Iceland's Economic Model No Longer Works
Source: iStock.com/nevereverro
The North Observer, who takes a keen interest in the economic development of the North, draws the reader’s attention to a remarkable article by an Icelandic economist. It appeared in the business paper Viðskiptablaðið under the title Eigum við núna að viðurkenna að það er stöðnun á Íslandi?—Should we now admit that there is stagnation in Iceland? He analyzes the current state of his native country’s economy—despite having no direct business ties to it himself.
Egill Almar Ágústsson—an Icelandic economist, entrepreneur, and executive who has garnered attention for his commentary on the Icelandic economy—has poured a bucket of ice-cold water over the heads of self-important Icelanders who blindly believe their economic model is superior to that of the EU.
He holds an MA in International Economics and Finance (MBA/MA Econ & Finance) from Brandeis University in the United States (graduating with distinction, ranking in the top 3.5%) and is a co-founder and CEO of the company Operator in Palo Alto, California.
His professional analysis, grounded in statistical data, leads to a well-founded conclusion: the Icelandic economy suffers from systemic weakness and dysfunction. These issues stem from both psychological factors—specifically, narcissism and a false sense of superiority over EU nations—and failures of expertise and policy, namely the incompetence of local economists and the politicians who heed them.
That belief is no caricature. Halldór Benjamín Þorbergsson of Áfram Ísland—the campaign that went on to defeat the reopening of EU accession talks on August 29—summed up the matter this summer:
“We are in the Champions League. The European Union, in its current form, is at best competing in the middle of the second division.”
The statistics cited by the author completely dismantle the illusion of prosperity surrounding Iceland’s economy—which has effectively stagnated for nearly two decades. This stagnation is masked by high inflation and an artificially strong króna that has long since lost touch with the country’s actual economic reality.
Cumulative growth in GDP per capita to June 30, 2026, by starting year (annual average in brackets)
| Since 2007 | Since 2013 | Since 2017 | |
|---|---|---|---|
| Iceland | 6.8% (0.3%) | 12.5% (0.9%) | 2.7% (0.3%) |
| Eurozone | 12.9% (0.6%) | 16.4% (1.2%) | 8.4% (0.9%) |
| European Union | 18.3% (0.9%) | 20.2% (1.4%) | 10.8% (1.1%) |
| United States | 28.1% (1.3%) | 26.7% (1.8%) | 18.6% (1.9%) |
Table: Compiled from the figures published by Egill Almar Ágústsson in Viðskiptablaðið
His own reading of the table is blunt. “Iceland has experienced less growth than the Eurozone, the European Union, and the United States across all three periods, and the difference is substantial. Since 2007, GDP per capita has grown nearly twice as much in the Eurozone as in Iceland, nearly three times as much in the European Union, and four times as much in the United States.” He adds: “Had we grown at the same rate as the European Union since 2007, Iceland’s GDP per capita would have been nearly 10% higher in 2025.”
The gap is also opening faster. “From 2007 to 2017, Iceland kept pace with the Eurozone. Since then, however, GDP per capita has grown three times as much in the Eurozone as in Iceland, four times as much in the European Union, and nearly seven times as much in the United States.”
Nor does any of this depend on a conveniently chosen baseline. As the author observes:
“Every single starting year from 2004 onwards yields the same outcome: GDP per capita has grown more in the European Union and the United States than in Iceland, up to the end of the second quarter of 2026.”
Growth there has been, but it went on the extra people. “GDP was 34% higher in 2025 than in 2007, while the population increased by 26%.” As the economist puts it: “Living standards do not improve simply because the economy expands; rather, they improve when each individual produces more.”
The ranking follows. “Of the 33 European countries for which Eurostat publishes figures, GDP per capita grew more slowly than in Iceland in only five countries between 2007 and 2025: Greece, Luxembourg, Finland, Italy, and Austria.”
The króna completes the illusion. The sense of growing wealth, the economist writes, is an exchange-rate effect: “the impression in recent years that we are becoming wealthier than others stems from the exchange rate, not from increased per-capita production.” At home the two indices all but cancel: “the wage index rose by 37% while the consumer price index rose by 30%, so in terms of krónur, we perceive little difference.” Abroad they diverge: “wages in Iceland rose by 42% in euro terms (with the króna strengthening on top of the wage increases), while prices in the eurozone rose by 19%.” In July, “26.5% of card spending by Icelanders took place abroad—covering both travel and online shopping from foreign retailers—a higher proportion than ever before.” His conclusion: “It is simply the króna that has failed to adjust.”
Among the Arctic Council nations, only Finland has—since 2007—lagged further behind the US and the EU in growth rates than Iceland. This is due to the refusal of Finland’s self-important elite (who view Finland as the center of the universe and Finns as the pinnacle of creation) to acknowledge the obvious: the country’s economic model is long since exhausted, it is operating on 20th-century concepts and ideas, and the elite lack the political will, clear situational understanding, and necessary expertise to implement essential structural reforms.
The situation in Iceland is much the same.
The post-2009 crisis strategy of banking on tourism as an engine of economic growth failed to yield the expected results, largely because the sector generates relatively low value-added.
This Icelandic author puts figures to it. “Tourism is not a high-wage sector; in 2025, the total wages of full-time employees in the accommodation and food service sectors were 19% below the average—the lowest among the industries for which Statistics Iceland publishes wage data.” His verdict on the strategy is unsparing: “An already wealthy nation bet on a sector that generates less value per hour worked than the average and pays lower wages. The sector expanded the economy but pulled down the average.”
A similar outcome resulted from the policy of prioritizing job creation within the public administration—which bloated the Icelandic bureaucracy—as well as in education, healthcare, and social services; these sectors are relatively weak drivers of economic growth.
The job numbers follow the same curve. “Between 2010 and 2018, just over a third of all new jobs were created in tourism, but there has been no growth in employment in the sector since then. Since 2018, well over half of the job growth has occurred in public administration, education, and health and social services, with about a fifth in the construction industry.” The trouble, he writes, “is not a lack of growth elsewhere, but rather that none of that growth has proven substantial or valuable enough to drive per capita economic growth.”
As is the case globally, the bet on a predominantly service-based economy has not paid off for Iceland. The author’s candid economic analysis reveals the long-term negative consequences of this misguided economic course for a country with such a tiny population—a nation destined to continue trailing the US and the EU in terms of economic growth and per capita GDP.
Unfortunately, the author does not compare Iceland’s per capita GDP growth rates with those of the rapidly growing economies of Southeast Asia.
As the author’s analysis indicates, Icelandic policymakers and their economic advisors created a dysfunctional post-2008/2011 crisis economy that relies heavily on the service and public sectors at the expense of high-tech industries. However, depositors in Icelandic banks—mostly blue-collar workers from the UK who lost their money when the banks collapsed in 2008—could speak volumes about the professionalism and rationality of the Icelandic authorities, likely using language that is predominantly unprintable.
Ágústsson names what is absent. “Wealthy nations do not become wealthier by adding jobs that generate less value than existing ones; they grow richer through the creation of specialized, high-paying knowledge-based jobs.” Iceland has built almost none of it: “Since 2010, only 6.5% of new jobs in Iceland have been created in information technology, finance, and professional services, compared to 27% in the European Union and between 17% and 28% in the other Nordic countries. Of the 35 European countries for which Eurostat publishes data, Iceland is the only one where the share of jobs in these sectors has declined since 2010.”
An old horse (economic model) will not gallop any faster, no matter how hard you whip its haunches. It is more likely to drop dead from a heart attack or sheer exhaustion.
Narcissism and an infatuation with its own illusory perfection could cost Iceland dearly in the near future.
Source: Viðskiptablaðið (in Icelandic)
