Another guest post from Iceland, this time from Huginn Freyr Þorsteinsson.
In the early days of the present financial crisis Iceland became one of the poster children for the crash that seemed inevitable. Some commentators thought Iceland’s problems were an indicator for what would soon be the fate of other countries that had prospered in the days of the economic boom. The question was posed in early January 2009: “What’s the difference between Ireland and Iceland? – One letter and about 6-months!”
The question was valid. Although Ireland did not expand its banking system nearly as much as Iceland did the situation in Ireland was serious enough. Both countries had followed neo-liberal policies in trying to lure investors to the country with deregulation, lowering of taxes and privatization. For this the two respected countries got lauded by neo-liberal economists who stated that the proof was in the pudding – economic growth was staggering in both cases. But what is the situation now one year has gone by since the above question was posed?
I think it is fair to say that the doomsday scenarios put forward in October 2008 for Iceland have not materialized. Also that predictions for other countries such as the Baltic States, Ukraine, Ireland, Spain, Italy and Greece turned out to be wrong because they were too optimistic. The status of these countries is now catching the international media headlines whilst Iceland has somewhat gone out of the spotlight and news that Iceland’s economic contraction was smaller then envisaged, unemployment figures lower, less capital needed to put into the resurrected banks and a huge turnover from a massive trade deficit to trade surplus has not surfaced.
Three major differences separate Ireland and Iceland. One is that we do not have the Euro which is extremely helpful when we need to rely on exports and a trade surplus. The Icelandic krona gives way whilst the crisis in Ireland has little or no impact on the Euro. Once an expensive place of travel, Iceland is now actually a relatively cheap destination, helping the tourist industry staying strong despite diminishing tourism around the world. The same goes for the export industry which benefits greatly from a weakened krona as it gets more kronas for the products exported.
The second difference is that Ireland went for an all-out bank bailout whilst Iceland took deposits and matching important assets (loans to individuals and Icelandic companies etc.) and put it into new banks whilst letting the old banks go into administration. This manoeuvre was implemented through emergency legislation in October 2008 in order to protect the Icelandic economy from collapsing along with its gigantic banks (their size was 8-10 times Iceland’s GDP at the time of collapse). This means that the sovereign did not try to stand behind the big banks but used the opportunity to heavily trim them down which in turn has made Iceland’s external debt many times lower than it was in the months before the crash.
The third difference is the future unforeseen impact of pensions on the tax payers’ money. One thing we do know is that the future number of pensioners in Europe will be considerably higher than today and more money is needed to fund pension schemes. When it comes to calculating the government debt or obligations of the state such numbers are left out but it is quite evident that many states will struggle with meeting pension obligations. Iceland has a well funded pension system and as seen on the picture below will be well off in meeting these demands and will probably not have to rely on tax payer money.
The ratio of OECD pension fund assets to OECD GDP increased from 70.7% in 2005 to 72.5% of GDP in 2006. The largest asset-to-GDP ratio was Iceland’s, at 132.7%.
However, Iceland has become very indebted because of the need to take loans to support its currency, restore the banks, resurrect the Central Bank (which went bankrupt), reimburse depositors in the UK and the Netherlands for the Icesave accounts and tackle a massive government deficit. At the moment the Icelandic government is working with the IMF and the Nordic countries in order to get the economy back on track and hasten the recovery. The IMF is working in close collaboration with a left-wing majority government whose finance minister, Mr. Steingrímur J. Sigfússon, comes from the Left-green Movement. The situation for the IMF is probably quite unique as they are dealing with a crisis that is a result of radical neo-liberal policies as opposed to lack thereof. Traditionally the IMF has thought such policies were medicine for failed economies but now the case is the opposite.
The uniqueness of the Icelandic case might be seen in how multi-dimensional it is. It is a bank crisis, a debt crisis (households and companies), a currency crisis and a tainted reputation. But as events unfold in the world economy Iceland’s difficulties seem to be less and less unique. Other countries seem to be catching up quickly and even possibly have already left us behind.
Huginn Freyr Þorsteinsson is adjunct professor at the University of Akureyri.