THE BIG MAC'S CURRENCY LESSON

October 29, 2009

Iceland is losing all three of its McDonald's franchises, effective next weekend.  But the Big Mac's departure from Iceland, a victim of the financial crisis that sent the currency into a tailspin, is nonetheless a suggestive economic indicator, says the Wall Street Journal.

McDonald's Icelandic franchisee noted, in explaining his decision to throw in the patty, that unlike his local competitors, McDonald's imports most of its raw ingredients, from beef to special sauce, lettuce, cheese, pickles, onions and, we assume, sesame seed buns.  This reliance on imports has undercut McDonald's margins in the island nation, which saw the krona plummet by more than 80 percent after the financial panic took down the country's major banks, says the Journal.

But the lesson here is not about the dangers of globalization or the virtues of buying local, explains the Journal:

  • Since Iceland's banks collapsed last fall, and its currency with them, the cost in local currency of all imports, and not just fast food, has soared.
  • This has done nothing to "cushion" the blow to Iceland's economy from what amounted to an international run on its banks.
  • Instead, it has added a currency panic to a financial panic, and made Iceland's prospects bleaker than they otherwise might have been.

In countries such as Ireland, some critics of the euro have claimed that membership in the currency bloc has made its economic woes that much more painful, and that Ireland would have been better off if it could have depreciated its way out of trouble.  In the United States, too, there's a chorus arguing that we can devalue our way toward prosperity.  But debasing one's currency makes a country poorer, not richer, says the Journal.  Just ask the residents of Reykjavik, who now must travel 900 miles to get their Big Mac -- in Dublin.

Source: Editorial, "The Big Mac's Currency Lesson; McDonald's departure from Iceland is a suggestive economic indicator," Wall Street Journal, October 29, 2009.

For text:

http://online.wsj.com/article/SB10001424052748703567204574499001220443342.html

 

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