, but a developed economy hasn’t had to call on the IMF since Britain in the mid-1970s.

Meanwhile, because nippy weather has finally arrived in Washington, DC I put on a 66 Degrees North jacket that I bought in Iceland and thought would be suitable attire for autumn bike commuting. When I read the story about the bailout, I thought that the collapse of the Iceland economy and currency might lead to some good bargains at the store’s website. But not really. Prices are denominated in Euros and not cheap.

UPDATE: Actually, David observes that South Korea needed an IMF assist during the 97-98 Asian financial crisis so this isn’t all that unusual.

Things Still Looking Down in Iceland

Coordinated action seems to have stabilized — not fixed, but stabilized — the financial system in most of the world, Iceland is still spiraling downhill as its currency has become worthless (as in you literally can’t trade it for any foreign currency) which risks destroying the entire economy of a small country that heavily depends on imports. Tyler Cowen says “I’m starting to wonder if I should visit for a weekend; it’s one of my favorite countries.”

I loved my trip to Iceland and would go if I had time, but the election’s a busy season. For $550 you can get rountrip airfare and three nights at the Hilton Rejkjavik Nordica. That’s a very nice deal and, I swear, it’s a great place to visit.

Taking on the Icelandic Menace

Well, if Canada or Russia don’t manage to take over Iceland first, maybe the British will:

Gordon Brown has told the Icelandic prime minister that he is considering legal action against the country over the collapse of its national banks.

The prime minister said tonight that Iceland’s decision not to recompense those with savings in the bank was “completely unacceptable” and the British government would do “whatever is necessary to recover the money”.

“I’ve spoken to the Icelandic prime minister, I have told him this is effectively an illegal action that they have taken. We are freezing the assets of Icelandic companies in the UK where we can. We will take further action against the Icelandic authorities where necessary to recover the money.

This talk of “legal action” is nice, but if Brown’s really willing to do “whatever is necessary,” then the UK is one of the few countries capable of projecting substantial military power in Iceland. And, of course, Iceland has no military with which to defend itself. The country’s even been subjected to British military occupation in the past. Before WWII, Iceland was part of Denmark. Then when the Germans conquered Denmark, the British dispatched troops to Iceland to secure the country under a new independent government so as to ensure the viability of the sea and air routes between the UK and North America. Later (but before formal US entry into the war), the United States took over occupation duties. And we continued to maintain a pretty substantial military presence (relative to the size of Iceland) at Keflavik Naval Air Station until a year or two ago. But now Iceland’s defenseless!

A Canadian Solution?

As world economic conditions continue to deteriorate, Iceland continues to be the leading edge of collapse. Small countries tend, in the nature of things, to have less-balanced economies than do big ones. And Iceland is a very small country with an economy that revolves more-or-less exclusively around fish, tourism, Bjork, and banking so a banking collapse amidst a global economic slowdown leaves them in bad shape and facing national bankruptcy. There’s some thought that Russia may bail them out. Were there not a million other stories in the news, the thought of a NATO ally that long played host to a strategically important US military base becoming some kind of dependency of Russia would be prompting a lot of alarmed coverage. Thus far, though, not much. But David Hayes in a letter to Canada’s National Post suggests a Canadian solution:

Iceland, in the words of its President, is facing the “very real danger” of national bankruptcy. If the situation deteriorates, Canada should invite the small island nation to join our confederation, just as we did 60 years ago with another island in the Atlantic facing bankruptcy.

The island in question, for those not up on their Canadian history, would be Newfoundland which until 1949 was a politically separate element of Britain’s evolving empire-then-commonwealth. He observes that Iceland is no further from Ottawa than is Vancouver, that Iceland’s population largely speaks English (and one might add that Canada has some experience with bilingualism), that Iceland’s population is comparable in size to Canada’s smaller provinces, and that Canada is already committed to Iceland’s defense through NATO.

The Collapse in Iceland

Iceland, like various other countries, has recently had to bail out a major bank. And like other countries, it looks like there may be more bank failures on the horizon. But where Iceland differs from other countries is that it’s tiny — fewer than 300,000 people live there — so that even though it’s a prosperous country, it simply doesn’t have very much money in the aggregate. And while its banks aren’t huge, they are quite large relative to the overall size of the Icelandic economy. Consequently, Iceland’s bank nationalization is leaving the country as a whole in need of a bailout.

Financial problems aside, Iceland’s one heck of a nice country. Absolutely beautiful and blessed with abundant reserves of puffins, hydropower, fish, and Bjork. Ultimately, taking over Iceland could be an excellent long-term move for a great power on the rise. Maybe China wants a new colony? After all, the US shut down the Keflavik Naval Air Station last year so it’s a wide open field.

UPDATE: More here from the Observer. Joking aside, the situation is quite serious: “Yesterday people were buying up supplies of olive oil and pasta after a supermarket spokesman announced on Friday night that they had no means of paying the foreign currency advances needed to import more foodstuffs.”