RACHEL MARTIN, HOST:
Iceland is hot. It's one of the hottest tourist destinations in Europe. So when the Icelandic budget airline WOW went bust this year, it wasn't just a few thousand tourists who were left in the lurch. The entire Icelandic economy was left stranded too. Cardiff Garcia and Alexi Horowitz-Ghazi from our daily economics podcast The Indicator From Planet Money explain.
ALEXI HOROWITZ-GHAZI, BYLINE: For most of its modern history, the tiny volcanic nation of Iceland has been dependent on two things - geothermal energy and fishing.
CARDIFF GARCIA, BYLINE: In fact, back in the 1960s, the country's economy was so dependent on fishing that there was a kind of herring bubble that collapsed in the late 1960s. But in the 2000s, the country turned to banking and bet big on the island's future as a financial services hub.
HOROWITZ-GHAZI: Money flowed in initially. But when the financial crisis hit, Iceland was hammered. Unemployment spiked, and the country's debt levels soared. And then Iceland blew up, literally.
(SOUNDBITE OF NEWS MONTAGE)
UNIDENTIFIED REPORTER #1: Ash clouds are billowing from a volcano in Iceland. And they've grounded flights in Britain, Ireland and across continental...
UNIDENTIFIED REPORTER #2: Volcanoes creating rivers of lava more than five football fields long and sending smoke more than two miles high.
GARCIA: So when a volcano sent a huge plume of ash over Europe, it seemed like it might have just been adding insult to injury.
HOROWITZ-GHAZI: Instead, the volcano presented an unexpected opportunity and ended up showcasing Iceland's extraordinary natural beauty. And once the skies had cleared, the tourists started coming.
GARCIA: An entrepreneur named Skuli Mogensen saw an opportunity to compete with the national carrier. That was Icelandair. And so he started a discount airline called WOW Air.
HOROWITZ-GHAZI: WOW sold tickets at bargain basement prices, and the tourists came in droves. Palli Borg, former director of business development at WOW, says that Icelanders across industries were eager to jump on the new tourism bandwagon.
PALLI BORG: I think it is just in our genes. If there's a new type of fish that comes into our waters, basically, we just go full at it. And everybody has a new boat, and they try to get that. This time, it was tourism.
HOROWITZ-GHAZI: By 2016, tourism had become both the country's largest export and its biggest private employer.
GARCIA: By 2017, Iceland was hosting upwards of 2 million tourists a year, meaning there were more than six foreign visitors for each native Icelander. And in less than a decade, Iceland had become one of the hottest tourist destinations in the world, and tourism had grown to account for more than 8% of the country's GDP. So when WOW went bust earlier this year, it meant that one of the country's main economic channels had been cut off. Iceland's central bank has cut interest rates to their lowest level in almost a decade in an effort to stimulate the economy.
HOROWITZ-GHAZI: But there is a silver lining. The slowdown will give the government an opportunity to improve infrastructure and, ultimately, to help safeguard the country's economic future. The trick to rebuilding sustainably may be to escape the mentality that WOW executive Palli Borg says fueled the banking collapse and, in some ways, characterized the tourist boom.
BORG: I think that it was kind of close to the hearts of a lot of Icelandic people that it's just this short-term rush, and we like it, and we love it. We're not big believers in planning long-term.
GARCIA: Palli says that despite this year's dip in visitors, the tourism boom that WOW Air helped to ignite has fundamentally reshaped the country's economy and that, for better or worse, those changes are likely here to stay.
HOROWITZ-GHAZI: Alexi Horowitz-Ghazi.
GARCIA: Cardiff Garcia, NPR News.
(SOUNDBITE OF SIGUR ROS' "HOPPIPOLLA") Transcript provided by NPR, Copyright NPR.
