IRISH AND Icelandic voters have a shared hostility to bailing out private bank losses with taxpayers’ money, despite the many political, institutional and legal differences between the two states.
On Sunday the Icelandic electorate voted down a government proposal to resolve a dispute with the UK and the Netherlands arising from the collapse of its bloated banking system in 2008, based on a prolonged negotiation following an even more decisive referendum result 13 months ago.
The issue will now go to an international court in Brussels. The continuing dispute is bound to complicate Iceland’s negotiations to join the European Union, as well as its efforts to escape financial and investment isolation. These objectives have been steadily pursued by its coalition government, which brings together the Social Democrats and Left Greens, elected after the country’s economy fell apart after the banking crisis.
EU membership offers protection from such future shocks, they believe, despite difficulties over fishing and agriculture. They had hoped the substantially reduced net capital repayments and interest rates negotiated with the British and Dutch would influence voters, and that most of the capital sums due to those governments would be recouped from sale of the major bank’s assets. They had a two-thirds parliamentary majority favouring the deal. But President Olafur Grimsson vetoed the legislation, ordered a referendum and voters rejected it by a 60-40 per cent margin.
As Mr Grimsson put it after the vote: “The leaders of other states and international institutions will have to respect this expression of the national will”; such disputes must be solved, he said, on the basis of “democratic principles”. But the decision leaves Iceland vulnerable to a court ruling that could be worse than the negotiated arrangement. It is not easy to escape the international obligations publicly incurred by grossly reckless banking practices, even if they are the result of private risk and greed.
Those pressing for a referendum on Ireland’s bank bailout agreements with the European Union and the International Monetary Fund will gain heart from this result. But Ireland faces many similar legal problems, albeit within quite a different institutional and political setting. The Government banking guarantee of September 2008 locked taxpayers into underwriting the sector’s debts, while the EU and IMF have also insisted this be fully honoured.
Despite the two Icelandic referendum results its elected government did not unilaterally abandon legal obligations but rather sought to negotiate the best available deal. The country is still bound up with the international system and seeks to enhance that position by joining the EU. Without that support most Irish voters realise we would be far worse off.
The key issue here is multilateral action. Both Fine Gael and Labour sought a mandate from voters to ensure bank bondholders share the costs of the bailout, within an EU-IMF framework. This remains the best route to achieving the objective over the several years it will necessarily take to secure it.