Walk through the streets of Reykjavik and you cannot fail to notice the vast cathedral of black concrete and multi-faceted reflective glass rising from its enormous seafront construction site — a monumental building which seems strangely out of place in such a predominantly low-rise city. The Harpa, which is the brainchild of Danish-Icelandic artist Olafur Eliasson, will house Iceland’s new opera house and conference centre. Putting paid to fears of a suspension of work at the site, the building will finally be inaugurated on the 4 May.

In the wake of the collapse of the island’s banks in 2008, Portus Group, the private investor behind the development, which had an intial estimated cost of 12 billion krónur (74 million euro), was forced to appeal to the island’s government and Reykjavik city council for help to keep the project going. The nation’s administrators did not flinch, and work on the architectural masterpiece is now nearing completion. But what became of the Icelandic crisis?

Too big to save vs too big to fail

Although reeling from the effects of a banking collapse that plunged it into virtual bankruptcy, Iceland did not opt for draconian austerity measures. In contrast to the trend in continental Europe, the island decided to take more time to implement a “budgetary adjustment” that was sufficiently gentle to enable a number of projects to continue.

The cuts introduced by the government are to result in savings equivalent to 10% of gross domestic product (GDP) over three years — a far cry from the measures adopted by authorities on another island that is often compared to Iceland, which had also been hard-hit by the crisis. In 2011, Ireland is aiming to reduce its deficit from 32% to 9% in the space of just one year. Today, Reykjavik has announced that it has recovered from recession – growth is expected to reach 3% this year — and is coping with its debt without too much effort. How did this minuscule economy (320,000 inhabitants) manage to resurface in just two years?

Economists have proposed three explanations. The devaluation of the Icelandic króna: the sudden drop in the value of the island’s currency, which fell by 40% at the end of 2008, has had a positive impact on fish and aluminium exports. The principle of “too big to save”: the exact opposite of the “too big to fail” dogma, which has held sway in Europe and the United States, forcing governments to prop up major financial institutions whose collapse would have a domino effect in their banking systems.

Country’s indebted households yet to bounce back

In Iceland, the assets of the three major banks were far too big (valued at ten times GDP in 2007) to be fully rescued, and the state fell back on a policy of only buying back “internal assets”, that is to say loans to private individuals and companies on the island. As a result, shareholders were forced to accept losses on foreign assets, which were more numerous. Austerity measures that were less severe than those adopted elsewhere: in 2009, the Iceland’s government and social partners signed a “social stability” pact, designed to protect the welfare of its citizens.

Although recovery, driven by exports from Iceland’s very open economy, now appears to be underway, the country’s heavily indebted households have yet to bounce back. Consumption is still down by 20% on previous years. The rate of employment, which rose to 9.7% at the height of the crisis, has now fallen back to around 7% — a far cry from the situation in Ireland where unemployment has now exceeded 14%.

Sigridur Gudmunsdottir is one of the thousands of Icelanders who fell victim to a crisis whose causes had nothing to do with her. When it began she had what she dubs a “2007 job” with the pleasant working conditions and generous pay now associated with the good years of the noughties. “You often hear people saying that we partied too much, and that we over-borrowed and overspent. But that is not true: only a tiny part of the population of Iceland really took advantage of those times,” she complains.

Since the crash, everyone talks about GDP and public debt

Laid off at the height of the recession, Sigridur, who is now 50, has gone back to university. “That way I can get student funding, which is higher than unemployment benefit,” she explains. In 2006, she took out a property loan of 11 million krónur (68,000 euros) to buy herself a house. In the wake of the crisis, the loan which had an inflation-linked component ballooned to 14 million krónur (86,000 euros). With in a few months, she was caught in a trap: on the one hand, the size of her loan was increasing, while on the other, the actual value of her property was plummeting.

Today Sigridur still does not know how she will manage to pay back her debts, but she does not feel sorry for herself: “Some Icelanders have to deal with much more difficult situations. The people who took out foreign currency loans are much worse off.” As a rule, Icelanders do not like to grumble: afterall, life on the island has always been tough. Would she consider emigrating like so many of her countrymen? “That’s impossible, I’m too attached to my Icelandic roots.” At the same time, she does not think that the country is coping too well. “Ask anyone in the street. No-one believes there is a recovery...”

Listen to people in Reykjavik, and you will be struck by the huge contrast between the optimism of politicians who are convinced that the crisis is behind them, and ordinary citizens trapped by the island’s virtual bankruptcy who are struggling to get back on their feet. Since the crash, everyone talks about GDP and public debt, considered to be the only relevant policy indicators — a view that also prevails elsewhere in Europe. Having forced certain banks to accept bankruptcy, and embarked on a policy of “gentle” austerity, the island should now decide to seek alternative instruments to measure the well-being of its population.

Translated from the French by Mark McGovern