Monday, March 25, 2019
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​Is there a way out of the crisis, Icelandic style?

Iceland is trying to get over of the crisis in its own individual way. In the first place, the path that it is following seeks solutions within their own country. Capital controls require that all the money held by residents and non-residents in the country remain there, which increases the tax base available to the Government, making it easier to collect taxes, as well as increasing the demand for bonds. public debt securities, which makes financing the deficit cheaper. It is a particularly relevant fact because it implies that the Icelandic Government does not constantly need to gain the "confidence of the markets". Although imposing controls on capital flows detracted from its market valuation, it gained much greater room for manoeuvre when it comes to designing public policies, compared to the Eurozone governments.


This inward outlook is also evident from the fact that Iceland is immersed in a process of constitutional reform, which could have an impact on relevant aspects such as the electoral system and the public ownership of the country's natural resources. Finally, we should not forget that Iceland has implemented procedures to prosecute political leaders for the banking collapse. Without assessing the relevance of these processes nor their results, they are a reflection more of a country This is trying to look to itself to find answers and those responsible for the causes of the crisis, and also measures to alleviate its effects.

Secondly, the way to deal with the crisis in Iceland is distinctive because the progressive distribution of the costs being taken up by the people, which cannot be compared with any other case of the current European context. It is not that the banks have not been rescued, of course they have been, nor that the public at large have avoided paying for the irresponsibility of the banks, since to some extent they have done so. However, Iceland, having lost much wealth as an economy, scarcity has led to more inequality. Highlighting this relatively progressive distribution of the costs of a bank crash as an example of social redistribution is not exactly good news, because it reflects that in most countries the solutions that are being adopted are markedly inequitable.

A final characteristic of the Icelandic way out of the crisis is that it is a path of its own making, designed to a large extent at the behest of its governments.

Both the conservative-led coalition that was in power when the collapse occurred and the Left-ruling coalition that has governed since 2009 have made determinations that, subject to all kinds of criticism, have generally been set apart from the dominant recipe in the European context: "austerity, competitiveness and structural reforms". This is, reduction of public spending, wage cuts and cuts in social rights. In Iceland, we have opted for medium-term fiscal consolidation, raising taxes progressively and controlling spending -not at first to avoid stifling economic recovery- but maintaining the welfare state in such a way that inequality has decreased. Lastly, no structural reforms have been carried out for use in the pension system, nor in health or education. There have been cuts, but not a questioning of the fundamentals of the model.


The Icelandic crisis exit mechanism also poses questions that cannot be ignored. First, there has not been a determined attitude to purge criminal responsibilities among the managers of the bankrupt entities or to determine those responsible, of whatever type of responsibility, of neither members of the governments nor those responsible in financial regulation and supervision bodies. The legal environment was diffuse, consciously blurred by the successive governments, led by the Independence party in the years before the crash. Thus it was undoubtedly difficult to determine responsibilities, but still, it is striking that former Prime Minister Geir Haarde was the subject of attention in this regard, even though he was charged in court, while a figure as relevant as the former prime minister and former governor of the Central Bank, David Oddsson, has barely seen their management explicitly questioned by the State institutions.

Secondly, the supposed political regeneration undergone by Iceland after the crisis has to be taken into consideration limited at best. *The draft of a new Constitution, quite promising, is stuck in Parliament, and it seems that it will have to fight not only against the explicit opposition of the conservatives, but also against a certain inaction of the progressive coalition in the Government. Nor can we forget that the President of the Republic, promoted to the category of hero of the social movements for daring to ask the public if they wished to pay the indemnities to the depositors of Icesave, is the same person who witnessed to the generation and growth of the real estate bubble, in that case without raising their voice.

Finally, the current prime minister, a social democrat, was already a minister in the previous government in coalition with the conservatives, a coalition that committed explicitly to the legislature to continue making Iceland a dynamic economy open to the world of international business.

If we add that conservative thinking does not seem to have made the slightest self-criticism as regards the model of financial exuberance that led the country to collapse, we conclude that we have to be quite cautious in stating that there was intense regeneration imposed by the crisis, rather that its withdrawal imposed quite high costs. In that case, we could not speak of getting over the crisis the Icelandic way, but rather just as much of a model that would have managed at most to defer the most significant social impacts of the crisis, but not to avoid them that the withdrawal of the controls is one of the most complex issues facing the Icelandic economy today, and that the success of this policy will depend to a large extent on the future evaluation of the "Icelandic model" and, of course, on the Government's strategy of withdrawing capital controls can be found in the International Monetary Fund.


The most relevant aspect of the Icelandic case does not seem to be the detail of the policies applied, but the fact that they have been designed in a sovereign and relatively independent manner. Beyond that, be they judged as being correct or not, the fact that they have been policies that have arisen to a large extent from Iceland itself is, from the democratic point of view, something particularly relevant and that we in all the countries of the Eurozone should remember.

A quite different question is whether the policies that have been applied are transferable to other contexts. It seems that the answer in this case is negative, because of the large number of specific factors that are present in the Icelandic context but not in other scenarios.

In the first place, Iceland has monetary autonomy that has allowed it to apply an regional monetary policy, including the devaluation of its currency.

In addition, although it is part of the European Economic Area, it is not part of the EU and this has allowed it to impose capital controls unthinkable for any EU country. Additionally, it is a quite small country, in which the capitals "trapped" by the controls are estimated at 25% of GDP. This figure is relevant because it accounts for 40% of Iceland's foreign exchange reserves, which amounts to some 2,600 million Euros, a figure that cannot be taken into consideration a serious obstacle to the functioning of international finance. Therefore it is not likely that the external pressures for the withdrawal of controls had been quite intense.

Nor should we forget that Iceland is a country that received the IMF's backing for its certainly unorthodox policies in the current context. It seems difficult that Iceland could have carried out the same programme without the economic support and the institutional endorsement that the agreement with the IMF implied. The reason for the margin granted by the IMF to Iceland, as opposed to the zero margin granted to Greece, Ireland or Portugal when financial assistance was granted, is an issue that deserves to be studied in more detail. Finally, Iceland's exit from the crisis has taken place in a context of turbulence in the Euro zone that has probably contributed to diminish international attention on this particular country, a response that was respected by the Government despite the fact that it supported the "Yes", with the ploy of a referendum that, to the scandal of many European leaders, took place in Greece to vote on the conditions of the second Rescue Plan between October and November 2011. This referendum, which was not even held, contributed to precipitate the downfall of the Yorgos Papandreou Government, a democratically elected president, to be replaced by Lucas Papademos, a person trusted by the European Commission, the European Central Bank and the International Monetary Fund.

All in all, there do exist elements to assert that there is an exit to the crisis the Icelandic way, but the specific policies that were put in place do not seem transferable to other contexts. However, its essence, democratic sovereignty, should be. It seems necessary then to reflect on why the political and institutional framework in which we currently find ourselves, the European Union, does not allow its members the degree of democratic sovereignty that Iceland has enjoyed. This reflection depends to a great extent that this crisis could be overcome with the public at large being for it, not against it.

Article published in 2012 by Pablo Aguirre Carmona (University Complutense of Madrid) and Nuria Alonso (Rey Juan Carlos University) in the journal Papeles de relaciones ecosociales y cambio global (number 118), with the title "Facing the crisis to the Icelandic: a story or a reality?"



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