Should Iceland Kill The Krona? : Planet Money Does it make sense for a country the size of Staten Island to have its own currency? Iceland wants to know.
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Should Iceland Kill The Krona?

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Should Iceland Kill The Krona?

Should Iceland Kill The Krona?

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(SOUNDBITE OF ARCHIVED BROADCAST)

MICHAEL LEWIS: In Iceland, the money rolled in, and the society basically granted a handful of egomaniacal alpha males the opportunity to become Vikings again, to get in their ships and go plunder in Europe and buy all kinds of things.

(SOUNDBITE OF SONG, "LITTLE TALKS")

NANNA BRYNDIS HILMARSDOTTIR: I don't like walking around this old and empty house.

RAGNAR PORHALLSSON: So hold my hand. I'll walk with you, my dear.

DAVID KESTENBAUM, HOST:

Hello, and welcome to PLANET MONEY. It's Friday, April 13. And that was Michael Lewis you heard at the top talking about Iceland on our show last year. Today we have a special guest host who lives in Iceland - former PLANET MONEY intern Baldur Hedinsson.

BALDUR HEDINSSON, BYLINE: Hello, hello, real great to be back.

KESTENBAUM: Baldur, back when you were here, you and I went to Iceland. We did some of what are my favorite PLANET MONEY stories. And at the time I remember an email from a listener saying, more Baldur. So today we got it for you, more Baldur.

HEDINSSON: And I am back because we are going to try to answer the question, should my country get rid of its currency, a currency we've had for almost a hundred years?

KESTENBAUM: There is an interesting economic argument that when your country is as small as Iceland, it really doesn't make sense to have your own money. How many people live in Iceland?

HEDINSSON: Well, according to our government, the population is 319,575.

KESTENBAUM: You really get the sense that they went around and physically counted every individual person. I was looking up population numbers in Staten Island here in New York. It has more people than Iceland. So this is like as if Staten Island had its own currency. The future of the Icelandic krona coming up after the indicator from Jacob Goldstein.

JACOB GOLDSTEIN, BYLINE: Today's PLANET MONEY indicator - 8.1. China's economy grew by 8.1 percent over the past year. Now, if we had 8.1 percent a year growth here in the U.S., well, basically it would mean somebody had screwed up the numbers...

KESTENBAUM: (Laughter).

GOLDSTEIN: ...Because there's no way we could have 8.1 percent a year growth here. You know, 3 percent a year, that's average. Four or five, that's like really fast, really good. But China's a whole different world. In China, 8.1 percent a year, this is actually on the slow side. I mean, for decades now, China's been growing at 10 percent a year. And 8.1 percent, this is actually the lowest economic growth has been in China in a few years.

KESTENBAUM: This GDP report, it's interesting because it also lays out where the growth is coming from. Jacob, you and I did that whole story when we were in China about how China needs to shift away from economic growth that's all about building new skyscrapers and bullet trains and airports because you can only build so many airports. And it needs to become a country where ordinary people actually buy more stuff.

GOLDSTEIN: And when you dig into this new report, it does look like China may be moving in that direction. Consumption, which is basically people going out and buying stuff, that was the biggest driver of China's economic growth. It actually played a much bigger role in economic growth than it did a year ago. And then on the other hand, investment, which is the part of economic growth that includes new skyscrapers and bullet trains, that played a much smaller role. So, you know, when you look at that, that is a promising sign for China's economy.

KESTENBAUM: Thanks very much.

GOLDSTEIN: Sure.

KESTENBAUM: All right, on to the show. Baldur, you have some Icelandic currency, some krona, there with you.

HEDINSSON: I do.

KESTENBAUM: So I was looking at it. Who's the woman with the gigantic hat on the 5,000 krona?

HEDINSSON: No, that would be Ragnheiaur Jonsdottir. She's a historic figure. I'm not sure that this hat would fly in Iceland at the moment, but back in the 1600s, it was pretty cool.

KESTENBAUM: OK, so the currency looks nice, but it is in trouble. And to get a sense for how much trouble, we called up your sister - could you say her name please?

HEDINSSON: (Speaking Icelandic).

KESTENBAUM: Everyone calls her Hubby (ph), right?

HEDINSSON: Yeah, I go by Hubby.

KESTENBAUM: OK, so Hubby is living right now on a neighboring island called Svalbard, which belongs to Norway, so they use the Norwegian currency there. And if you think Iceland is this cold, frozen place, Svalbard is significantly further north.

HEDINSSON: Yeah, it is so far north that it's almost underneath that plastic disc at the top of the globe that holds the globe to the stand. It's really, really high north.

KESTENBAUM: So it was plenty cold there when we called her. She was outside walking to the supermarket.

HUBBY: Oh, my God, I'm freezing. Oh, my hands.

HEDINSSON: It's really cold. People, they wear sealskin a lot. And she even told me about this one local guy who has a sealskin suit, like, a businessman suit.

KESTENBAUM: But made of sealskin. So people don't go out without wearing something warm, and they don't go out without a rifle.

HUBBY: You have to carry a rifle if go outside of Longyearbyen.

KESTENBAUM: Why do you have to carry a gun?

HUBBY: Because there are polar bears that live in Svalbard. And the population of polar bears is a lot bigger than the population of humans here. So everywhere you go you have to be aware that you can be attacked by a polar bear.

HEDINSSON: Now, polar bear attacks, that's manageable. But what's really annoying if you come from Iceland is trying to buy something.

KESTENBAUM: So Hubby gets to the grocery store. She picks up some stuff she needs - milk and flour. And she gets to the cash register, and there they have this currency conversion table taped up.

HEDINSSON: And this table at the checkout, it basically tells you how much each of these currencies is worth in Norwegian krona. And we asked her to read off the list.

HUBBY: We have the euro at 7.036. There is the U.S. dollar, 5.292. There's the Swedish crown...

KESTENBAUM: Boats come through here a lot from all over the world, so they take all kinds of currencies. The table shows the conversion rate for Danish krona, the British pound, the Swiss franc, the Japanese yen and the Canadian dollar is equivalent to 5.364.

HUBBY: And right at the bottom, we have the Icelandic krona for 0.000.

KESTENBAUM: Which means...

HUBBY: That means that there is no way that you can buy food with your Icelandic money because it's worthless.

HEDINSSON: (Laughter) So Hubby posted a photo on this Facebook and I thought it was pretty funny. It's so exact, like four digits. No chance it's a rounding error. Our currency is completely worthless.

KESTENBAUM: Hubby works in Svalbard, so she gets paid in the local currency and she gets by. But that currency table in this story, it illustrates the trouble the Icelandic krona is in. Here's how it happened. After the financial crisis, Iceland's government basically put the currency into lockdown.

HEDINSSON: So my country's economy crashed in 2008. And a lot of people who had kronas wanted to switch to a safer currency.

KESTENBAUM: So there was this mad dash. All these people were trying to dump their Icelandic krona and exchange them for U.S. dollars or for anything else. And the value of the krona, it started to plummet.

HEDINSSON: And my government decided it had to stop it. And it put in currency controls, meaning that it's very hard to take money out of the country. And now basically no one outside of Iceland wants to deal with the Icelandic currency.

KESTENBAUM: And despite the government's efforts, the currency, it has lost half of its value.

HEDINSSON: Yeah, so if you go to a store in Iceland and you want to buy something, something imported - say, toothpaste, an orange - everything that we import is crazy expensive.

KESTENBAUM: And Iceland being an island, you import a lot of stuff.

HEDINSSON: Yeah, it's like everybody took a huge pay cut. Basically, our salaries, they stay the same, but we can't buy nearly as much with it.

KESTENBAUM: So the question in Iceland right now is, what do you do with the Icelandic krona?

HEDINSSON: And one guy you'll hear on the news in Iceland is Arsaell Valfells. He's an economist at the University of Iceland. He's been saying Iceland should give up the krona entirely and use some other, more established currency.

KESTENBAUM: So this being Iceland, which, as we said, is a small place, you just invited Arsaell over to your apartment to talk. I joined in by phone. And he made this really interesting argument. Iceland, he said, is too small to have its own currency, just doesn't really make sense for it to have its own money. We told him Hubby's story about trying to pay for groceries in Norway and he said, yeah, that's what I'm talking about.

ARSAELL VALFELLS: This just goes to show that microcurrencies like the Icelandic krona, they don't fit the function of a proper currency. The function of a proper currency is to be, for example, a medium of exchange. The absurdity of being with your own currency in a population of 300,000 people is that there are more people using Disney dollars every day than the Icelandic krona.

KESTENBAUM: More people using what?

VALFELLS: The Disney dollar.

KESTENBAUM: Disney dollar?

VALFELLS: Yeah. You know, the Disney dollar that you get in Disneyland, which I think has the writing or the inscription, in chocolate, we trust. There are more people using Disney dollars than the Icelandic krona.

KESTENBAUM: This is the state of things in Iceland. One of your own economists is comparing your currency to the Disney dollar.

HEDINSSON: Wait. Wait. I don't find this argument completely convincing. For one, Disneyland is a global empire. Maybe it should have its own currency. And number two, we in Iceland, we've had the krona for almost a hundred years. And countries of all different sizes have their own currencies.

KESTENBAUM: Arsaell told us this idea that a country can be too small to have its own currency, it has a very distinguished pedigree going back to some economic work done in 1961 by one person in particular.

VALFELLS: The Nobel economic laureate Bob Mundell.

KESTENBAUM: Did someone just summon a Nobel Prize winner? I think they did. Here he is.

ROBERT MUNDELL: I'm Robert Mundell at Columbia University, professor of economics and Nobel Prize winner.

KESTENBAUM: Bob Mundell is here in New York, so I went up to talk to him. He got the Nobel Prize for his work on something called optimal currency areas.

Is Iceland too small to have its own currency?

MUNDELL: Well, I think it's very difficult to do it. It's very difficult to manage a currency in a small country like that.

HEDINSSON: He said the problem is that if you're small, it's easy to get pushed around by the markets.

MUNDELL: If you have a very small country, one of the big wealthy people in the world, Carlos Slim or Bill Gates or someone like that could buy up whole currency.

KESTENBAUM: Or some pension fund manager in California.

MUNDELL: Yes, buying up the currency and destroying the usefulness of that currency. But you don't get that normally.

KESTENBAUM: That wouldn't actually happen, he says. But it sort of sets the scale of the problem, right? If the world gets slightly more interested in Iceland and a tiny bit of the world's money flows into Iceland, that can have a huge effect on the value of the krona. For example, he says, during the boom, money rushed into Iceland and the krona appreciated. It got a lot stronger.

HEDINSSON: Yeah, people in Iceland bought expensive imported cars. My family took trips abroad. We all lived a very good life.

KESTENBAUM: However, when the crisis hit, a lot of that money rushed out of Iceland and everyone felt really, really poor. This, Bob Mundell says, is one reason your economy is a wreck right now. It has a very small currency. A larger economy with a larger currency would be safer.

MUNDELL: The bigger you are - it's like a lake. Any kind of shock - a big stone coming into a lake, a big lake, doesn't have any effect. But coming into a small pond, it has a big splash. So the effect is proportionately high. That's the issue of size.

KESTENBAUM: OK, so let's accept the idea for the moment that being a small island with your own currency can make life difficult. The next question is, what do you do? If you give up the krona, you've got to replace it with something.

HEDINSSON: Arsaell, the economist that we talked to earlier, he has an idea, and this idea has gotten some attention in Iceland. He said we should consider adopting the currency of Canada.

KESTENBAUM: The Canadian dollar, sometimes called the loonie because they have a loon on their $1 coin.

HEDINSSON: We'd go from money with our own Icelandic heroes on it to a bird. Arsaell doesn't really mind.

KESTENBAUM: You'd have a Canadian bird on your ones.

HEDINSSON: Yeah, and it's the loon, which is one of the most beautiful birds here in Iceland as well. So we call them loon, the Canadians call them the loonie, and why not have the loon or the loonie?

KESTENBAUM: No country has ever adopted the Canadian dollar before, but Iceland and Canada, he says, they have similar interests. They both depend on natural resources.

HEDINSSON: Both our countries have long, dark winters.

KESTENBAUM: And he says the Canadian dollar - it's very stable.

HEDINSSON: Arsaell - he had really thought this through. He'd calculated Iceland would only need a planeload of Canadian dollars. You could just fly them over and start replacing kronas with them.

KESTENBAUM: This may sound like a sort of joke idea - you know, flying over a bunch of Canadian dollars - but it got serious attention in Iceland, mostly because of this.

(SOUNDBITE OF ARCHIVED RECORDING)

UNIDENTIFIED MAN: (Speaking Icelandic).

HEDINSSON: This is the 12 o'clock news on national public radio in Iceland. And the guy coming up, he's Canada's ambassador to Iceland.

KESTENBAUM: His name is Alan Bones.

(SOUNDBITE OF ARCHIVED RECORDING)

ALAN BONES: We're certainly open to discussing the issue if Iceland makes that request. What - you know, the nature of the final agreement is - will depend very much on the expectations of both countries. But in a straightforward, unilateral adoption of the Canadian dollar by Iceland, we'd be certainly open to discussing the issue.

HEDINSSON: This definitely caught the attention of everybody in Iceland. But things quickly got awkward. So he was apparently going to say more about this at a conference, but somebody somewhere got upset, and he didn't even show up to the conference. And Canada has no further comment on the issue.

KESTENBAUM: This idea of adopting the loonie, it may not go anywhere. But the idea that Iceland should maybe give up its krona - that is being talked about pretty seriously.

HEDINSSON: Yeah. Our prime minister, Johanna Sigurdardottir, she said that the krona isn't really workable. Her party wants to give up the krona, join the European Union, and adopt the euro as our new currency.

KESTENBAUM: The euro. OK. So let's talk about that idea. There are some obvious downsides to the notion of hitching your currency to a larger economy. One word - Greece. As we've said a lot on this very program, part of Greece's trouble is that it gave up the drachma and it went on the euro. Having control over your own currency, that can be really useful. If Greece had the drachma right now, it could print more drachma to try and stimulate its economy. If it had the drachma, the drachma would be dropping in value, which would make Greece's exports cheaper. That might help Greece recover.

HEDINSSON: And right now, having our own currency, it's definitely helping Iceland. Yeah, it does cost more to buy toothpaste, but our currency being weak, that means it's cheaper for the rest of the world to come visit us. And Reykjavik, right now it pretty much feels overrun by foreigners. And even in the winter, when we never used to see tourists, now they're everywhere.

KESTENBAUM: So tourism is doing well. Also, fishing - those fish are now cheaper abroad, right? Exports are cheaper. We spoke to an economist who argued that this is all working the way it should, which is an argument for keeping the krona and just trying to find a better way to manage it.

HEDINSSON: But if you talk to people in Iceland, a lot of them will tell you that they have had enough. They are tired of these wild swings in the currency. And even before the crisis this was a big issue. We've had chronic problems with inflation. People here, they will tell you that they would love some German or Canadian stability.

KESTENBAUM: So you can understand why people might throw up their hands when you ask, what do you do with the krona? I mean, how do you decide? Do you keep it? Do you adopt some other currency? If you adopt some other currency, which currency? People start looking outside of economics for an answer.

HEDINSSON: Here, for instance, is the mayor of Reykjavik. Now, before you hear what he has to say, we need to explain that before getting elected, he was kind of a surrealist comedian. Now he's a surrealist politician.

KESTENBAUM: Reporters will ask him these serious questions and he'll give these answers, but you're never sure if he's being straight or if he's just mocking the whole political thing. Here's what he says about what should happen with the krona in an interview with Euronews.

(SOUNDBITE OF ARCHIVED RECORDING)

JON GNARR: We have the Icelandic krona, and we're having great problems with it because it's such a small currency. I would prefer the dollar because the dollar is much cooler than the euro. (Laughter) I mean, the euro isn't that cool. I mean, it's bland. I mean, it doesn't really - it's just - you know, the graphics of it are, like, quite dull. But the euro - but the dollar is cool. I mean, it has, you know, dead presidents and the coolness about it. So I would prefer the dollar, you know?

KESTENBAUM: Finally. You know, my feelings were being hurt through this whole podcast. Everyone's talking about the loonie or the euro - finally, the U.S. dollar.

HEDINSSON: David, you can rest assured the dollar is definitely on the table. And our central bank, it is scheduled to come out with a report laying out the pros and the cons of all our options in the coming months.

(SOUNDBITE OF SONG, "LITTLE TALKS")

HILMARSDOTTIR: There's an old voice in my head that's holding me back.

PORHALLSTON: Well, tell her that I miss our little talks.

HEDINSSON: Now, I would really want to know what you guys out there think, so please send us an email at planetmoney@npr.org.

KESTENBAUM: You can also find us on Facebook and Twitter and Spotify. I'm David Kestenbaum.

HEDINSSON: And I am Baldur Hedinsson. (Speaking Icelandic) - or thanks for listening.

(SOUNDBITE OF SONG, "LITTLE TALKS")

NANNA BRYNDIS HILMARSDOTTIR AND RAGNAR PORHALLSSON: (Singing) 'Cause though the true may vary, this ship will carry our bodies safe to shore. Don't listen to a word I say. The screams all sound the same. Though the truth may vary, this ship will carry our...

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