Bailout, austerity and cuts have been buzzwords of the current financial crisis. The EU and US have unceasingly talked of escape from economic Armageddon lying only in taxpayer funded rescue packages. We were ensured that fiscal austerity would lead to jobs, with cuts making businesses more confident, which in turn would encourage private spending and boost economic growth. The results of this experiment, however, have roundly proved this prognosis to not only be wrong but highly destructive. With Greece buckling beneath the demands of the European bailout plan and the British economy stagnating, Europe’s own future is under serious scrutiny. But was there another way out?
A little known case of relative success exists among the gloom and apocalyptic talk. The glacial island of Iceland experienced its own deep economic crisis from 2008/9. Similar to other banking crises, a group now known as the ‘Viking Raiders’, untroubled by regulators, acquired cheap debt in order to obtain overseas corporate acquisitions. These banks then went into administration, resulting in much social ire. Protests outside parliament turned violent on several occasions, the populace making it clear they were unwilling to foot the bill for the financial adventures of some modern day buccaneers. The continued threat of civil unrest culminated in the changing of government after a vote of no confidence.
This is not to say that the country did not suffer austerity…
Instead of bailing out the banks, the new Icelandic government embarked upon an alternative economic strategy. The failed banks were nationalised and split into two halves, with international banking placed under receivership and depositor money being guaranteed by Reykjavik. Other European powers have consistently sought to pacify international investors, however, receivership allowed Iceland to impose immediate control upon the movement of its capital. Consequently, the banking system shrunk by 80% and protracted court battles ensued with Britain and the Netherlands who held hefty investments in the country, but importantly access to accounts for householders was never in danger.
The outcome of the financial crisis here has indisputably been milder than in Greece or Ireland. A halt in the rise of unemployment and even economic growth from 2010 can be attributed to the protection instead of destruction of social security. This is not to say that the country did not suffer austerity, but, unlike the other European models, it has not prioritised the banking sector over the general public.
This saved it from the polemics of economic ‘contagion’…
Iceland appears to be the fastest recovering country in European trading circles but still the world’s most intelligent seem to be flagrantly ignoring the facts that heavily weigh in favour of its model. Europe’s bailout plans have continued to pump money into failing enterprises, while Iceland did not pump good money into bust projects. To make matters worse for Europe, though, the whole situation seems to pose further interesting questions to its future existence.
Some economists argue that fundamentally it was Iceland’s status as a non-EU member that was key to it not qualifying for a bailout. This saved it from the polemics of economic ‘contagion’ and therefore the forceful policies of the European Central Bank and the IMF. The current government is now pursuing EU membership to further steady its economy but how wise this would actually be for the future economic stability of the country is an issue under great doubt.
Images courtesy of Iceland