A Tale of 2 Economies: Switzerland and Iceland

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INTRODUCTION
In the past year, one has not been able to open a financial newspaper without consistently seeing stories about the unfolding European debt crisis, which has become the headline story in the global economy. The reason for this is that as the state of affairs develops, there are implications for nearly every country in this new era of globalization. And the effects are felt no more than in the countries just outside of the fiscal euro-zone, which are the most heavily exposed to the financially endangered bloc of nations. Two of these nations are Switzerland and Iceland. Both economies navigate a new economic landscape filled with significant risks, and it will be crucial for these nations to take the correct steps to ensure economic growth in the near future. They provide an interesting point for comparison because of their similar status as “first world” nations, geographical locations near the fiscal euro-zone, banking struggles during the financial crisis, and significant currency swings in recent years, yet they have very different competitive economic advantages that require some similar and some different actions taken. The Swiss-franc and the krona, must be stabilized to healthy levels that will put both economies on a sounder footing. The policies of the two countries should diverge in the banking sector, which has always been a lucrative area for Switzerland, and not Iceland. Switzerland, which remains heavily dependent on this sector for profits, must continue to refocus its financial services industry to safer areas of the business where it thrives. Iceland should be less ambitious in this realm, ensuring that it continues to take steps that this sector remains merely stable and healthy. However, Iceland has its own unique opportunities for growth. The country has the ability to leverage its natural geothermal capabilities to form trade partnerships and to draw in Foreign Direct Investment, a huge opportunity given the worldwide uptick in “clean” energy spending. If these words are heeded, further growth can be achieved for these already developed economies.

EURO-ZONE CORRELATION
Because it is of such tremendous importance to the economies of both nations, it is necessary to outline just how both Switzerland and Iceland’s economic futures hinge upon the unfolding of the European debt crisis. Primarily, this is true euro-zone’s performance has a significant effect on both Swiss and Icelandic export revenues. Germany, Italy, and France, just 3 members of the zone, account for roughly one quarter of Swiss export destinations, while Iceland relies on the euro- zone for over 75% of its exports (Graph 3a). A slowdown in demand from any of these countries has damaging effects on Swiss businesses. Companies like Nestle, the world famous chocolate company, saw sales fall by over 20% in 2011 amidst tough economic times. Very recently, some confidence has been restored to the Euro-Zone after a bond swap agreement was reached for Greek bondholders. However, the Euro-Zone’s problems remain. New countries, such as Spain, have come to the forefront of global headlines and are in dire need of financial correction. The future of Europe’s debt crisis hinges on the region’s economic growth, which has been recently been abysmal (Graph 6). These countries must to undertake substantial structural reforms to restore growth. Austerity measures are simply not enough. The recent struggles of nations like Spain and Greece to hit their deficit objectives exemplify the difficulty of managing fiscal and financial instability when growth fails to occur as anticipated. During these times, economists keep a close watch on economic figures being released from the Euro-Zone. Statistics such as Germany’s monthly PMI (Purchasing Manager’s Index) give valuable insight into the demand for German factory goods. These results of such indicators help economists forecast their constantly revised growth outlook of Switzerland and Iceland...
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