We can learn from Iceland's crash – and their recovery

Iceland's PM isn't the only one guilty of ignoring the evidence that a crisis was coming.

Let’s confess, it felt good to see a Prime Minister criminally charged for the financial mismanagement of his country, as happened to Iceland’s Geir Haarde. But it also seems fair that he was convicted only of negligence.

After all, he and his government had full policy cover from mainstream economists like Richard Portes (ex-President of the Royal Economic Society) in the bubbly lead-up to the banking collapse in October 2008. Professors Portes and Baldursson co-authored a November 2007 report for the Icelandic Chamber of Commerce, in which they concluded that:

. . . the Icelandic economy and financial sector are highly resilient. . . With regard to both the macroeconomic situation and the characteristics and performance of the banks, we consider that the current market premium on Icelandic banks is excessive relative to their risk exposure and in comparison with their Nordic peers. . . Overall, the internationalisation of the Icelandic financial sector is a remarkable success story that the markets should better acknowledge.

The authors made similar points in a letter to the Financial Times in July 2008 – just 3 months before the crash!

No wonder then that Mr Haarde argues that

None of us realised at the time that there was something fishy (sic) within the banking system as now appears to have been the case.

Moreover, he added, "nobody predicted that there would be a financial collapse in Iceland."

Well, that last point is not quite true. Many did, like Professor Robert Wade. In my book The Coming First World Debt Crisis (2006) I drew attention to a report by Danske Bank which flashed strong warning lights:

Iceland seems not only to be overheating, but also looks very dependent on the willingness-to-lend of global financial markets. This raises the question of whether the economy is facing not just a recession but also a severe financial crisis.

Yet if Iceland got it all wrong in the lead-up to the October 2008 banking collapse, the country (which still has its own currency) has since done much that is interesting and positive, ignoring or going against the counsel of orthodox economists:

  • Iceland nationalised the domestic parts of its banks, and allowed the non-domestic parts to go bankrupt

  • Iceland looked after its own citizens first, and refused to be bullied by the UK and the Netherlands demanding preferential treatment for non-existent ‘loans’ at usurious rates of interest

  • Iceland’s President responded to popular dissatisfaction with proposed deals with the UK and the Netherlands, by allowing a democratic vote – which confirmed overwhelming opposition

  • Iceland imposed capital controls to stop hot money flows into or out of the country.

  • It gave special protection to home-owners threatened by banks foreclosing.

Despite (because of) all the above, GDP grew by 2.7 per cent in 2011, and unemployment - though high at 6.9 per cent - is far below the current EU average of 10.2 per cent. The IMF’s latest country report (March 2012) states

Iceland’s post-crisis recovery has taken hold. After two years of recession, growth turned positive in 2011, led by domestic demand. The labor market improved, although the unemployment rate remains high… A moderate economic expansion is projected going forward.

So compared with the Eurozone, Iceland is not doing so badly. And compared to Ireland, which has followed very different policies, it’s steaming ahead. Ireland’s GDP rose by 0.7 per cent in 2011, and unemployment is now double Iceland’s at 14.7 per cent. Given that many of Europe’s governments are now run by unaccountable technocrats, the same ones that developed the kind of policies that brought Iceland down, one must congratulate the people of this small country for insisting on the democratic accountability of its political class.

Iceland's former Prime Minister Geir Haarde speaks to the press during his trial. Photograph: Getty Images
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How a small tax rise exposed the SNP's anti-austerity talk for just that

The SNP refuse to use their extra powers to lessen austerity, says Kezia Dugdale.

"We will demand an alternative to slash and burn austerity."

With those few words, Nicola Sturgeon sought to reassure the people of England, Wales and Northern Ireland last year that the SNP were a party opposed to public spending cuts. We all remember the general election TV debates, where the First Minister built her celebrity as the leader of the anti-austerity cause.

Last week, though, she was found out. When faced with the choice between using the powers of the Scottish Parliament to invest in the future or imposing cuts to our schools, Nicola Sturgeon chose cuts. Incredible as it sounds the SNP stood shoulder to shoulder with the Tories to vote for hundreds of millions of pounds worth of cuts to schools and other vital public services, rather than asking people to pay a little bit more to invest. That's not the choice of an anti-austerity pin-up. It's a sell-out.

People living outside of Scotland may not be fully aware of the significant shift that has taken place in politics north of the border in the last week. The days of grievance and blaming someone else for decisions made in Scotland appear to be coming to an end.

The SNP's budget is currently making its way through the Scottish Parliament. It will impose hundreds of millions of pounds of cuts to local public services - including our schools. We don't know what cuts the SNP are planning for future years because they are only presenting a one year budget to get them through the election, but we know from the experts that the biggest cuts are likely to come in 2017/18 and 2018/19. For unprotected budgets like education that could mean cuts of 16 per cent.

It doesn't have to be this way, though. The Scottish Parliament has the power to stop these cuts, if only we have the political will to act. Last week I did just that.

I set out a plan, using the new powers we have today, to set a Scottish rate of income tax 1p higher than that set by George Osborne. This would raise an extra half a billion pounds, giving us the chance to stop the cuts to education and other services. Labour would protect education funding in real terms over the next five years in Scotland. Faced with the choice of asking people to pay a little bit more to invest or carrying on with the SNP's cuts, the choice was pretty simple for me - I won't support cuts to our nation’s future prosperity.

Being told by commentators across the political spectrum that my plan is bold should normally set alarm bells ringing. Bold is usually code for saying something unpopular. In reality, it's pretty simple - how can I say I am against cuts but refuse to use the powers we have to stop them?

Experts - including Professors David Bell and David Eiser of the University of Stirling; the Resolution Foundation; and IPPR Scotland - have said our plan is fair because the wealthiest few would pay the most. Trade unions have backed our proposal, because they recognise the damage hundreds of millions of pounds of cuts will do to our schools and the jobs it will cost.

Council leaders have said our plan to pay £100 cashback to low income taxpayers - including pensioners - to ensure they benefit from this plan is workable.

The silliest of all the SNP's objections is that they won't back our plan because the poorest shouldn't have to pay the price of Tory austerity. The idea that imposing hundreds of millions of pounds of spending cuts on our schools and public services won't make the poorest pay is risible. It's not just the poorest who will lose out from cuts to education. Every single family and business in Scotland would benefit from having a world class education system that gives our young the skills they need to make their way in the world.

The next time we hear Nicola Sturgeon talk up her anti-austerity credentials, people should remember how she did nothing when she had the chance to end austerity. Until now it may have been acceptable to say you are opposed to spending cuts but doing nothing to stop them. Those days are rapidly coming to a close. It makes for the most important, and most interesting, election we’ve had in Scotland.

Kezia Dugdale is leader of Scottish Labour.