How Iceland Got Its Groove Back

Don't look now, but Iceland's economy is growing. Tourism is up, the standard of living remains high, and unemployment is down to 7%. "For a country whose entire financial system collapsed, Iceland is doing remarkably well," the IMF's mission chief there tells the Washington Post. Why? In part because Iceland charted a unique course through the financial crisis: It let its big banks default and its currency collapse, and poured money into its economy and social safety net, raising taxes on the wealthy to do so.

Those moves were born in part out of necessity—the government simply couldn't bail out banks that large—and other countries couldn't necessarily do the same. Countries like Greece and Italy can't just let their currency plummet, for instance, because it's tied to the euro. But Iceland's devalued currency made its goods cheap, with exports and tourism each up 11% last year. "What we had before was some sort of irrational exuberance," one Icelandic economist says. "That has left, and maybe that's a good thing." (More Iceland stories.)