The Committee to Nuke Elysium

“Excluding the financial system, the real economy is doing well,” Arsaell Valfells, a professor of business and finance at the University of Iceland, said in telephone interview. Retail spending was still shrinking, he said, but the export sector, consisting mainly of fish, aluminum and tourism, was improving.

“We’ve basically gone back to 2003 in terms of the level of standard of living,” he said. The worst has been felt by younger people who borrowed at the height of the bubble and are now having to reduce their debt, he said. “But they’ll come through this,” he added.

Iceland’s experience, he said, offered a lesson for the euro zone as it grappled with its own crisis: “This is the proper process. If you go through a bubble economy and you need to correct it, the answer is not to convert private debt into public debt. Rather it is to restructure the debt to the level of the assets.”

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The three biggest Icelandic banks, which had expanded aggressively during the credit bubble, all failed and were nationalized in October 2008. Cleaning up the mess left by one of those, the Icesave unit of Landsbanki, has soured relations with Britain and the Netherlands and delayed international aid.

Icelanders have resisted international pressure to make them fully reimburse the two governments for $5.4 billion they spent making whole Dutch and British depositors who lost their savings in the financial collapse. A March referendum in the nation of 300,000 people on whether to support repayment was overwhelmingly rejected by voters.