Slí Eile: 'Iceland's Road To Recovery: What Lessons To Be Learned' was the title of an address by Iceland Minister for Finance, Steingrímur Sigfússon last week. The similarities with Ireland in the story of Iceland were remarkably similar - yet crucial differences emerge not only in relation to how the crisis was managed in 2008-2009 but how the institutional context differs. Put simply, Iceland had more policy levers to play with even if they were - metaphorically speaking - more 'on their own' than is the case in Ireland. The jokes about Iceland, Ireland, the Euro etc circa 2008-09 seem ironic when recounted from the vantage point of 2011.
What is striking about Iceland in the build up to the 2008 crash was the dominance of a strong ideology of neo-liberalism from the early 1990s onwards involving de-regulation, privitisation (for example two of the three main banks were privitised in the early years of the last decade) and tax cuts. The golden circle corporate culture was in full swing prior to the crisis with cross-directorships, single families own swades of banking and close ties between politicians, regulators and bankers. That all sounds very familiar to Irish ears.
While the initial reaction to the crisis (the pots and pans revolution when 10% of the population of 320,000 took to the streets) was dramatic Iceland has managed to plot a course that avoided a chaotic disruption to economic activity. While GDP fell and unemployment rose (but not as much as in Ireland) a dramatic restructuring of banks took place. Deposits and assets were transferred in a matter of days to a new bank and claims by creditors were and are being tested in the courts. The debacle over Icesave continues. And there have been two referenda in which citizens voted down proposals to share the debt burden in a particular way. The extraordinary aspect of the story is that ordinary life went on, people continued to use credit cards and withdraw funds and somehow more people survived than not.
But there was a downside. As Iceland implemented a tough austerity programme in agreement with the IMF (but significant funding was also made available by a Nordic alliance) there were repercussion for workers, welfare recipients and users of public services. Public expenditure has been drastically reduced and revenue raised. This is the downside to currency devaluation coupled with a tought austerity programme imposed from outside.
Mr Sigfússon expressed the view that such painful measures were entirely necessary, unavoidable, morally required and proportionate. Coming from a left-of-center perspective he sounded very much in the same point of view of mainstream economic commentariat in Ireland: cut public spending, raise revenues, close the deficit quickly, more pain now for gains later. Of course, Iceland has another policy tool that we do not have: currency devaluation plus changes to the interest rate. One suspects that monetary policy had some significant effect in boosting Icelandic exports even while consumer demand continued to fall.
He also spoke about the strengths of Iceland and the need to raise hope rather than talk people into despair. He mentioned, for example:
Plenty of natural resources and energy (don't we know...)
Human capital levels which are high (just like us in Ireland)
Pensions funds which he claimed - incredible given the banking meltdown in 2008 - are in a health state (125% of GDP)
Flexible labour markets and very high participation rates for both men and women
A relative young population and less pressure from ageing population trends (Iceland has one of the highest rates of fertility in Europe - it's the long dark winter night you know...)
And what lessons for others? He said:
Don't privitise the gains and socialise the losses
Don't do market fundamentalism - it precipitated the crisis of 2008 in Iceland and elsewhere
Trust needs to be re-built - this takes time and patience
Overall, his presentation was a source of inspiration at this time - things can be changed and turned around quickly if decisive and fair action is taken. One might have appreciated alternative voices and perspectives to the official one presented here. Also, one would have liked more analysis of the underlying budgetary situation. To what extent did the sharp deflationary fiscal adjustment agreed with the IMF contribute to a remarkable improvement in the fiscal position in the last 12 months? I suspect that currency depreciation is part of the story (as it was in Ireland in 1986 and 1992). He did point out that currency devaluation involves higher import prices and further erosion in living standards of consumers. So, any policy response is difficult.
Perhaps the most interesting insight from the evening was the role of active citizens in claiming the future and changing the balance of political power in Iceland ushering in important new reforms to the political system (including legislation to fire Central Bank directors who refused to go voluntarily).