Iceland’s recuperation seems to offer two big lessons for Ireland and other troubled euro-zone countries. The first is that the extra cost to a country of not standing by its banks can be surprisingly small. Iceland let its banks fail and its GDP fell by 15% from its highest point before it reached bottom. Ireland “saved” its banks and saw its output drop by 14% from peak to trough.
A second lesson is that the benefits to a small country of being part of a big currency union are not all they were once cracked up to be. When panicky investors were rushing out of small currencies in the autumn of 2008, the euro seemed a haven. There was much talk in Iceland of fast-tracked membership of the European Union and, ultimately, the euro. Two years on, the euro looks more like a trap for countries struggling to regain export competitiveness.
After two years of analysis, West and Bettencourt discovered that all of these urban variables could be described by a few exquisitely simple equations. For example, if they know the population of a metropolitan area in a given country, they can estimate, with approximately 85 percent accuracy, its average income and the dimensions of its sewer system. These are the laws, they say, that automatically emerge whenever people “agglomerate,” cramming themselves into apartment buildings and subway cars. It doesn’t matter if the place is Manhattan or Manhattan, Kan.: the urban patterns remain the same.