Today, Iceland is recovering. The three new banks had combined profit of $309 million in the first nine months of 2010. GDP grew for the first time in two years in the third quarter, by 1.2 percent, inflation is down to 1.8 percent and the cost of insuring government debt has tumbled 80 percent. Stores in Reykjavik were filled with Christmas shoppers in early December, and bank branches were crowded with customers.
To be fair, real GDP is still about 14 percent down from its 2007 peak, so Iceland hardly got off unscathed. But the human and social damage appears to have been much lighter than many expected.
But I thought austerity works? So why are the austerity economies stagnant?