Monday, May 29, 2023
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Mateo Peyrouzet García-Siñeriz

​The curious case of Iceland: democratic lessons ten years after the banking crash

Political analyst of the Alternativas Foundation

Iceland is a truly unique country, one of those peculiarities that the world map contains. While tourists are fascinated by natural landscapes that evoke film fantasy planets, no less fascinating is the democratic culture of the society that inhabits it. With a population of only 350,000 inhabitants, a census similar to Bilbao in Spain, the occurrence of the financial crisis situated the island under the microscope of the global media press. After a decade, it is worth looking again at Iceland.

Parlamento de reykjavik

Let's recall the facts. The island's most recent history begins with the financial deregulation undertaken at the end of the century, which encouraged foreign investment and boosted the meteoric growth of the banking sector that has become one of the main economic engines of the country. It was a risky bet. Between September and October 2008, in the middle of the earthquake the fall of Lehman Brothers caused, the bubble burst and the three major Icelandic banks (Landsbanki, Kaupthing and Glitnir) fell into bankruptcy. Instead of recovering the totality of some insolvent entities, the government nationalized and divided the banks partly 'toxic' and part 'healthy', and in doing so saving the priority assets of each bank.

At the same time, Iceland was entering into a diplomatic crisis with the Labour Government of the United Kingdom: a good number of Britons had deposited savings in Icesave, a subsidiary of Landsbanki, for a total value of over two thousand million Euros. However, the shock plan of the Icelandic Government was to protect domestic demand, guaranteeing the deposits of its own citizens and releasing these entities from responsibility towards British and other international creditors (debts included in the toxic part).

This last decision was submitted to a referendum on two occasions, both with the same result. The Icelanders were not willing to pay, even more so if that was possible, for the mistakes of their reckless bankers. In November, Iceland became the first country in 'Western' Europe to receive a loan from the International Monetary Fund since 1976 (granted to the United Kingdom, precisely).

Five years later, the Icelandic GDP has returned to pre-crisis levels, and we can say that the economy is more than recovered today. 

After almost reaching 100% of the GDP, the public debt has returned to the path of normality, and we expect that after a decade in which the Icelanders have had to tighten their belts, public spending will increase again soon. Once the financial boom is over, the main engine of the current Icelandic economy is fishing, historically vital and cause of previous diplomatic crises with the dear British in the Cod Wars, to which two expanding sectors are added: renewable energy and tourism.

Shortly after the banking crisis, Iceland was once again the focus of media attention with the eruption of an impossibly-pronounced volcano (Eyjafjallajökull), ejecting a monumental cloud of ash into the atmosphere and turning European airspace upside down. Far from the pessimistic omens expressed by some in their day, from the Icelandic tourist industry perceive the natural phenomenon as a true turning point. As of 2010, Icelandic society began to focus on tourism in a more structured and coherent way, and since then the numbers of tourists have not stopped growing, reaching over two million last year and becoming the largest source of income for the economy.

However, among all the economic activities that are expanding on the island, the most striking is the proliferation of data processing centres for the 'mining' of cryptocurrencies.

The protocol of validation in the chain of blocks of all transactions with these cryptographic currencies, such as Bitcoin, is carried out through a complex algorithmic process. The success of these centres in Iceland is due to a favourable climate (the cold outside protects the processors from overheating) and the low cost of electricity, since the processors consume huge energy resources to 'mine' the solution to these equations' maths. Quoting a revealing statistic, the energy consumption of this data centres already exceeds that of Icelandic households, presenting a problematic scenario in environmental terms. Some warn of the danger that Iceland will again be affected by its economic link with a volatile market such as cryptocurrency, so the authorities will have to be particularly vigilant in this regard.

Leaving the economy aside and moving to more political-legal issues, the financial rescue plan was not the only front opened up by the crisis in which Iceland has acted unorthodoxly. Not only were the bankers blamed for putting the country at risk through their financial irresponsibility - they were also punished by the law with prison sentences. In total, Prosecutor Hauksson has handed down judgments -from a few months to five years in prison- against 38 businessmen, including the top executives of the major banks, who got the 'biggest prizes'.

The punitive measures taken against the Icelandic bankers contrast visibly with the relative impunity enjoyed by their fellow workers in other democracies.

The case of the United States, the epicentre of the financial earthquake, stands out. Despite the fact that some real estate advisers, investors and bankers of small entities have received convictions, the US justice system has given amnesty to the directors of the main financial institutions of Wall Street, those on the very top of the pyramid. Where financial turbo-capitalism and the pursuit of personal enrichment are part of the idiosyncrasies, the sustainability of the system can be threatened without any punishment, as long as we can justify its action through certain 'laws' of a human-economic nature, or be rich enough to be above justice entirely. In either case, if the democratic health of a state is a reason for foreign mediation, certain Americans may be considered lucky that Icelanders do not exert a substantial influence on international relations.

More concretely, the referendums to which the external debt was submitted have been mentioned before, and that is that Iceland is a country with a profound sense of democracy. Proof of this is the process of constitutional reform initiated in 2010 by the coalition government between the Social Democrats and the Greens, after taking over from conservatives who were forced to renounce power after 18 years due to popular pressure against their management. With the aim of drawing up the draft of the new Constitution, the public at large elected 25 members of civil society that would constitute the Constitutional Council.

After a series of legal difficulties, a non-binding referendum was held, and the six constitutional guidelines submitted to vote were approved.

Due to the blockade on the part of parties reticent to the reform, the parliamentary motion that should have endorsed the text was delayed until new elections were held in 2013, after which a government was formed contrary to the constituent process; since then, the project has been paralyzed.

Despite this institutional setback, the democratic success of the process gives grounds for believing in the possibility of more participatory governance systems. It is true that the Icelandic case is difficult to extrapolate to heterogeneous countries with millions of inhabitants, but it is still a particularly interesting political experiment and from which some lessons can be drawn.

More recently, the public at large once again took to the streets in force in 2016 to force the resignation of their prime minister, as a result of the information revealed by some Panama papers that involved a considerable number of wealthy Icelanders. In Iceland, transparency and investigative journalism are valued, and in 2010 the pioneering 'modern media initiative' was approved, aimed at protecting the work of 'whistleblowers' and anonymous sources, in this way turning the island in a kind of sanctuary for freedom of expression in the press.

All these particularities (and the others that we do not have space for here) make this remote island one of the most amazing political microcosms that exist. Far from continental Europe, graced with natural and energy resources, with a tiny population, homogeneous and mobilized by its democratic ideals, Iceland is a country to follow and that surely will continue to give plenty to speak about. Ten years after being on the edge of the precipice, the Icelandic economy has managed to reinvent itself in its own way, and although it is difficult to determine to what extent its case is comparable with that of other countries, what is clear is that Icelandic society is not a bad mirror in which to look at ourselves when setting the democratic standards that we want to attain. Zero tolerance with corruption, a judicial system that penalizes financial recklessness appropriately and creditable citizen involvement in participatory processes: these are just three of the lessons that should be applied throughout the world.

Mateo Peyrouzet García-Siñeriz. Political analyst of the Alternativas Foundation, graduate in Politics, Philosophy and Economics studies at the University of Exeter.



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