Small states in international health crises : Iceland鈥檚 response to the global COVID-19 pandemic

Abstract

This paper analyses Iceland鈥檚 macroeconomic policy responses to the COVID-19 pandemic during the first phase of virus contagion in Western Europe (January-June 2020). The country鈥檚 smallness, as evidenced by trade openness and economic specialisation, provided for acute crises in Reykjav铆k鈥檚 fight against the virus as a lack of local manufacturing forced the government to procure medical supplies, equipment, and pharmaceuticals from a crowded and competitive international market. The country鈥檚 reliance on tourism resulted in massive economic loss as North Atlantic economies implemented travel restrictions and closed national borders. However, the Icelandic government鈥檚 massive welfare and economic rescue packages kept the national economy afloat, earning praise from world markets. The intervention of the Icelandic Central Bank into currency markets, in particular, proved sufficient in stabilising the value of the national currency. Reykjav铆k鈥檚 skilful macroeconomic governance during spring and summer 2020 allowed the government to access revenue independent of taxation. This paper finds that although Iceland was disadvantaged by its size during critical phases of virus spread, the country鈥檚 smallness and control of an independent national currency enabled a robust macroeconomic response to stabilise wages and the national economy, mitigating the impact of the concurrent global recession.