Iceland is supposed to be the one that got it right. When the global financial crisis battered the country last decade, it was reported that Icelanders reacted by successfully challenging neoliberal convention.
“When everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net,” Paul Krugman wrote for The New York Times in 2011. Vox’s Matt Yglesias offered similar commentary in 2015. “Instead of embracing the orthodoxy of bank bailouts, austerity, and low inflation,” he wrote, “Iceland did just the opposite.”
Admittedly, the narrative of Iceland as a brave, iconoclastic nation is compelling, and it has kernels of truth. Thousands of Icelanders took to the streets immediately after the crash, eventually forcing their right-wing government to resign. Icelandic officials also managed to punish malfeasant bankers, giving 36 of them a total of 96 years in prison for collapse-related misdeeds. But this is where the boldness begins and ends.
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The left-wing coalition that came to power after the protest movement ended up governing as a dutiful technocracy. It slashed social spending to mollify international creditors and the International Monetary Fund, while sheepishly claiming to have increased welfare expenditures as a percentage of Gross Domestic Product (GDP) between 2007-2011 — a sleight of hand glossing over the sharp decrease in GDP after the crash. By the government’s own measure, calculated in absolute terms, it cut welfare spending by 22 percent, even if it didn’t want to own the policy. If this isn’t austerity, nothing is.
To say that Iceland “let the banks go bust” or that it “rejected the orthodoxy of bailouts” is also a gross oversimplification. The fiscal cost of saving the country’s banks, including its Central Bank, has been estimated to be equal to 36 percent of GDP. And while the government nationalized the country’s main three commercial banks’ domestic operations amid the crisis, it sold off two of them to creditors of the failed firms within months of the crash, with a generous public subsidy, of course.
The third bank that remained nationalized, Landsbanki, served no social purpose, either. As noted in a 2012 ruling by a European trade dispute panel: “the [new] banks from their creation in October 2008 operated as commercial entities without any involvement from the State … in essence, there was business as usual from day one.”
Unsurprisingly, the number of Icelandic families dependent on loans shot up between 2008 and 2010 — by 44 percent. The metric has not declined even as the crash itself has increasingly become a distant memory, suggesting a new generation of Icelanders is growing up mired in a cycle of debt, despite the country’s supposed bravery in the face of neoliberalism. Stagflation-like conditions set the stage for this trend, with wages stagnant and price increases in the double-digits for months after the collapse.
Some of this nuance may have been lost in commentary because Iceland recovered from the 2008 crisis much more rapidly than other European countries. But even this can be attributed to factors that have nothing to do with any sort of bold plan executed by the post-crisis government. Iceland’s Supreme Court ruled in 2010 that a certain class of indexed loans had been made illegally, granting significant debt relief. The country’s longtime refusal to adopt the euro also gave the country’s export sectors a boost after the crisis, thanks to devaluation. Moreover, basic macroeconomic statistics on unemployment and GDP growth fail to adequately convey the damage done by the crisis: Between 2009-2012, Iceland lost about 2.5 percent of its population to net migration, according to government statistics.
Little changed after the collapse. In the first scheduled post-crisis election in 2013, Icelanders voted to return a right-wing coalition to power, even though it consisted of the parties most responsible for the bubble and the collapse. The right had rebranded as “populists,” making hay of the left’s deference to norms.
“Both of the [winning] parties were more outspoken towards creditors of the failed banks than the outgoing government, and their rhetoric harsher,” said an analysis published by one of the Icelandic banks after the 2013 election. The memo noted how one of the losing incumbent parties “frequently testified to the creditors’ constitutional rights.” The right, meanwhile, promised an unrealistic windfall in the form of a 20-percent write-down for all indebted homeowners. This should sound vaguely familiar to anyone who followed US and UK right-wing politics in 2016, and all the fantastic promises they yielded.
As anyone familiar with the Panama Papers might recall, this right-wing coalition didn’t finish its term in office. Prime Minister Sigmundur Davíð Gunnlaugsson was forced to resign in April 2016 after the International Consortium of Investigative Journalists revealed he and his wife held assets in an offshore tax haven. Rapid-response protests played a role, as they had after the 2008 collapse. But, again, the grip of conservative forces remained strong. Subsequent elections elevated Bjarni Benediktsson, the leader of the junior coalition partner in Gunnlaugsson’s government, to the senior role—despite the fact that he, too, had been caught squirreling assets abroad, as reported in The Panama Papers.
Appropriately, Benediktsson’s time as prime minister was short-lived. His coalition government also collapsed in scandal after his father asked the Interior Ministry to use its pardon power to clear the name of a convicted child abuser. But he still remains in government as finance minister, serving once again as junior partner–this time, to a Left-Green Movement that has seen its support wither after entering into a coalition with Benediktsson’s Independence Party.
Fortunately, not all is lost from the years after the crisis, when it was believed Iceland could forge a path divergent from neoliberalism. After the collapse, there emerged a movement to draft a new constitution with the help of a random cross-section of society and an elected constitutional council. Though it was abandoned by the post-crisis left-wing coalition at a crucial time, the framework still exists. It calls for new labor rights, more public involvement in natural resource ownership and vestiges of direct democracy. The draft amendments are there, published online, for anyone who wishes to attempt to implement them. (Amending the Icelandic Constitution requires parliamentary approval in two consecutive legislative sessions.) Perhaps a critical mass might form behind the initiative once again if, as feared by some, Icelandic investors repeated the mistakes of last decade by staking too much on a single industry: this time, the country’s booming tourism sector. The initial constitutional reform effort was spearheaded in the wake of 2008, after all, and garnered support from the left-wing coalition parties, even if they abandoned the movement when it mattered.
Still, the strength of political inertia in Iceland can’t be overstated, as is the case with the entrenchment of elites everywhere. For example, then-Prime Minister Geir Haarde announced 10 years ago today that the country had gone bankrupt, concluding a televised speech with the declaration, “God bless Iceland.” Panic ensued, as Icelandic commentators noted. A special parliamentary inquiry into the collapse would later recommend that Haarde and other leaders face criminal negligence charges —for failing to act for months as the banking system teetered. Ultimately, Haarde never faced any penalties. Today, he serves in one of the more important roles in the government, as the country’s Ambassador to the United States.
God bless Iceland, indeed.