Iceland’s economic recovery questioned

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Before Egill Helgason began his lecture on Iceland’s economic recovery to a crowded classroom in UVic’s Clearihue Building on June 3, he made it clear that it would not be an academic lecture, but rather, “a chat.” This proved to be accurate, as he concluded his prepared remarks a mere 33 minutes later and opened the floor for questions. That was the first hint that Egill was no ordinary guest speaker.

While most people in Victoria may not have heard of him, Egill Helgason is one of the most popular TV personalities in Iceland, and it is easy to see why he was invited by the Beck Trust to talk about the current turmoil in Iceland. His fluent English lets him serve as an advocate of native Icelanders’ opinions.

Western media’s perceptions of Iceland’s recent economic recovery are largely positive. Paul Krugman, the Nobel Prize–winning economist and New York Times columnist, frequently cites Iceland as a model of success for its unconventional methods of dealing with their recent financial collapse. Instead of bailing out banks, Iceland’s government let them fail. Drastic spending cuts have been eschewed in favor of more gradual reductions. Now, four years after a spectacular financial collapse, Iceland seems to be recovering far better than expected. However, Icelanders don’t quite see their situation as positively as western media commentators do.

After Iceland’s banks were privatized in 2000, the small country of 320,000 experienced a rapid expansion of its banking sector. The increasing value of the Icelandic krona allowed people to spend well beyond their means thanks to the favourable exchange rate and low borrowing costs. In time, the banking sector became so disproportionate to the actual country’s wealth that the government could not act as a lender of last resort in the event of a collapse. Banks could not be bailed out even if the government wanted to help them; thus, the onset of the international credit crunch left Iceland incapable of maintaining its financial sector.

As Iceland’s banks dealt mostly in foreign money, the collapse of the banking sector brought about a diplomatic crisis as well, particularly with the U.K. The internet bank Icesave, run by Landsbanki, provided far more attractive interest rates than most U.K. banks did, leading to over $7 billion in deposits from British investors. When Landsbanki collapsed and Iceland refused to guarantee the foreign deposits, the U.K. was forced to do what Iceland could not, and retaliated by freezing Icelandic assets within Britain through the use of anti-terrorism legislation.

Originally, it seemed like a deal would be made between Iceland and the U.K., but according to Egill, “this seemed like an exorbitant sum for Iceland, and soon this became very unpopular. There was a national grassroots movement against this — asking why Icelandic citizens should pay for the folly of financiers.” He says that two deals were made with the U.K. and Holland, passed by parliament, but then vetoed by president Ólafur Ragnar Grímsson and later voted down in referendums. The case is now before a special court, and many think the court will rule against Iceland.

Another point of contention is the trial of Iceland’s former Prime Minister, Geir Haarde, who was found guilty on one count of negligence for failing to hold cabinet meetings during the worst of the economic crisis. So far, Geir has been the only political leader in the world to face prosecution for their role in the financial crisis of the late 2000s, but this has not done much to unite the country.

“It is very problematic to mete out punishments to politicians who are a failure, but are not really guilty of intentional crimes,” says Egill. “Geir failed badly, but he did not intend to crash the economy. In the end he was convicted for only one of six charges . . . It was not the reckoning that some hoped for, and of course Geir’s supporters were outraged that he was convicted at all.”

Iceland’s prospects are better than those of Spain or Greece at this point. Landsbanki might even have enough money to reimburse the British government for their intervention in the Icesave crisis. Still, according to Egill, the perception of Iceland remains better on the outside than it does on the inside.

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