19 December 2012

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Iceland: The Road to Recovery
19 December 2012
Revolve |

transport Feature by RevolveTeam

Iceland is the only country in Europe to have deposed its leader for “gross negligence.” The island is also the fastest to turn around and counter the economic crisis, writes Andrew Canning.

Laxness and Independence

“The tyranny of mankind; it was like the obstinate drip of water falling on a stone and hollowing it little by little; and this drip continued, falling obstinately, falling without pause on the souls of the children.” So go the words of one of Iceland’s finest literary figures, the Nobel laureate, Halldór Laxness.

Published in two volumes in 1934 and 1935, Independent People (Sjálfstætt fólkin Icelandic) is a social realist critique of the plight of Icelandic farmers in the early part of the 20th century.

Laxness’ words were a damning indictment of the working conditions of the Nordic island’s farmers, only recently emancipated from debt bondage. Through the telling of the story of Bjartus, a sheep farmer determined to become financially independent by toiling away on his plot of land, Laxness also issues a more fundamental critique of the governing laws of economics.

Wrestling with the Norwegian and Danish monarchies, Iceland declared independence in 1918. Previously one of the least developed and poorest countries in the world, the industrialization of the fishing trade and Marshall Plan aid after the end of the Second World War helped to turn around the fortunes of one of Europe’s most sparsely-populated countries.

These changes brought startling economic growth to the island during the 1970s, rapidly turning it into one of the world’s richest nations. Iceland joined the European Economic Area in 1994 and undertook a wholesale privatization of its banking industry in the early 2000s. Integration into the globalized economy was, as Iceland was soon to discover, only a one-way street.

Slippery Slope

In 2007, the U.S. housing bubble which, until then, was artificially inflating large parts of the world economy, finally popped. The subsequent panic provoked an enormous, systemic financial crisis. Despite its geographical isolation, the Nordic country of just 320,000 habitants was spared none of the secondary effects.

Having chosen to build its house on foundations of sand, Iceland was one of the crisis’ first victims. It would be no exaggeration to say that Iceland was literally staring down the barrel of bankruptcy, its (privatized) banking sector having racked up massive debts almost equivalent to the entire holdings of the Iceland National Bank.

In one fell swoop Iceland tore up the rule book of Brussels’ austerity orthodox that was to be imposed on numerous countries from Ireland to Greece in the years to come.

With the country facing economic meltdown, the Icelandic authorities took the unprecedented step of re-nationalizing its three biggest banks: Glitnir, Kaupthing and Landsbanki. In one fell swoop Iceland tore up the rule book of Brussels’ austerity orthodox that was to be imposed on numerous countries from Ireland to Greece in the years to come.

“The size of the banking sector, roughly 10 times Iceland’s GDP, made it impossible for the Icelandic state to save the banks. In other words [they]were too big to save,” explains Gudrun Johnsen, Assistant Professor at the Reykjavik University’s School of Business.  Johnsen continues:

“The boldest and biggest accomplishments of the Icelandic authorities during the collapse of the banks were to alter the order of claims of the bankrupt estates – meaning that deposit-holders received priority claims over bondholders. This saved the Icelandic economy from total collapse and chaos, given the fact that the three banks amounted to over 95% of the banking sector, in Iceland, in terms of their assets.”

Instead of bailing out the banks with tax revenues, Iceland protected account holders before letting the edifice crumble. Icelanders had overwhelmingly voted against (90%) the so-called ‘Icesave proposal’ of refunding the banks’ foreign account holders in March 2010. This measure would have meant transferring roughly 4% of Icelandic GDP to the UK and 2% to the Netherlands, which prompted the former to enact anti-terrorist legislation in 2008 to freeze Icelandic financial assets in the UK. Icelanders argued unequivocally that they were not going to be held responsible for the debts of a private bank. In April 2010, another vote was taken, with the  government hoping to get the result it desired with a publicity campaign eager to get the population behind the measure. Again, the proposal was shot down by a majority of 60%.

This totally unique approach to the crisis in Europe of prioritizing democratic pragmatism over immediate financial considerations set the tone for what was to come next.

This totally unique approach to the crisis in Europe of prioritizing democratic pragmatism over immediate financial considerations set
the tone for what was to come next.

Haarde’s Trial and Hauksson’s Investigation

Protests broke out sporadically in the early part of 2009 and quickly intensified with protesters calling for the resignation of the right-wing government for its alleged irresponsibility both before and after the outbreak of the crisis. Elections followed in April 2009 and a new left-wing government was elected, supportive of the protest movement and determined to put in motion its reform process.

The Icelandic Parliament conducted what it called a “truth commission report”, published in 2010, that accused the former prime minister, Geir Haarde, of “gross negligence” in failing to keep Icelandic banks under control and for withholding information that showed the island was heading for financial meltdown. The 2,300 page report is the result of a thorough investigation into the crisis and depicts an artificially inflated financial system that was infested with corruption and exacerbated by regulatory negligence.

“The Parliamentary Special Investigation Commission had truly unique data privileges, so Iceland is the only country which knows what happened to its banks and why the crisis hit the country the way it did,” Johnsen explains. This, again, was another extraordinary step that the country was willing to take.

The report eventually led to Haarde appearing in a special criminal court (Landsdomur), set up by the Parliament that met for the first time in its 100-year history to discuss the case against the only politician in the world to stand trial since the international financial crisis first hit in 2008. Haarde was eventually to be exonerated in April 2012 of three charges of failing to rein in the country’s banking sector but was charged with failing to hold dedicated cabinet meetings ahead of the crisis, although ultimately he managed to escape punishment.

Haarde nevertheless claimed he would take his case to the European Court of Human Rights: “I have always found this charge to be even more ridiculous than the others […] and I am therefore seriously considering whether to take this matter further,” he declared at the end of the trial.

While the Haarde trial was an important step in bringing those deemed responsible to account, many Icelanders still feel it was not enough. “I think the Geir trial is important in terms of accountability,” explains Anna Andersen, Managing Editor of The Reykjavik Grapevine, an English language magazine based in the capital. “At the same time, people are critical of the fact that only Geir is being tried, that one person is being blamed. Perhaps that’s not fair.”

Perhaps indeed, which is why, another twist in the plot saw Iceland take another unique and somewhat bolder measure: it appointed Ólafur Þór Hauksson, a former district commissioner in rural Akranes, to hunt down the country’s economic miscreants.

“This is a criminal investigation and follows the same procedures as any other such investigation, even if it is connected to banks and businesses and a lot of specialized knowledge is involved,” Hauksson told the Huffington Post in 2009. “What we think banking is, this picture was incorrect, it had no basis in reality. This collapse last fall [2008] surprised most Icelanders. Even if there were a few  warning voices, I think it absolutely caught the nation off guard.”

Hauksson’s investigation led to the first criminal prosecution following the financial crisis of the country’s former permanent secretary at the Ministry of Finance for insider trading in April 2011. In December 2011, criminal charges were also brought against the former CEO of the now bankrupt Glitnir Bank.

Bumpy Road after Rapid Recovery

While the majority of the Eurozone plunged into recession, Iceland’s extraordinary measures, which without recourse to hyperbole, would not have seemed incongruous in a Hollywood blockbuster, started to take their effect. The island’s economy grew by 3.1% in 2011, higher than the Eurozone’s anaemic 0.7% and higher as well than its Nordic neighbors, Sweden (1.1%), Norway (2.5%) and Finland (2.9%).

Tourism, now the country’s third most important revenue stream after fishing and aluminium, has started to recover as well. The government and the private sector invested some €4.5m in a promotional campaign just as the now-infamous Eyjafjallajökull volcano erupted in 2010, causing travel pandemonium across Europe. Adventurous touristsnwere invited to come and discover more about the country whose volcanoes were hitting the headlines and the integral role they play in the island’s mystique.

Iceland finds itself at a critical crossroads between deeper EU integration or turning its interests across the Atlantic.

Dubbed “an economic enigma” by the Belgian economic review, Trends, Iceland now hopes to sustain or even increase the 700,000 tourists who make the trip each year to discover more about the island’s volcanoes, geothermal pools and exquisite nature. Once put off by its reputation as an expensive destination, tourists slowly began to return thanks in part to the fact that the Icelandic krona had lost almost half its value since the start of the crisis.

However, unlike many a Hollywood blockbuster, there’s no fairytale ending in sight. “We’ve gone a long way, however we are not over the hardship yet,” tempers Johnsen. With budgets still tight, the country’s government is currently considering a proposal to triple the current rate of VAT on accommodation, restaurant meals and tourist attractions, potentially undoing Iceland’s recently earned reputation for an attractive yet economical holiday.

Unemployment is also still an issue. “[It] was less than 2% before the crash,” explains Andersen, “and I believe it peaked around 9%. [It is now 5.8% which] doesn’t take into account the number of people who have left the country.” Emigration hit a 20-year peak in 2009 with 10,612 people (or 3.3% of the population) deciding to pack their bags, although it has started to level again.

“The [economic]growth that we saw in 2011 was primarily driven by private consumption,” Johnsen adds. “Icelandic consumers have a built up need for consumption, after having pulled back after the crash and that is showing in the national accounts of 2011.

“A lot of perverse incentives remain in the financial and economic (and judicial) system, due to the fact that rules were changed [after
the crisis hit]. The capital controls still hold the currency steady, which both hampers real growth due to lack of foreign investment and pushes successful Icelandic exporting firms to leave the economy to maintain their freedom of movement of capital.”

A cathartic process of hunting down those responsible for bringing the country to the brink of economic destruction and modest yet promising growth means Iceland finds itself at a critical cross-roads between deeper EU integration or turning its interests across the Atlantic.

In March 2012, The Economist re-started the debate over the future of the Icelandic króna and floated the proposal of swapping it for the Canadian dollar. The idea was originally dismissed by the Icelandic government but the debate continued, particularly amongst the business community where it was warmly received.

In April 2012, the Icelandic Minister of Economy travelled across the Atlantic for meetings with Bank of Canada and regulators and stating publicly that it was not something to be ruled out. In the same month, Chinese Premier Wen Jiabao took the opportunity to visit Iceland, prompting hopes for Chinese investment in the country’s post-crash economy but also speculation about the world’s most popular country hoping to get a foothold in the Arctic.

Negotiations are underway regarding Iceland’s application for full EU membership, originally deposited in July 2009 by the new center-left government. Despite issues regarding fishing quotas, ongoing controversy over Icesave and a lack of consensus among current Member States, Iceland is confident that it can become a member of the club. Under what terms and or indeed what currency, remains to be seen. Although there is political will, public opinion started to turn against membership (and the adoption of the euro) as recession and austerity reined in the Euro zone.

In navigating the inevitably choppy waters of the years to come, Iceland will have some undeniably tough decisions to make. Nevertheless, Laxness’ classic portrait of an independent people, written almost 80 years ago, still resonates today.

Andrew Canning is a British journalist dealing in political, social, economic, cultural and transport affairs. With a background in History, he has a keen interest in Nordic society and culture, and has traveled extensively in the region.

Photographer: Maroesjka Lavigne. Maroesjka Lavigne obtained a Masters in Photography at Ghent University in the summer of 2012. She spent four months in Iceland, driving on her own through the desolate snow-covered and blossoming landscapes of winter and spring, looking for those moments when color, light and the subject merge into the perfect image. You can see more of her photo essay Ísland in our Views section: Barren Icelandic Beauty.