It’s official – Iceland is emerging from recession, with growth up in the last quarter, and inflation and interest rates down. What lessons can we learn from our North Atlantic neighbours, and can Ireland follow Iceland out of the financial doldrums?
THE PRESIDENT OF ICELAND, Ólafur Ragnar Grímsson, expressed his deep annoyance at the start of the year at a joke about his country: “What’s the difference between Iceland and Ireland? One letter and six months.” The gag, first heard on the BBC’s daily current-affairs programme
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a year earlier, implied that Ireland was facing an economic collapse as severe as Iceland’s. In nationalistic vein, Grímsson said the joke was “just a recent example” of the “arrogance of the British”. A year later and the shoe is on the other foot. Ireland has embraced British generosity and Iceland has officially emerged from recession.
The British chancellor of the exchequer, George Osborne, published legislation on Thursday granting a €3.87 billion bilateral loan facility to Ireland. Two years after Iceland’s €7.5 billion IMF bailout, the North Atlantic island has returned to growth for the first time, recording 1.2 per cent growth in the last quarter. Inflation is at its lowest level since 2004, at 2.6 per cent, and the official interest rate has dropped from 18 per cent at the height of the crisis to a more manageable 4.5 per cent.
The Noble laureate Paul Krugman notes in his New York Timesblog that although Iceland had by far the biggest excesses, "through the magic of default and devaluation, it's actually doing better than Ireland". Patrick Honohan, the Central Bank governor, assessed this point in his report for the Banking Inquiry this year, noting that Iceland's losses were "almost 10 times those of Ireland when measured relative to each country's GDP".
So why what can Ireland learn from Iceland? In a blunt comparison between the two, a senior Icelandic government source privy to his country’s IMF negotiations said: “I think the blanket guarantee given by the Irish Government on all bank obligations was a big mistake which now needs to be paid for . . . We were not going to have the Republic of Iceland go into a default situation. Which is why we did not guarantee the banking system in its totality.” In a referendum in March to decide what to do about more than €5 billion lost by Dutch and British savers who had online Icesave accounts with Landsbanki, which went into receivership in October 2008, more than 90 per cent of Icelanders rejected a proposition to fully reimburse the money.
Despite impressions to the contrary, the Icelandic government never defaulted on its sovereign debt. The commercial banks, however, did default on their obligations, burning foreign creditors, including senior bondholders. The country’s three largest banks – Kaupthing and Glitnir held the top spots alongside Landsbanki – were nationalised immediately. The government did not pour good money after bad in a pointless effort to rescue its zombie banks. It cleanly pulled the plug on financial institutions that had no means of saving themselves.
There are other lessons too.
As a direct response to the country’s economic cataclysm, Icelandic citizens adopted the mantle of Howard Beale, the frustrated anchorman from the Sidney Lumet film Network, and protested en masse – a virtually unknown phenomenon in Iceland’s history. The “kitchenware revolution” of January last year saw thousands gather outside the Althing, the national parliament, adopting Beale’s slogan to proclaim: “We’re mad as hell, and we’re not going to take this any more.”
This cathartic uprising brought down the centre-right government that had been in the ascendancy in Icelandic politics for decades. The subsequent April elections saw the centre-left win a parliamentary majority for the first time and the election of Jóhanna Sigurðardóttir, the first woman to hold the office of prime minister.
As part of her programme of democratic renewal, the Icelandic parliament voted last June to establish a directly elected constitutional assembly “for the purpose of reviewing the Constitution of the Republic”. This 25-seat body will essentially rewrite the constitution and prepare a Bill that, if passed in parliament, will be put to a referendum in 2012.
There is scepticism in Iceland about this unique constitutional experiment. Elections to the assembly last week recorded the lowest electoral turnout in the country’s history, with only 35.9 per cent of voters going to the polls. Of the 523 candidates who put themselves forward, the successful ones tended to be celebrities. This low expression of support for Sigurðardóttir’s constitutional initiative suggests Icelanders believe their government is trying to change too much too fast.
As the shock of the economic collapse has subsided, the popularity of the new government and its authority to implement political reform have taken a hit. The constitutional assembly may yet become the stick that a resurgent centre-right will use to regain popular support. Lessons, perhaps, for an incoming Fine Gael-Labour government: the dynamics of politics changed quickly in Iceland as the immediate memory of the collapse waned.
Ordinary Icelanders have mixed views about their future. When the property boom collapsed, two friends of mine, Brynhildur and Hinrik, lost their jobs in architecture and property conveyance. When I visited earlier this year, they were living in a tiny two-room basement of their house, having divided the rest of their home into rental apartments. Trapped in a cycle of negative equity, Hinrik has no option but to work as a fisherman in the Arctic Circle two-thirds of the year. “A dramatic shift in the mentality of the people has occurred,” says Brynhildur; “we are revaluating every priority in our lives.”
Even more tax increases, spending cuts and salary cuts are promised for 2011. The Icelandic minister for finance cancelled a trip to Trinity College Dublin two weeks ago after the failure of attempts to legislate for a bailout for mortgage holders. In a country of only 320,000 inhabitants, up to 40,000 of them may now lose their homes.
Things will get much worse in the next year before they get better. A taste of the future?
Look and learn: What Iceland can teach us
Accountability is not just a word
In September Iceland’s former prime minister Geir Haarde became the world’s first political leader to face criminal charges for alleged economic mismanagement during the financial crisis. Special prosecutor Ólafur Hauksson indicated on Icelandic state television this week that fraud charges would shortly be brought in some of the 60 cases of financial crime currently under investigation.
Loss of trust in politics creates a funny vacuumIn June Reykjavik elected Jón Gnarr, a comedian from the newly established Best Party, as the capital's mayor. He was voted in on a pledge not to implement his promises. They include: "Stop corruption: We promise to stop corruption. We'll accomplish this by participating in it openly."
A change in government does not mean a change in political systemIcelandic commentators believe the country's reactionary phase may be at an end and that the political system will return to what it was. The popularity of the centre-right has increased as it watches the centre-left grow progressively more unpopular as it struggles to implement the conditions of the IMF programme.
In adversity there are always opportunities waiting to eruptBaldur Arnarson, a journalist at the Morgunblaðið newspaper, believes the crisis forced Iceland to become competitive and imaginative within its thermo-energy, fishing and tourism industries. Last April's eruption of Eyjafjallajökull proved to be "the best publicity the island could have hoped for". The government responded with an incredibly successful "Inspired by Iceland" marketing campaign. A third of the population contacted foreigners during "Iceland Hour" and encouraged them to visit. It worked. Tourism has increased by 7 per cent. Almost two tourists for every citizen holidayed in Iceland this year.
