Iceland’s had a pretty rough patch since 2008.  The banking crisis there — which wasn’t so much a “banking” crisis as a “near-total economic collapse” crisis — created severe hardship for many people in the country.  That’s been so well documented (also, John doesn’t pay me by the word) that there isn’t any need for me to rehash the past.

Now, with the bubble fully burst and the requisite pain experienced, the country is rebuilding.  Nothing about the future is certain, but on balance the economy is motoring along quite nicely, especially if you compare it to other European countries further down the domino chain. There’s still a great deal of political, economic and emotional laundry to clean within the country, and I’ve followed with some interest one of the things on the laundry list: “What currency should we use going forward?”

To me, it’s kind of a funny question; not wrong-headed, but curious.  It wasn’t the currency that caused the financial meltdown as much too much participation in the heady, bubbly years of crazy banking that preceded 2008.  When the economy popped, the currency fell apart, but that was an inevitable artifact of the larger over-extension and subsequent punishment phase.  The krona didn’t devalue by half because it was a bad currency; it fell apart because it didn’t really have any other choice.

With the economy in rebirth mode, it does make sense to examine monetary policy and devices, but replacing the krona just doesn’t seem necessary to me.  Would economic stability be easier to achieve if the krona were replaced with a larger and more stable currency (no sense in hooking up with another small-nation currency)?  Well… maybe, but where will you find one of those? 

The Canadian dollar?  That was sort of Canada’s idea earlier this year, but Iceland and Canada don’t really have much in common economically, and it’s not exactly what you’d call a benchmark currency.

The renminbi?  No way; China’s monetary policy is in flux and its role as an international benchmark is untested over time.  And if Canada-Iceland isn’t a natural fit… moving on.

What about the euro?  Iceland’s prime minister is trying to drum up support to join the EU and adopt the euro.  This will probably sit badly with a lot of people within driving distance of where I live, but to me that sounds like an unbelievably stupid idea.  I’m no economist (and if I were, I’d probably have the same degree of accuracy at a higher rate of pay), but I don’t think the EU’s problems are anywhere near over.  Considering Spain, I don’t even think they’ve bottomed out yet.  Joining the EU at this point would be either the world’s luckiest and most shrewd “buy the crash” strategy; or it would be tying the country to a rock and heaving it overboard because they didn’t quite drown all the way in 2008 and they want another try. There are a number of countries tied to the euro that aren’t looking at a very stable future, near-term; if that is Iceland’s goal, this idea seems very unwise.

The US dollar?  Oh dear, look at the time, must dash.  Yeah, it’s sacrilege, but I don’t think that would be a very smart move either.  I don’t really think we’re doing the tie-ourselves-to-a-rock trick, but we’ve done a lousy job in the last couple of decades of pragmatically and sensibly taking on the ugly economic issues we’re confronting, and I see no evidence that any legislators (including those hoping to be elected this year) are really focusing on practical financial matters.  A country could certainly do worse than aligning with the US dollar, but why take the risk if there are better choices?

And in this case, I think there’s a better choice.  They’ve already got it.  They have a very nice, traditional currency called the krona.  They’ve got lots of it printed up and in circulation. Yes, it’s a small currency.  Yes, it’s vulnerable to severe shocks that come from other countries. But Iceland didn’t get into big trouble because of the currency, or just because Lehman Brothers went bankrupt.

The country doesn’t need to change its currency; it needs to stick to its financial diet as things improve.  Will that guarantee their future safety?  Of course not.  But it will help insulate them against toxic failure lurking dangerously in the shadows of some of the more obvious “go-to” countries.

And maybe most importantly, that will allow the shapers of monetary policy to focus on things that will help them survive the future shocks to come.

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