Let the free market work for economic recovery

The lesson is clear: let the free market work as it is supposed to. Iceland has experienced a “surprisingly strong” recovery from the global financial crisis, according to the International Monetary Fund (IMF). The country’s economy is expected to grow over the next two years, which is more than can be said for most European economies that are still mired in debt.

As part of its recovery programme, Iceland refused to protect its bank’s creditors, who had made bad investment decisions. It also safeguarded its welfare system to ensure that its unemployed received social support.

This is in sharp contrast to the continued efforts at financial engineering to protecting bondholders from the sovereign debt crisis, by European regulators. Their efforts have done little more that to drag out the dangerous volatility on the global financial markets.

Debt-stricken European countries are also implementing harsh austerity packages in an effort to reduce the burden of their deficits. But the cuts in government development and social spending are reducing demand and are proving to be a serious drag on economic recovery. Sustainable, affordable and productive social and development investment — very different from recklessly handing out inefficient grants — is an important economic stimulus.

There is no simple, single solution to the economic crisis, but Iceland shows that those countries who let the free market work efficiently are on the fast-track to recovery.