Note that Iceland is a small, open economy and fish accounts for 40 percent of Icelandic exports. It does not hurt that Norwegian cod prices have risen 20 percent over the last year; I cannot find a separate figure for Icelandic cod prices but that is a likely major factor behind the Icelandic resurgence. Here is a separate, brief report on the boom in the Icelandic fishing sector. Especially when it concerns small countries, always look first for the real shocks.
As an aside, there seems to be a system of fairly flexible wages for the major export:
The lay system of remuneration is used extensively in fisheries. Under this system, fishermen are paid a share of the catch value, perhaps after subtracting some costs, rather than a fixed wage. There may, however, also be a fixed wage element, so that fishermen get a share of the catch value in addition to the fixed wage, or a fixed wage as a minimum in case the fishing trip turns out to be unrewarding.
That is a Norwegian source about fisheries worldwide and not Iceland-specific, and here is another general source on compensation for fishermen with a similar message; can anyone speak to Iceland in particular?
Krugman writes: “And nominal wages are downwardly rigid. That’s simply a fact, true always and everywhere.” But that is an overstatement, especially when an output-linked and value-linked bonus system is in effect.
Iceland has had both currency flexibility and, it seems, a higher than average degree of wage flexibility in the major export sector, automatically built in at that. (If further and more targeted sources contradict this portrait I will gladly report the update.) That real wage flexibility may or may not be a major factor in the Icelandic comeback (only 4,000 fishermen in the whole sector, and the fisheries already do their accounts in euros), but it does show the standard theory of optimum currency areas should not be applied here without considerable caution.
Finally, note that a flexible exchange rate does not bring all of the wage-reducing benefits of yesteryear. Workers are employed increasingly in domestic services (health care, education) and many export sectors are less labor-intensive than before, at least in the West. With the progress of mechanization and globalization, the ability to cut your real wages rapidly for your exports is arguably diminishing in value. The relevant rigidities are becoming increasingly domestic, it would seem.