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A tale of three countries: recovery after banking crises. Bruegel Policy Contribution 2011/19, December 2011

Darvas, Zsolt (2011) A tale of three countries: recovery after banking crises. Bruegel Policy Contribution 2011/19, December 2011. [Policy Paper]

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    Abstract

    Iceland, Ireland and Latvia experienced similar developments before the crisis. However, the crisis hit Latvia harder than any other country, and Ireland also suffered heavily, while Iceland exited the crisis with the smallest fall in employment, despite the greatest shock to the financial system. • There were marked differences in policy mix: currency collapse in Iceland but not in Latvia, letting banks fail in Iceland but not in Ireland, and the introduction of strict capital controls only in Iceland. The speed of fiscal consolidation was fastest in Latvia and slowest in Ireland. Recovery has started in all three countries. • Iceland seems to have the right policy mix. Internal devaluation in Ireland and Latvia through wage cuts did not work, because private-sector wages hardly changed. Productivity increased significantly in Ireland and moderately in Latvia, but only because employment fell more than output, with harmful social consequences. • The experience with the collapse of the gigantic Icelandic banking system suggests that letting banks fail when they had a faulty business model is the right choice. • There is a strong case for a European banking federation.

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    Item Type: Policy Paper
    Subjects for non-EU documents: Countries > Ireland
    Countries > Latvia
    Countries > Iceland
    EU policies and themes > Policies & related activities > economic and financial affairs > financial crisis 2008-on and consequences/reforms
    Subjects for EU documents: UNSPECIFIED
    EU Series: UNSPECIFIED
    ["eprint_fieldname_eusries" not defined]: UNSPECIFIED
    EU Annual Reports: UNSPECIFIED
    Series: Series > Bruegel (Brussels) > Policy Contributions
    Depositing User: Phil Wilkin
    Official EU Document: No
    Language: English
    Date Deposited: 16 Jan 2012 13:59
    Number of Pages: 18
    Last Modified: 16 Jan 2012 13:59
    URI: http://aei.pitt.edu/id/eprint/33334

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