| Summary: | The fall of the Icelandic economy in 2008 highlighted the destructive effects of unbridled markets. Yet, the small Nordic country has experienced an impressive recovery, so much so that in recent years its annual growth rates have been significantly higher than those of the overwhelming majority of advanced capitalist countries. Several commentators have attributed this extraordinary accomplishment to the interventionist state policies adopted by successive Icelandic governments. The aim of this article is to debunk this myth by delving into the fragile foundations that the current Icelandic economic boom rests on. We argue that the substantial growth of the real exchange rate has made the rapid absorption of unemployment compatible with price stability during the recovery period. At the same time, the boom in tourism services made the impressive appreciation of the Icelandic króna compatible with the country’s external balance. However, the laissez-faire approach shown by the Icelandic authorities towards the krona appreciation hasseverely penalized most of the tradable sector, in which the bulk of skilled labor is usually concentrated. Arguably, the heavy specialization in the tourism sector, by restricting sources of productivity growth and international competitiveness, will render the current level of unemployment and real wages inconsistent with internal and external equilibrium in Iceland in the long run. Natural rate, Wage, Real exchange rate, Human Capital, Marxian
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