That’s Deutsche Bank, to be exact, in a note entitled “Iceland v Ireland: Is the difference really only one letter?”
In it, DB is exploring the differences between the two island economies — starting with a bit of historical background:
Iceland and Ireland have some historical ties. For example in the 10th century Norse chiefs are known to have taken female slaves from Ireland (and Scotland) to Iceland, helping to explain the similarities in appearances between Irish and Icelandic populations! But never before have we seen such frequent comparisons between the two countries as last October. Both economies rapidly felt the backlash of the global credit crunch and governments were forced to take radical measures to rescue their banking sectors. The most obvious difference between the two situations is Ireland’s membership of [the Ec0nomic and Monetary Union] allowing it to access ECB liquidity to help funding the banking sector and sovereign. This allowed Ireland to escape Iceland’s currency collapse, an immediate and rapid deterioration of domestic private sector debt servicing capabilities and the imposition of widespread capital controls.
Now, however, Ireland’s membership in the eurozone could be one of the things which hinders its recovery.
As the analysts point out, the Icelandic krona’s precipitous fall in value has helped the country’s economy regain some of its national competitiveness. In contrast, Ireland is `stuck’ in the eurozone — unable to competitively devalue its currency:Looking ahead we see potential for the two case studies to diverge. Iceland’s floating exchange rate, such a foe last year, could become a friend. Over recent quarters it has helped Iceland export its recession while huge competitiveness gains combined with valuable natural resources and the potential for E(M)U entry offer Iceland a chance to emerge from this crisis, of historical proportion by any standards, pretty rapidly over the coming 1-2 years. In contrast Ireland is struggling to improve competitiveness while searching for a new business model. In the absence of growth and at the risk of deflation, paying down its ballooning debt burden will become an increasing challenge. While the downside risks to the Icelandic economy remain hefty, in our view the upside is more obvious than in the case of Ireland.
What’s Irish for “uh oh” ?
Related links:
Something is rotten in the state of Denmark. And Ireland. And Spain – FT Alphaville
The Irish find a scapegoat – FT Alphaville