Iceland fell hard in 2008. Its engorged banking system sunk and unemployment soared. The government was jeered out of office by dispirited voters in angry street protests. Young people packed their bags. As in the euro zone, the International Monetary Fund parachuted in with a bailout.
Its currency devalued by half. That boosted exports, like Mr. Palsson's fish, and trimmed costly imports, like cars. The weakened krona was hard on homeowners who borrowed in foreign currency, but Iceland's judges and policy makers orchestrated mortgage relief. Expensive foreign goods also ignited inflation. Consumer prices have risen 26% since 2008.
That rescue, in turn, weighed on the financial system. But unlike Ireland, for example, Iceland let its banks fail and made foreign creditors, not Icelandic taxpayers, largely responsible for covering losses.
Iceland also imposed draconian capital controls—anathema to the European Union doctrine of open financial borders—that have warded off the terrifying capital and credit flights that hit Greece, Ireland and Portugal, and now test Spain and Italy.
And instead of rushing into the sort of spending cuts that have ravaged Greece and Spain, Iceland delayed austerity. Initially, the country even increased social-welfare payments to its poorest citizens, whose continued spending helped cushion the economy.
Amazing how that works...