DEBATING POLITICS, ECONOMICS AND OTHER TIMELY TOPICS WITH PAUL KRUGMAN OF THE NEW YORK TIMES

FRIDAY, DECEMBER 11, 2015

PAUL KRUGMAN

A Lesson From Iceland: It Pays to Have Your Own Currency

One of the major lessons of the
euro crisis is that the economist Milton Friedman was right not about
monetarism, but about the case for
flexible exchange rates. When big
adjustments in a countrys wages
and prices relative to those of trading partners are necessary, its far
easier to achieve those adjustments
via currency depreciation than via
relative deflation which is one
main reason that there have been
such huge costs for the euro.
But many economists remain
deeply unwilling to accept this point.
And so in Thorvaldur Gylfasons
otherwise useful survey of Iceland
since the financial crisis, we get
this: In Ireland, the 2007 level of
the purchasing power of per capita
[gross national income] was restored a year later than in Iceland, in
2014, Mr. Gylfason wrote recently
at VoxEU.org. It is, therefore, not
true that having its own currency
(which lost a third of its value in real
terms during the crash) saved Iceland from the sorry fate that Ireland
would have to suffer because Ireland
is anchored to the euro. Ireland adjusted by other means. Iceland, had
it used the euro, could have done the
same. The Icelandic krna has lost
99.95 percent of its value vis--vis
the Danish krone since 1939 when
the two currencies were equivalent,
convincing many local observers

Employment: Iceland and Ireland

105

Text

100
95
90
85

IRELAND

80

ICELAND

75
2005

2006

2007

2008

2009

2010

2011

Note: The data has been indexed (pre-crisis peak = 100).

Source: Eurostat

that Iceland is ripe for the adoption

of the euro.
First off, that comment about depreciation since 1939 1939! is a
cheap shot. But what about the comparison with Ireland? Its true that
gross domestic product per capita
in Ireland (in this case, using gross
national income doesnt make much
difference) recovered to its pre-crisis
level only a bit later than Icelands did.
But G.D.P. isnt the only indicator, and
its one that is arguably distorted by
the nature of the Irish export sector,
which held up fairly well and is highly
capital-intensive (think pharmaceuticals) that is, it contributes a lot to
G.D.P. but employs very few people.
If you look instead at employment
(see the chart), Iceland did far better

2012

2013

2014

THE NEW YORK TIMES

than Ireland. Unemployment data

in Iceland also shows a much more
favorable picture. Less formally,
everyone I know who tracked both
countries has the sense that the human toll in Iceland was much less
severe than it was in Ireland.
And if you remember, everyone
expected the Icelandic crisis to be a
lot worse, given the incredible scale
of the banking overreach early
on, comparisons between the two
countries in Ireland were regarded
as black humor, not something expected to be taken seriously.
I understand the urge to make
excuses for the single currency. But
the evidence really does suggest that
there are important advantages to
keeping your own currency.

READER COMMENTS FROM NYTIMES.COM

Few Options, All Unpleasant

Traditionally, countries that
are going through hard times can
either devalue their currency or
lower interest rates. If interest
rates are hovering near zero, as they
are today, a country can resort to
devaluation that is unless it doesnt
control its own currency.
GARY, NORWAY

(namely by letting the banks fail)

and the prudent management of an
independent currency.
This is clearly illustrated in your
employment chart. If Iceland was
a member of the eurozone and had
followed Irelands path, the recovery
would have been much slower.
D., NEW ZEALAND

I have visited Ireland and Iceland on a regular basis, before and

after the financial crisis.
My perception is that both countries are still scarred by their economic troubles, but the human impact of Icelands much more severe
crisis was moderated by the actions
of the government after the crash

During troubled times, every

country wants to devaluate its
currency in order to improve economic conditions. But its impossible for all countries to devalue at
the same time.
If that were to happen today, we
would repeat the crisis of 1929.
M., SPAIN

Shouldnt the fact that Iceland

has only about 330,000 people,
less than the number living in my
Los Angeles neighborhood, affect
your analysis?
JERRY COTTS, CALIFORNIA

When you read Thorvaldur Gylfasons original article on VoxEU,

you cannot help but wonder: Who
wrote it? Was it Mr. Gylfason the
professor, or Mr. Gylfason the rejected politician?
I bring this up because, according
to my friends in Iceland, Mr. Gylfason co-founded a political party
and ran for office during the last
parliamentary elections, and joining
the eurozone was one of his partys

ILVY NJIOKIKTJIEN/THE NEW YORK TIMES

Reykjavik, the capital of Iceland. The nations economy has bounced back since the 2008 financial crisis.

pledges. But Icelandic voters rejected Mr. Gylfason and his party.
Perhaps that is the reason that
he chooses to overlook Irelands
troubles, or why he doesnt mention
how different the Irish economy is
from those of other countries in the
eurozone.
ALDO STUMM, ESTONIA

Ireland is fortunate that Britain

and the United States are its two
main trading partners. Throughout the crisis, the euro fell against
the pound and the dollar, which
made Irish exports more competitive.

fare. The value of Irelands exports

is generated elsewhere.
H., THAILAND

Employment is not the whole

story; wages are important, too.
Mr. Krugman, you seem to have
learned nothing from the fact that
even though the United States
employment rate is pretty strong,
voters are still supporting Donald
Trump.
The reason for that is wages are
down for 90 percent of the population, while rich Americans who own
stocks are doing quite well.
JERRY HOUGH, NORTH CAROLINA

Iceland rebuilt its economy by using someone elses money, and the
country was able to do so because it
kept its own currency.
But is that really a good thing? Is
this really the way that governments
are supposed to operate? I assume
that your answer would be yes, as
you have indicated in the past.
DAVID, FRANCE

I still struggle with the idea that

any conclusions can be credibly
drawn by examining Iceland.
It has a population of about
330,000 people, and its economy can
be managed incredibly easily.

MARK, IRELAND

PATRICK B., BRITAIN

Due to the tax-avoidance efforts of large corporations based

in Ireland, many of the products
that the country exports have
little real effect on its overall wel-

Icelands capital controls have

held creditors hostage for seven
years. Now they are are going to
be permitted to transfer funds out
of the country after they pay a 39
percent tax.

ONLINE: COMMENTS
Comments have been edited for clarity and
length. For Paul Krugmans latest thoughts
and to join the debate online, visit his blog at
krugman.blogs.nytimes.com.

PAUL KRUGMAN

BACKSTORY

The Fall of Rome: Setting the Record Straight

Fears About Refugees

Intensify Debate in Europe

The historian David Potter

recently had a great letter to the
editor published in The Financial
Times, correcting the really bad
history of Dutch Prime Minister
Mark Rutte, who suggested in
November that migrants brought
about the fall of Rome.
According to Mr. Potter: The
barbarians who were responsible for the fall of the western Roman Empire in the fifth century
A.D. were not a wave of desperate
migrants. They were a collection
of disgruntled employees.
Its true. Many of the groups
who ended up invading the Roman Empire were originally
clients that had been hired, subsidized or bribed (its hard to tell
the difference) to serve the empire at a time when its own military capacity was waning. And
this isnt just a story about the
western empire, or about Rome.
Im currently reading In
Gods Path: The Arab Conquests
and the Creation of an Islamic
Empire by Robert G. Hoyland;
I read Tom Hollands In the
Shadow of the Sword a while
back. Both books portray the rise
of Islam as something very different from the image that I and, I

NADIA SHIRA COHEN/THE NEW YORK TIMES

Tourists in Rome take pictures in front of the Colosseum.

suspect, many other people had.

It turns out that when it comes
to the Roman Empire, we are not
talking about Bedouin peoples,
inspired by faith, suddenly
swooping out of the desert on
unsuspecting lands. The soldiers
and generals who conquered

Persia and much of the Byzantine

Empire were, most likely, mainly
drawn from long-established
client states on the Persian and
Byzantine borders men who
learned the art of war and much
else from the people who hired
them. They turned first into raid-

READER COMMENTS FROM NYTIMES.COM

Rewriting History
The ancient Romans were open
to immigration and thrived because of it. At one point, citizenship
was granted to all people withing the
Roman Empire.
Also, the Romans lasted for a
thousand years, much longer if you
include Byzantium.
MICHAEL BOYAJIAN, NEW YORK

A college teacher friend of mine,

a professor of philosophy, once
told me: I knew a historian. He
was a liar. His point was that it is
simply too easy to write history.
NAME WITHHELD, CALIFORNIA

The distinction between disgruntled employees and desperate migrants in Roman times
seems a bit artificial.
The Romans co-opted Germanic
tribes like the Franks, Burgundians
and Visigoths by resettling them
and inducting them into the Roman
army in order to stop the tribes from
raiding the border.
Prime Minister Mark Ruttes
statement is ironic because he and
his countrymen are likely descendants of those Frankish immigrants.
So its a bit cheeky for him to decry
the decline of the Roman Empire

ers, drawn by the Roman Empires weakness, then into conquerors when that weakness
exacerbated by an exhaustingly
destructive war between Persia
and Byzantium proved so great
that resistance to their raids collapsed. In other words, the Arab
conquests were quite a lot like the
Visigoth conquests in the west, at
least at first.
And as Mr. Hoyland points out,
the Arabs werent the only peripheral powers making big inroads at
the time. The Avars, for example,
swept up to the walls of Constantinople a few years before the Arab
conquest, and various Turkic
groups wreaked havoc on Persia.
What was different about the
Arabs was the way that they
achieved political and religious
unity. But while that was a momentous accomplishment with huge
consequences, it was probably a
much messier and slower process
than we tend to imagine, mainly
taking place after, not before, the
initial conquests. This notion of a
great holy war is probably a story
that was invented centuries later.
So how much light does any
of this shed on current events?
Little, if any.

that his forefathers provoked.

GERALD SILVERBERG, AUSTRIA

If there is a lesson here, it is that

we should avoid stereotypes and
think in more complex terms.
To regard the surge of Arab refugees as an attempt to convert the
West to Islam is very wrongheaded.
And to regard it solely as an outcome of the Bush-Cheney legacy is
too simplistic.
MATHIAS WEITZ, GERMANY

As refugees from Syrias ongoing civil war have fled to Europe in large numbers over the last couple of years, immigration has become a divisive issue on
the Continent. However, after the terrorist attacks in Paris last month, tensions have reached new heights.
On Nov. 26, Mark Rutte, the Dutch
prime minister and the next president
of the European Union, warned in an
interview that a massive influx of
refugees could destabilize Europe. As
we all know from the Roman Empire,
big empires go down if the borders are
not well-protected, Mr. Rutte said.
Additionally, some mainstream politicians across the Continent have begun
to echo sentiments that many Europeans would have considered extreme
just months ago. For instance, earlier
this month, Donald Tusk, the president
of the European Council, suggested
that refugees should be placed in holding centers for up to 18 months while a
battery of security checks is completed.
Mr. Tusk also characterized Germanys
policy of granting asylum to large numbers of refugees as dangerous.

This isnt a complicated issue.

The fact is that there is nothing inherently good or evil about Islam,
and Arabs are as human as everyone else.
LUKE, TAIWAN

The fall of Rome does shed some

light on current events. A major
power became exhausted following
an expensive, resource-draining
war, after which brutal gangs started launching opportunistic attacks.
JOHN M., CALIFORNIA

An unequal distribution of
wealth forced Rome to rely on client entities.
The empire as a whole lacked
funds to maintain a large enough
army to protect its borders.
TIM KANE, ARIZONA

The Visigoths didnt destroy

the Roman Empire. However, they
were refugees, and they did cause
a lot of trouble.
They were admitted en masse in
A.D. 376, but instead of assimilating

as Roman citizens, they kept their

national identity and drew thousands of Goths and other Germans
to their banner when they rebelled.
I doubt that Mr. Rutte meant to
imply that Syrian refugees coming
to Europe today are going to destroy
anyones army, but hes probably
correct to think that theyre not
likely to ever defend the Dutch army
or Dutch people.
DAVID RAINES, MASSACHUSETTS

Alexander the Great conquered

most of Asia by turning Persian
client states into allies. w
In fact, one conqueror after another was able to take advantage of
peoples weak loyalty to the current
empire in order to defeat it.
DANIEL A. GREENBUM, NEW YORK

In the aftermath of the shootings

in Paris, the terms of debate among
mainstream parties have shifted, and
many far-right politicians who have
long opposed immigration have been
emboldened to connect the arrival of
Syrian refugees with an increased
threat of future attacks.
For example, in the first round of
Frances regional elections on Dec. 6,
the long-marginalized National Front
party surged into first place nationally, winning historic vote percentages
in traditional strongholds of the Socialist Party. National Front leader Marine Le Pen, who has tried to project a
more moderate image while maintaining a tough anti-immigrant stance, remarked after the election that her party was now without contest the first
party of France.
While the National Front must still
claim victory in next weeks round of
runoff votes, analysts believe that it is
well positioned to do so in a number of
regions, and that its success will further legitimize the party on a national level.

Paul Krugman
joined The New
York Times in 1999
as a columnist on
the Op-Ed page
and continues
as a professor of
economics and
international
affairs at Princeton
University. He was awarded the
Nobel in economic science in 2008.
Mr. Krugman is the author or editor
of 21 books and more than 200
papers in professional journals and
edited volumes. His latest book is
End This Depression Now!