The Icelandic economy has been in the news a lot recently. I guess everyone has already read something or other about this, if not Claus has a post here (and here) which gives background and links.
Basically I had been giving the Iceland economic 'problem' a rather wide birth (until today that is), since I think it is, when all is said and done (and with full apologies in advance to all Icelanders), 'pretty small lava'. In addition since my "global imbalances" theoretical model doesn't follow the well-trodden Roubini-Setser path, and since underlying euro weakness means that the dollar can't possibly fall in any dramatic way over the longer term, and since I don't find it necessary or desireable to treat every fresh crisis as just one more example of my own pet thesis, and since anyway I have enough on my plate right now, I thought, well, let's give this party a miss. There will be plenty more later.
(For those who have missed out Brad Setser has been posting on Iceland here. Basically I have been arguing for ages with Brad that his work - which tries to address the imbalances issue without any reference to the underlying demographics - is rather like putting on a performance of Hamlet without the presence of the Prince himself. What you end up with is a good deal of interesting data, but with no theoretical model to put it all together around. And then there is the 'next crisis is around the corner-ism' of Nouriel Roubini which seems so much to drive things. My guess is that the next crisis may eventually come round the next corner, and it has a name: Iran, and what this could do to global oil prices, and what a huge spike in global oil prices could do to an already extremely weak and debt-ridden Italian economy, which is, IMHO, the weakest link in the global chain, but then, this is not an economics blog, and this is only a guess, perhaps it would be better if I try to keep to my promise to myself and stay away from all this here).
But then I open the FT today and read this:
"The Icelandic krona’s sharp fall, which put it at a 4½-year low against the euro on Tuesday, has provoked debate between political and business leaders about the country’s possible membership in the eurozone".
Iceland joining the euro, what a whacky idea was my first thought, but then 'hmmm' was my second one. Basically it is very hard to see what the logic of Iceland joining the eurozone would be, the zone itself already has got more than simply teething problems of its own to worry about, and it is hard to see how losing control of its interest rate, currency and monetary policy would help the Icelanders with the problems they have (indeed, as some have noted, it might well only add to them):
"Carsten Valgreen, chief economist at Danske Bank, said the small size of the Icelandic economy and its heavy reliance on a small number of industries left the country exposed to global market fluctuations, whether it joined the euro or not.
“The advantage would be that the credibility of monetary policy would increase,” Mr Valgreen said. “But you should also ask yourself whether a tiny economy in the middle of the Atlantic, largely based on fishing and aluminium, is really aligned with the eurozone.”"
But them, as I say, I thought hmmmm, let's take a look at the demographics here, and that's when I got that 'wow' sensation. I went to Statistics Iceland, and I read the population blurb. This is what I found:
Live births in Iceland were 4,280 in 2005. Total fertility rate was 2.1 which is higher than in most other European countries. Turkey is the only country in Europe with higher total fertility rate than Iceland. The total fertility rate has remained relatively stable in Iceland since the early 1990s. During the 20th century total fertility peaked during the 1960s to a rate of 4.3.
In recent decades Iceland has experienced pronounced increase in the age of mothers at childbirth. In the late 1970s the mean age of primparas was 21.3 as compared to 26 in 2001-2005. During this period, age-specific fertility in the age groups under 25 has declined considerably whereas fertility above the age of 30 has increased slightly.
The share of extra-marital births is higher in Iceland than in any other country of Europe and in 2005 almost two thirds of all children were born out of wedlock. The majority of these children were born to parents cohabiting and only 14.4 per cent of all mothers were not living with the child’s father. The share of extra-marital births is considerably higher in the case of first births than with children of higher parity.
Now here we can see four things.
(i) Fertility is currently near replacement level.
(ii) First birth age is high on average
(iii) Fertility first dropped and then rebounded
(iv) There is a level degree of cohabition.
Now (ii) is normally a low-fertility indicator, while (iv) is normally associated with slightly higher levels of fertility. (iii) is consistent with a slow process of birth postponement, with TFRs rebounding slightly later, as the 'missing births' appear.
So then I went and checked my lists. Iceland currently has a fertility (TFR) of 2.0, it has a life expectancy of 80.19 (which is comparatively high), and it has a median age of 34 . Now it is this latter median-age data point which produced the wow sensation, since this is very young, and puts it in the same zone as the United States, Ireland and New Zealand, ie by median age it is the archetypal country par excellance to be having the kind of credit/housing driven boom, and balance of payments deficit it has been experiencing (that is according to my 'stylised facts' version of events). This is something I hadn't picked up on before, so I took a look at the age pyramid, and sure enough it looks remarkably solid (Iceland even had minimal, but significant, inward migration last year, 3,860 in 2005).
So there we are, one problem more or less resolved. Iceland is not fundamentally unstable, and isn't about to collapse anytime soon, run on the krona or no run on the krona. Iceland probably needs to edge the retirement age upwards to compensate for the increasing life expectancy, and invest plenty in education and broadband internet connections, then they might find that being 'a tiny economy in the middle of the Atlantic' isn't really as bad as some people think it is. Of course none of this means that Iceland might not consider at some stage joining the European Union, but that, as someone once said, is another country.