Iceland: an economic miracle?

Iceland was the epicentre of the 2008 financial crisis that rocked the world. Five years on, after letting its banks fail, things are looking different. Ben Whitford investigates

In October 2008, a fortnight after Lehman Brothers defaulted, Iceland – a patch of wind-lashed rock the size of Ireland, but with a population nearer that of Coventry – became ground zero for the global financial crisis. With credit markets drying up, Iceland’s three main banks – Glitnir, Landsbanki and Kaupthing – imploded, and its decade-long financial boom came crashing to a halt. The Icelandic stock exchange dropped more than 90%, the krona’s value fell sharply, and thousands of people who’d taken out cheap foreign currency loans suddenly found themselves hopelessly under water. Polls taken after the banks’ collapse found that a third of Icelanders were considering emigrating. One MEP fretted, apparently seriously, that the depopulated island would wind up being sold to the Russians for scrap. “The whole nation was in shock,” says Mark Weiner, an American legal scholar who was teaching in Iceland at the time of the crisis.

Five years later, things couldn’t be more different. A series of peaceful protests – known as the ‘Kitchenware Revolution’ for the pots and pans that demonstrators clattered to register their discontent – forced Iceland’s conservative ruling party to call early elections, and saw a centre-left coalition take control of the Althing (Iceland’s national parliament). The country’s new leaders refused to bail out the failed banks or to repay their foreign creditors, and resisted the British and Dutch governments’ demands for reimbursement for the billions they had paid to depositors in Landsbanki’s Icesave accounts. That flew in the face of conventional economic wisdom, but it allowed Iceland to avoid leaving taxpayers on the hook for the debts run up by its banks – and thus to sidestep the painful austerity measures used to bankroll other countries’ bailouts.

The results, the government’s supporters say, speak for themselves. While countries such as Ireland and Greece, which handled their crises more conventionally, continue to struggle, Iceland looks like an economic miracle: the country that went over a cliff, hit the bottom, and bounced. Unemployment has fallen from its post-crisis peak of more than 9% to a relatively respectable 4.7%. Inflation, which once approached 20%, is now below 4% and is expected to keep falling. And after shrinking by around 10% in 2009-2010, the national economy has returned to a steady simmer, with growth in the region of 2% per year since 2011.

Iceland’s leaders are happy to take the credit for that turnaround. “We were wise enough to realise this was also a fundamental social and political crisis,” Ólafur Ragnar Grímsson, the Icelandic president, told reporters at Davos, the scene for 2013’s World Economic Forum. “We didn’t follow the traditional prevailing orthodoxies … and the end result four years later is that Iceland is enjoying progress and recovery.”

Political change

Iceland’s voters, however, weren’t so sure. While foreign observers were feting Iceland as an economic success story, residents continued to fret about their household debts, their decimated savings accounts, and their liberal leaders’ eagerness to join the European Union. In national elections at the end of April 2013, voters dealt the liberal coalition a stunning defeat, electing a new centre-right government led by many of the same politicians who had presided over the banks’ meteoric rise and catastrophic collapse.

That volte-face suggests that despite their initial revolutionary zeal, Icelanders haven’t yet learned the lesson of the banking crisis, says Hörður Torfason, a folksinger who was the ringleader and public face of the Kitchenware Revolution. He predicts that the new centre-right government will strip away the economic safeguards put in place since the banking crisis, putting Iceland on course for another devastating crash.

“Iceland is the country that went over a cliff, hit the bottom, and bounced”

Not everyone is despairing though. Iceland’s economic recovery wasn’t solely due to the left-wing government’s steady hand, notes Ásgeir Jónsson, former chief economist of Kaupthing. The emergency legislation that protected failed banks’ domestic depositors, but not their foreign creditors, was actually shaped by the same conservative factions that voters have now returned to power – a product, Jónsson says, not of wisdom or ideology, but of simple necessity. Iceland’s banks failed with assets equal to 11 times the country’s GDP, he explains, and with nobody willing to lend the country such colossal sums, Iceland didn’t have the cash to bail them out. “Given the chance we probably would have tried to save our banks,” he says. “But that wasn’t a practical possibility, so we just had to let them collapse and build a new system.”

Iceland’s refusal to bail out its banks, then, wasn’t the stinging rebuke to neoliberalism, as it has sometimes been portrayed. In fact, the new government was more concerned with stabilising and rebuilding the old economic system than with ushering in sweeping changes, says Haukur S. Magnússon, editor in chief of the Reykjavík Grapevine, the country’s largest English-language newspaper. “We did have a bona fide revolution,” Magnússon says. “However, in the aftermath it wasn’t like the Bolshevik revolution – the old power structures weren’t discarded or tossed away.”

Instead, the progressive government faced stiff resistance from an entrenched conservative minority in parliament, and from a mainstream media still largely controlled by Iceland’s economic elite. One striking example: Davíð Oddsson – a former prime minister and central banker whose championing of neoliberalism in the early 2000s helped, according to critics, to propel Iceland to the brink of crisis – now edits Iceland’s main daily newspaper. Putting Oddsson in charge of Iceland’s newspaper was “roughly the equivalent of Richard Nixon being made editor of the Washington Post during the Watergate investigation,” notes Robert Wade, a London School of Economics (LSE) professor who has written widely on the Icelandic crisis.

Those tensions acted as a brake on some of the administration’s most ambitious policy proposals. The highest profile victim: a new ‘crowdsourced constitution’, drafted in part based on input Icelanders gave via Facebook and Twitter, which promised to allow referenda on controversial legislation; to limit future privatisation of Iceland’s natural resources; and to enshrine new civil rights including freedom of the press, the right to a safe work environment, and the right to healthcare.

“Iceland is very mobilised, there’s a furious debate, and the old establishment or the old oligarchy has been substantially discredited”

Icelanders were proud of their new constitution, and voted for its adoption by a two-thirds margin in a non-binding referendum last autumn. But rather than ratifying the draft, lawmakers delayed a key vote until after the general elections. In addition, conservatives in the Althing successfully moved the goalposts, changing the ratification procedure to require both a parliamentary supermajority and the direct approval of 40% of all registered voters, rather than a simple majority of votes cast, in a second referendum. The conservative victory in April’s election leaves the constitutional draft dead in the water, says Mark Weiner, the legal scholar. “It’ll be very surprising to me if these specific proposals are taken up,” he says. “One can only hope that the momentum for reform … will continue.”

If the failure of the constitutional overhaul was a defeat for Iceland’s progressives, other post-crisis initiatives have yielded better results. Some of the most successful measures have focused on ensuring accountability for those government and private sector officials responsible for the crash. An investigative commission, staffed by academics and other experts, issued a widely praised nine-volume report offering a definitive account of the bad policies, bad luck and bad decisions that led up to the banking crisis. And a special prosecutor’s office staffed by more than 100 legal and financial experts has now investigated more than 120 individuals’ roles in the crisis, including former Glitnir CEO Lárus Welding, who was briefly jailed in connection with fraudulent loans issued by his bank.

Even former prime minister Geir Haarde was subjected to formal investigation, and indicted on four charges of negligence relating to his handling of the crisis. Although Haarde was only convicted on one count – a minor charge involving his failure to hold enough cabinet meetings – and received no real punishment, experts say such cases suggest that in future Icelanders won’t allow themselves to be led so easily to the brink of crisis. “There are grounds for reasonable optimism,” says LSE’s Robert Wade. “Iceland is very mobilised, there’s a furious debate, and the old establishment or the old oligarchy has been substantially discredited.”

New laws

One potent symbol of Icelanders’ newfound distrust of corporate and political elites are new laws, crafted in consultation with WikiLeaks founder Julian Assange, increasing corporate transparency and offering world-class protection to whistleblowers and muckraking journalists. Other measures included a debt-relief program requiring banks to forgive mortgages in excess of 110% of a home’s actual value, a move that eased the debt burden of more than a quarter of the island’s population.

Such efforts are “commendable,” says Magnússon, the newspaper editor. Still, there have been plenty of setbacks and disappointments since the cold winter nights when Icelanders’ gathered outside the Althing, clattering pots and pans to show their anger. “One lesson you could maybe take from our failures is that patience is a virtue,” Magnússon says. “Change doesn’t happen overnight, and you aren’t going to like everything that happens in between.”

Iceland’s future could depend on how well its people learn that lesson, believes Torfason, the folksinger-turned-revolutionary. Now that the clanging of the pans has died away, he explains, it’s easy for people to grow complacent – but it will take an ongoing commitment to ensure that Iceland’s revolution isn’t relegated to a historical footnote. The key, Torfason says, is for concerned individuals – in Iceland and elsewhere – to accept personal responsibility for making the world a better place. “If you want to move a graveyard, don’t expect the inhabitants to help you,” he says. “Do something about it. It’s going to take time, yes, but don’t sit down and start crying – do it.”

Land of equality

* For four consecutive years, Iceland has been ranked the best place in the world for women by the World Economic Forum

* Outgoing PM Jóhanna Sigurðardóttir was Iceland’s first female premier — and the world’s first openly gay head of state

* Most Icelandic political parties have voluntary gender quotas, and around 40% of Icelandic parliamentarians are women

* Iceland made paying for sex illegal in 2009 and banned strip clubs in 2010, arguing that women should be “equal citizens rather than commodities for sale”

* To challenge ‘macho’ bankers, female CEOs were appointed to supervise Iceland’s failed banks

* Iceland requires firms to give 40% of directorships to women, in a bid to bring ‘feminine values’ into the workplace

* Ministers practice ‘gendered budget-making’, and seek to spur jobs growth by supporting the creative sector rather than boosting heavy industry

* Audur Capital, a women-run firm named after a sagacious female Viking, was one of Iceland’s only financial companies to turn a profit during the banking crisis