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Oddný Helgadóttir

Jón Gunnar Ólafsson

June 10th, 2021

Lessons from Icesave: How international pressure can produce a nationalist backlash

3 comments | 31 shares

Estimated reading time: 10 minutes

Oddný Helgadóttir

Jón Gunnar Ólafsson

June 10th, 2021

Lessons from Icesave: How international pressure can produce a nationalist backlash

3 comments | 31 shares

Estimated reading time: 10 minutes

Iceland held two referendums in 2010 and 2011 on whether the country’s government should insure British and Dutch deposits in the Icelandic bank Landsbanki, which went bankrupt during the financial crisis. Oddný Helgadóttir and Jón Gunnar Ólafsson write that the saga demonstrated how external pressure can foster nationalist discourses and reduce the scope for compromise in international disputes.

A few years ago, the Financial Times argued that Europe was in the throes of a ‘referendum fever’ and that it was ‘delirious for direct democracy’. The continent had just witnessed the Greek ‘oxi’ to a third Eurozone bailout, the surprise of ‘Brexit’, Denmark’s refusal to opt-into European policing and judicial policies, a Swiss vote to restrict European immigration and a Hungarian referendum on whether to receive refugees as part of a European Union scheme. There can be no doubt that the spike in referendums was unusual – not to mention consequential for European politics – but is it best described as direct democracy at work?

We argue that there is a lot more to the recent spate of referendums in Europe: these votes primarily revolved around questions of external economic and political pressures, and we examine them as a means of managing such pressures as national leaders faced the increasingly challenging task of reconciling domestic demands with inter- and supranational imperatives under crisis conditions. We call this kind of voting resistance-referendums.

Crucially, however, resistance-referendums, deployed to attenuate a set of external constraints, can impose a new set of internal constraints, as key actors can neither control the outcome of referendums nor the political debates that they engender. Reducing such referendums to direct democracy risks impoverishing the debate and diverting our attention from the dynamic realignment of interests and identities that they can set in motion. By contrast, based on an in-depth analysis of the ‘Icesave referendums’ that took place in Iceland in 2010 and 2011, we argue that referendums of this kind are not just a political reaction to external pressures, but that they can also act as catalysts for new nationalist discourses that would not appear in their absence.

The Icesave saga

To understand how this played out in the Icelandic case, some background is required: a few years before the Great Financial Crisis hit, the Icelandic bank Landsbanki began marketing high-interest online savings accounts under the name ‘Icesave’ in the UK and the Netherlands. They quickly became popular due to unusually high interest rates, garnering billions in deposits, mostly from British and Dutch citizens.

When the crisis hit, the Icelandic government was cut off from international financial markets and could not prop up its drastically overleveraged banks. Instead, they were put into receivership. In the process the Icesave accounts were left in a nebulous legal zone between jurisdictions and seemingly without direct access to deposit insurance. In response, both British and Dutch authorities stepped in to guarantee their citizens’ lost deposits in full.

Moreover, in an unprecedented move, the British government deployed anti-terrorist legislation to freeze the assets of Icelandic banks in the UK. Britain and the Netherlands then went on to apply a great deal of pressure through various channels, including the International Monetary Fund and the European Union, to try to ensure that the Icelandic government reimbursed them.

As the Icelandic government negotiated terms of repayment, the Icelandic public demanded a referendum on whether to repay at all. After receiving a petition signed by about a quarter of the electorate, the President of Iceland refused to sign legislation on repayment, triggering a national vote on the matter.

In the end there were two Icesave referendums: the first, in 2010, was on a draconian repayment plan that had already been made redundant by further negotiations as the British and Dutch, fearing a ‘no’ vote in the face of widespread popular anger, offered more favorable terms. Unsurprisingly, then, this first plan was rejected by just over 93% of voters.

The second referendum, which took place in 2011, was on a plan with much less punishing terms. The agreement passed through parliament with a considerable margin, but again the President refused to sign it into law even as the ruling coalition and a number of civil society actors pushed hard for it. The British and Dutch authorities also sent a clear message: there would be no further negotiation. Rejecting the deal would mean taking the case before the EFTA court, with all the attendant costs and risks. It was widely believed that a loss in the court would result in Iceland having to pay substantially more than if the agreement were passed. Nevertheless, around 60% of voters rejected the second repayment plan.

Constructing resistance

From a rational materialist perspective, Icelanders should have been inclined to accept the second agreement. So why did the Icelandic people reject this plan, even as the terms offered were much more favourable, a better deal was not to be expected, and the material cost of a ‘no’ vote remained very high? Or, to put the same question in more general terms: when do contentious negotiations generate political dynamics that prioritise matters of identity and national pride over economic concerns?

To answer this question, we examined the coverage of the Icesave dispute in Icelandic news media for three periods: after the British government deployed anti-terrorist legislation to freeze the assets of Icelandic banks in 2008 and in the run up to the two referendums in 2010 and 2011. In total, we analysed around 2,400 news items.

Here it is important to stress that the 2008 episode was on the face of it a most likely case for nationalist mobilisation. While international hostilities were present throughout, they were at their peak when British authorities used terrorist legislation to freeze the assets of Icelandic banks in the UK. Yet, we found that even in this atmosphere of highly adversarial international negotiation, nationalist reasoning only appeared in around 18% of news items on Icesave. By contrast, discourses emphasising the responsibility of Icelanders to repay the Icesave debt were a prevalent theme. This is in line with previous research that suggests that international pressures can help induce cooperative international behaviour.

However, this pattern was reversed after the first referendum was called, at which point nationalist backlash gained momentum. In 2010, before the first referendum, nationalist recoil became central to around 41% of news reports, rising to 45% in the run up to the second referendum in 2011. Some of this nationalistic rhetoric was quite heated, treating resistance to repayment as synonymous with protecting the nation and standing up to foreign and international ‘others’, regardless of potentially high material consequences.

A surprising turn

Our analysis suggests that nationalist discourses are neither a spontaneous nor automatic response to external pressures, but rather one that is constructed and mediated by political processes, such as the act of calling a referendum. In turn, the rise of such discourses stands to alter electorates’ interpretations of both sticks and carrots. Once nationalist interpretations become prevalent, punishment in particular is as likely to incite voters as it is to intimidate them.

Taken together this adds up to a serious warning to political leaders, both at the national and international level: democracies, placed under sufficient international pressure, can resort to a set of tools that pit mass publics against external political demands. In turn, the use of such tools can unleash nationalist political dynamics that can neither be controlled by domestic elites nor managed through pressures from abroad, but which can have serious consequences for international cooperation. Discipline, in other words, does not always work as intended and should be wielded with the utmost care.

In the end, the Icesave story took a surprising turn. After the second rejection, the case was brought before the EFTA Court, but the UK and the Netherlands found themselves on the losing side of that ruling. Then, in a final ironic twist, as markets regained equilibrium, the assets of the old Landsbanki recovered enough to cover all the priority claims associated with the Icesave accounts. With cooler heads, it seems that the costly and drawn out Icesave saga might have been prevented altogether.

For more information, see the authors’ accompanying paper in the Journal of European Public Policy


Note: This article gives the views of the authors, not the position of EUROPP – European Politics and Policy or the London School of Economics. Featured image credit: Annie Spratt on Unsplash


About the author

Oddný Helgadóttir

Oddný Helgadóttir is an Assistant Professor of International Political Economy at the Copenhagen Business School’s Department of Organization.

Jón Gunnar Ólafsson

Jón Gunnar Ólafsson is a Postdoctoral Researcher at the Faculty of Political Science, University of Iceland.

Posted In: JEPP Series | Politics

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