Tuesday, 19 May 2009

Political lessons from Iceland

Peadar Kirby: With the forthcoming local and European elections opening the first opportunity for the political impact of the economic crisis to find expression, a look at Iceland offers salutary lessons.

Speaking at a seminar at the University of Iceland last week on the Irish and Icelandic crises allowed me to learn about the similarities in the depth of the economic recession in both countries. Iceland has a budget deficit of about 14% of GDP, a little greater than that of Ireland, GDP is expected to fall by 10% this year and bottom out next year, its unemployment rate is around 9% and though its inflation rate is falling fast it is still around 12%.

The big difference, of course, is that Iceland now has a currency which economists expect can never be traded feely again. To gain foreign exchange, Icelanders have to present an airline ticket out of the country, and Icelandic companies are suspected of keeping as much of their capital as possible abroad in order not to have to exchange it for krona. Discussion therefore centres on what currency to adopt with the Norwegian and Swedish krona being mentioned and the Canadian dollar. Most informed observers see no option other than adopting the euro, and for this membership of the EU is necessary. However, suspicions remain widespread that the EU is after Iceland’s natural resources, particularly its fish, and it is by no means certain that the government would win a referendum on EU membership, which is likely to take place in 2011 or 2012.

It is, though, the politics of the present moment that are most interesting to observe and may be an indication of what is likely to happen here. Icelandic politics had been dominated since independence by the Independence Party, a conservative nationalist party which had always been the largest party in the Althingi (the 63-seat parliament). Unlike its Scandinavian neighbours, Iceland had never had a left-wing government. All this has now changed. A general election was forced by sustained popular protest, with angry protesters camped outside the parliament building and effectively forcing the government to resign in February. The general election in April saw the Social Democrats emerging as the largest party for the first time and they have now formed a coalition with the Left-Green party; together these have 36 seats giving them a comfortable majority. Even the new Citizens’ Movement formed by the protesters, won four seats.

The new Althingi met for the first time last week and is showing a determination not only to resolve the economic crisis but to implement fundamental political and economic reforms. While the decision to apply for EU membership has got most attention, equally momentous is the decision to re-write the country’s constitution and a constituent assembly is to be put in place to undertake this task. Negotiations have taken place with employers to raise the wages of the lowest paid so as to ensure they carry less of the burden of the crisis. Industrial development policy is being fundamentally redrawn as the government has decided to move away from dependence on foreign-owned aluminium plants, attracted to Iceland by its low energy costs, and instead to strengthen the indigenous small and medium-sized sector as well as some large Icelandic companies that continue to be very successful abroad. While the country faces some very painful years of increased taxes and budget cutbacks, there is a sense that the general election has taken control from those who were responsible for the crisis and brought a new political direction to the country. It has created the necessary political conditions to move forward and renew a sense of hope and self-confidence.


James Wickham said...

This is really informative. Of course what is astonishing is that for all the anger with the government in Ireland, it is not producing (yet?) any fundamental re-orientation of the type that seems to be happening in Iceland.

Paul Sweeney said...

Iceland is interesting, but James, I don’t think the situation in Ireland is anywhere near as bad. I also think that after 5th of June, there is likely to be a General Election. The real worry is that there is no fundamental thought at all about corporate and institutional governance issues in most of the political parties, or amongst economists etc. Most are fiddling around with interesting but largely peripheral, technical issues. Can we afford to pour €7bn plus, of our taxcuros into the banks without a fundamental reform of company law and governance; of bank and other regulators; of the whole regulatory structure; and of the economic departments of the civil service itself? Without such deep reform, history is bound repeat itself

Pat Donnelly said...

Part of the experiment is the assumption of power by left leaning governments all around the world as the depths of the depression darken, as they will in Ireland.
Some credit may be still be created, equal to the work done if it can be valued correctly and the correct projects must be identified. But this can only be done under a government that commands respect, not merely a garda force. Just recall who voted in cabinet, for amnesty from taxation so that the well connected could escape correct taxation. Some were in Labour.