Overshooting of the exchange rate has caused enormous burning of assets and redistribution of wealth, more or less arbitrarily. The consequences of overadjustment of this magnitude can hardly be called “creative destruction”, to use Schumpeter’s turn of phrase. It is simply destruction that reduces the potential output of the economy. 4. According to textbook economics, exports should be stimulated when the domestic currency depreciates; hence relative wages become more competitive and domestic demand contracts. In theory, external shocks should therefore have a lesser impact on the domestic employment level than they would under a fixed rate regime. This probably applies to Iceland as well, to a certain extent. But there is reason to assume that the positive effect of currency depreciation on exports is less pronounced in very small countries, particularly those whose exports are of the same type as Iceland’s. Iceland’s chief export sectors – marine products and aluminium – cannot easily step up production for obvious reasons, irrespective of wage competitiveness. Iceland’s export companies are generally specialised for exportation. Only a tiny share of their production is destined for the domestic market. As a result, they cannot easily step up exports simply by shifting a larger share of their production to overseas markets. The domestic market is simply too small to absorb a significant share of the production of a domestic firm that has achieved full economy of scale. In order to boost exports, Iceland’s exporters must increase their production capacity through new investment, often with a long gestation period.

Although exports in most product categories over the last 20 years have increased in absolute terms; in relative terms, we have seen a clear shift from exports of productionrelated goods to exports of consumer goods. In the last two decades, the proportion of consumer goods has practically doubled and now amounts to more than 50% (cf. chart 2). 13 With this high share, Switzerland far outstrips other industrialised countries. 10  When comparing the share of exports to Asian countries with the German economy – which also registered a significant rise – the equivalent figure for Switzerland is still roughly 50% higher. 11  In the case of Switzerland, the surplus is significant even in quantitative terms. Averaged over the last few years, the surplus in Switzerland’s goods trade with Asia accounted for just over 2% of Swiss GDP, and this trend is on the increase. 12  The picture is similar for Switzerland’s trade with the BRIC countries. Switzerland’s trade surplus with China is also a reflection of the comparatively small share of imports from China. Busch (2010) attributes this to the fact that, because of Switzerland’s specialisation in pharmaceuticals and precision instruments, the Swiss industry can find only relatively few relevant intermediate products in China. Cf. Christian Busch (2010), Die Struktur des Schweizer Aussenhandels mit China – eine vergleichende Analyse. 13  The shift from capital goods to consumer goods is a general trend in Switzerland’s export activity across all trading partners. 4  BIS Review 157/2010  Chart 2  Source: FCA.