Benjamin Leruth documents the evolution of Iceland’s economy since the beginning of the country’s financial crisis in 2008. Although there were severe consequences in the short-term, the economy has entered a period of recovery since 2011. While the economic situation has improved, the Icesave dispute between Iceland and the governments of the UK and the Netherlands remains to be resolved. This has had political implications for the country, with support for accession to the EU falling sharply amongst Iceland’s citizens and opinions on Iceland’s political leaders being shaped by their response to the crisis.
As mentioned in a previous EUROPP article on the evolution of Iceland’s application for EU membership, the domestic political context changed drastically within the country between 2008 and 2012. While, in 2009, public opinion on EU membership was quite balanced, there is now a strong majority of the population opposed to this project. Furthermore, public support for the government dropped from 50 to 29 per cent between January 2010 and May 2012.
One of the main reasons to explain the evolution of public support is the economic state of Iceland and the Icesave dispute. While, in the aftermath of the financial crisis, the GDP growth rate was negative for ten quarters in a row (between the third quarter of 2008 and the fourth quarter of 2010), the economy started to recover in 2011 as GDP rose by 3.1 per cent. Unemployment, which peaked at 11.9 per cent in a country where this rate is historically low, is also on its way down. Several economists even claim that the financial crisis is over in Iceland.
Summarizing the evolution of Iceland’s crisis can be quite challenging, due to its complexity. However, three periods can be outlined: the collapse, which occurred in October 2008; the consequences, between 2009 and 2010; and the way out, from 2011 onwards.
In October 2008, shortly after the collapse of Lehman Brothers, three major Icelandic banks, Landsbanki, Kaupthing and Glitnir, faced default, as a result of the banks’ aggressive expansion strategies. The Icelandic Parliament, the Althingi, passed an Emergency Act enabling the Financial Supervisory Authority of Iceland to intervene in the banks’ operations.
Moreover, the Icelandic authorities, jointly with the IMF, imposed capital flow controls in the country. The Icelandic króna dropped against other currencies, and the government decided not to intervene. Further investigations conducted after the collapse revealed that a number of Icelandic political and economic authorities showed negligence in the management of the crisis. As a result of the collapse, the country entered recession in the fourth quarter of 2008, inflation skyrocketed and protests known as the “pots and pans revolution” started in the streets of Reykjavik.
Besides recession and higher unemployment rates, the years 2009 and 2010 witnessed a “political big bang” in Iceland. First of all, a new government was put in place following early elections held in April 2009, relegating the conservative Independence Party to the opposition after 18 years of presence in the government. As a result, the first left-wing government in Iceland’s history, composed of the Social Democratic Alliance and the Left-Green Movement, submitted Iceland’s application for EU membership for the first time in the country’s history, seeing this as an alternative to the crisis.
However, the biggest political (and economic) consequence of the crisis is the Icesave dispute. In a nutshell, Icesave is an online saving branch of Landsbanki that opened in 2006 in Britain and the Netherlands. When the bank collapsed, about 320,000 British and Dutch “Icesavers” were compensated by their respective governments, which claimed back €3.8 billion to Iceland (corresponding to about €12,000 per Icelander). Negotiations over a reimbursement eventually led to a first Icesave bill signed by the Althingi in December 2009. However, President Ólafur Ragnar Grímsson refused to sign the bill after having received a petition signed by more than 50,000 Icelanders. This led to the organisation of a referendum in March 2010, the first one in Iceland since its independence, and was a first sign of popular distrust of the government. Following an uncontested rejection of the bill by the population (more than 98 per cent of the voters said “nei”), negotiations started again. By the end of 2010, Iceland exited recession. This proves that despite several criticisms, the government’s decisions to control capital flows and to let the króna drop as well as the rejection of the Icesave bill by the population were steps made in the right direction to get out of the crisis.
The way out
During the first quarter of 2011, the GDP growth rate increased by 3.8 per cent, turning positive for the first time since the financial crisis started. Since then, the various sectors of the economy seemed to recover well. However, the Icesave dispute remained unresolved. In a last attempt to find a solution before going to court, a second Icesave bill was voted by the Althingi, but again President Grímsson refused to sign it and the agreement was put to a referendum. The government intensively campaigned in favour of the agreement, but again with a majority of 59.77 per cent, the population rejected it. These referenda on Icesave are the only examples of direct democracy in the context of economic crisis, taking advantage of Iceland’s non-membership in the European Union (including the Eurozone) and the blurriness of European Law regarding the dispute. Furthermore, Icesave clearly affected public opinion on potential EU membership: since September 2009, opposition to the European project has varied between 50 and 60 per cent. Public support for the government strongly dropped as well and on 30 June 2012, President Grímsson got reelected with a strong majority as a result of his decisions to put the Icesave bills to referenda.
Nowadays, the Icelandic economy is on its way to full recovery. Currency devaluation boosted exports, taxpayers refused to pay for the banks’ mistakes and the country made a second early repayment to the IMF. Despite criticism from the British and Dutch authorities, the outcome of the Icesave referenda seems to have helped Iceland’s economy to recover, as advocated by Nobel prize winners such as Stiglitz and Krugman. However, the Icesave dispute seems to have strongly affected public opinion both on the application for EU membership and the government, which might eventually lead to the end of the political “big bang” and bring the Independence Party back into power in 2013 according to recent opinion polls.
NB: all GDP growth and unemployment rates are taken from Statistics Iceland
Note: This article gives the views of the author, and not the position of EUROPP – European Politics and Policy, nor of the London School of Economics.
Shortened URL for this post: http://bit.ly/MufiZ8
Benjamin Leruth – University of Edinburgh
Benjamin Leruth is a PhD student at the School of Politics and International Relations, at the University of Edinburgh. His research focuses on the relations between the European Union and the Nordic States. He will be a guest researcher at the ARENA Centre for European Studies (University of Oslo) from September 2012.