The Amazing Story of Iceland’s Economic Recovery

Iceland map

Iceland went through a deep economic crisis in 2008. This tragedy, which could have led to the economic enslavement of the country – the Greek scenario – was the occasion of a major restart of the Icelandic society, on very different principles from the reigning neo-liberal vulgata that controls presently the Western world, with dire consequences that are continuously exposed prophetically by Pope Francis, which makes the preachers of the neo-liberal false ‘gospel’, to accuse him of being a communist. They would have done that to Jesus too, if he lived today. So, the pope is in good company.

How did the whole thing started? Here is one version of it:

Five years of a pure neo-liberal regime had made Iceland, (population 320 thousand, no army), one of the richest countries in the world. In 2003 all the country’s banks were privatized, and in an effort to attract foreign investors, they offered on-line banking whose minimal costs allowed them to offer relatively high rates of return. The accounts, called IceSave, attracted many English and Dutch small investors.  But as investments grew, so did the banks’ foreign debt.  In 2003 Iceland’s debt was equal to 200 times its GNP, but in 2007, it was 900 percent.  The 2008 world financial crisis was the coup de grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went belly up and were nationalized, while the Kroner lost 85% of its value with respect to the Euro.  At the end of the year Iceland declared bankruptcy.

Now, the story of its recovery was often overblown, as in an article shared today on Facebook by some of my friends, from which the quote above comes. Now, this is not surprising when we know it is a story about Iceland, where, it is said, 30% of people still believe in elves and fairies. And if we also observe that many of these idealistic hyperbolic stories are perpetrated by anarchists and others of leftist persuasion. Here is an example, from a critical article (you may also see a point by point ‘deconstruction’ of the above story in an article published by The Reykjavik Grapevine):

What most of the world appears to believe is that, some time between 2008 and 2009, the country refused to bail out its banks when the global economy crashed and that instead it jailed all of its bankers, overthrew the government, wrote a new constitution on the internet and elected a lesbian prime minister who solved all the nation’s problems with a flick of her magic wand. In this global era of enforced austerity, people want to believe this so much that they get angry when friends who live in Iceland disabuse them of the fantasy.

So, what did actually happen? Laurie Penny, in the same article quote above, explains:

Although it is true that the three largest banks –Glitnir, Kaupthing and Landsbanki – were allowed to go bust in 2008, this was hardly a political choice: Iceland could do nothing else, because their debts were ten times the size of its GDP. It is also true that popular protest brought about a change in power. Demonstrations over the government’s handling of the crisis, particularly its promises to the IMF to repay the financial sector’s enormous debts to countries such as the UK and the Netherlands, started in 2008. On 20 January 2009, the usually reserved Icelandic people turned out on to the streets in their thousands, bashed kitchen utensils and threw fruit and yoghurt at the Althingi, the parliament building. They were demanding a change of government.

They got one. Referendums were promptly held on whether to repay foreign debts, and the state began to draw up a new constitution in consultations with the public that included garnering responses on Facebook. But then, the new administration tried to side with the IMF over the debts of the online bank Icesave and refused, in effect, to implement the constitution Icelanders had been promised. So much for the socialist utopia.

Instead of bailing out its leading banks, Iceland devalued the króna and instituted capital controls, and the economy did indeed contract: real wages dropped and unemployment went from 1.6 per cent before the crash to a peak of 9.3 per cent. But it has now come down to roughly 5 per cent and the economy is slowly growing again.

Where Iceland did break the rules, however, was in choosing to force the banks’ losses on to their creditors, including billions owed to Britain and the Netherlands. The IMF attempted to force Iceland to repay this debt, and the new, nominally left-wing government agreed. But the people of Iceland rejected any such deal.

The message that most of the country took away from this was that the parliamentary left, just like the parliamentary right, could not be trusted not to kowtow to the banks.

And then the author interestingly observes that ‘half of Iceland now wants the old centre-right parties back in power’. That is, I think, normality in a democratic system.

She also observes that the newness of the latest elections in Iceland (2013) is the sudden rise of the anti-system Pirates Party, whose ‘solution is a system of digitally facilitated “direct democracy”, which aims to replace representative, parliamentary democracy with something fairer’. She explains: ‘Its demographic is young, educated and precariously employed, mostly in programming, with a taste for lots of black clothing. The gender balance at meetings is skewed towards men, although the women the party does have are over-represented in critical roles. Rather than electing official leaders, the Pirates believe in what one campaigner, Alla Ámundadóttir, calls “rough consensus and running code”.’ Quite interesting, you have to admit, and that explains its attraction to voters (they reached 5.1% of votes, with three representatives elected in the Parliament), in the given conditions.

The Reykjavik Grapevine apologises for blowing up the Icelandic myth. They say: ‘ As a publication we strive to practice good journalism, though we have to say that a part of us is reluctant to correct these kinds of articles, as it is nice to see citizens of other nations, like Spain and Portugal, being inspired by our story. Hope has to come from somewhere.’

Another critique of this myth building, the socialist author Hordur Torfason, also writes: ‘Although we certainly need inspiration, simplifying (or lying to ourselves) can be dangerous. No “peaceful revolution” has taken place in Iceland; no benevolent government foregoing debt to relieve its people; rather, the people of Iceland have forced the government to give some concessions, in a contradictory political crisis that could present opportunities for revolutionaries.’

So, what could we learn from this story? Here are a few personal conclusions:

– the neo-liberal ‘gospel’ is largely responsible for the current economic crisis and the dire consequences it had on the poor;

– the bailing out of banking institutions responsible for the crisis, on the justification that they are ‘too big to fail’ is immoral and requires the assumption of responsibility by those who allowed for this possibility through deregulation measures;

– the power of such large trans-national institutions is a real threat to democracy;

– this world crisis is not just financial and economic, but primarily a moral one, and it requires a solution that will put economy back on the foundation of commonly agreed values;

– this situation requires a reinvention of democracy and the boosting of more direct participation in democratic processes;

– in the complex globalised world in which we live, there are no magic solutions; utopia always led to despair and, worse, to authoritarianism (remember the French and the Bolshevik revolutions);

– ideology is never the solution; God endowed people with free-will and moral responsibility; a working solution can also be found collectively, by releasing those God-given gifts, with proper input from responsible elites: prophetic religious and non-religious leaders, specialists, academics and, let us not forget, maybe most importantly, poets and artists.

We all need hope, but that will never come from fake myth building, but from living dangerously with reality.

So help us God!



Author: DanutM

Anglican theologian. Former Director for Faith and Development Middle East and Eastern Europe Region of World Vision International

One thought on “The Amazing Story of Iceland’s Economic Recovery”

  1. I wish the same would have happened in United States. One of the amazing facts is that the US bailed out American banks with taxpayers money such that they can pay their obligations to foreign banks. Since when does a US citizen have to make sure that Deutschebank does not lose money on their speculations? That shows that many governments (Iceland being an exception) work in favor of big money, not for the welfare of their citizens.


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