Iceland’s False Dawn

April 28, 2009

Protesters in Rekyavik

Protesters in Rekyavik

Iceland’s voters responded last week to the economic nightmare that financial liberalization has brought them by voting in an interesting left-wing coalition. With 85 percent of Icelanders voting, the Social Democrats and the Left Green Movement claimed 34 seats out of 63, with the more centrist Social Democrats claiming 30 percent of the vote and the Left Greens 21 percent.

The big losers were those in the Independence Party – whose policies were resoundingly rejected – meaning that Iceland chose an alternative path to unrestricted financial speculation. They also rejected a slavish adherence to NATO, a policy that has lain at the heart of the Independence Party’s ideology. In a shift away from American hegemony, Icelanders elected parties that are committed to seeking membership of the European Union. So things are changing significantly in the north Atlantic.

Nowhere was this more evident than in the personality of the new Prime Minister. Johanna Sigurdardottir, leader of the Social Democrats, will be Iceland’s first openly gay leader, a welcome development, while the representation of women surged to its highest level ever.

However, it’s not likely that the new coalition will have much room for the implementation of innovative social policies. As the Times reports, “The Government has two balancing acts to perform.”

“One is to meet the stringent conditions of the International Monetary Fund while at the same time keeping enough control over the budget to redistribute resources to help those affected by the meltdown.”

This is not easy. Iceland’s economy imploded in 2008, due to the overloading of its banking sector with risky investments. The IMF stepped in to fill the hole left by billions of dollars of phantom capital, bringing with it a familiar package of requirements. Iceland received $827 million from the Fund in December 2008, with the prospect of over a billion more staggered over 8 installments. But the conditions for dispersing this money could well be severe.

Iceland will be allowed to increase its budget deficit from 0.5 percent of GDP to 8.5 percent, but it will also have to divert 80 percent of GDP to “taking care of the problems in the banking sector” – paying off creditors and recapitalizing the financial sector.

As the IMF’s Poul Thomsen said in December, “How exactly the government achieves this consolidation—through either expenditure cuts or higher revenues, or a combination of both—will be up to Icelandic authorities to decide.”

Thomsen also said that “There is no doubt that Iceland will face a couple of years of hardship,” calling the banking crisis “a dramatic and unprecedented shock.” According to him, “It could be the most expensive bank restructuring that the world has ever seen relative to the size of the economy” meaning that “even if we succeed in stabilizing the króna, GDP could fall by 10 percent next year, and there might even be a further small decline in 2010.”

This makes the election seem like less of a departure. Indeed, the IMF’s Mark Flanagan said in February 2009 that “Looking ahead, elections need not interrupt the program. Many countries have experienced elections with IMF programs in place, with little or no interruption.” He was confident that Iceland’s democracy had been stitched up, and its economy locked into austerity for the foreseeable future.

Iceland is essentially under colonial administration by the Mandarins of the IMF, who have judged that “in the near term it is unfortunately true that real wages will likely decline” as the Fund seeks currency stability and reduces Iceland’s debt burden.

Ordinary Icelanders, who saw little of the money accrued by the tiny financial elite during the last boom, will now be forced to pay for the excessed of their betters. In time, it is theoretically possible that “Repaying debt will, over time, reduce the interest burden, and thereby make room for an expansion of productive public expenditures, or for a reduction in taxes” as Flanagan proposes, but few wards of the IMF have progressed from structural adjustment to productive public investments.

Private looting and ongoing stewardship have been far more common. At least in Iceland, however, the Fund has instituted and supports capital controls, which could mitigate the effects of the banking collapse. Such pragmatic measures were resisted by the IMF for years, with catastrophic consequences during financial shocks.

But what could be done to change this situation? Why do Iceland’s people have to pay so severely for the sins of the few? Why have so many millions of people been ruined or killed in pursuit of debts incurred by dictators?

The answer is that the U.S., Japan and Europe as the world’s major creditors have always demanded that it be so. In many cases the dictators were their own paid agents or clients, making the ensuing repayments doubly disgusting.

Yet the world’s super-rich, encompassing bankers and despots alike, should rightly be seen as a category apart. When countries rack up enormous debts or implode financially, perhaps their debts should be rolled into a global fund, capitalized from taxing currency transactions, or seizing the bank accounts of criminals or dictators. Or winding up bloated military budgets and corporations.

That would, at least, provide a means of shielding the poor in affected countries from the mistakes made by their rulers.

As it is, with the current fragmented system of national debts, ordinary people are trapped within the confines of nation states while the rich can move their capital (and their bodies) easily from region to region.

If we don’t remedy that, then we’ll all be going to Iceland.

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