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
Ukip's Nigel Farage and Paul Nuttall. Photo: Getty
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Is the general election 2017 the end of Ukip?

Ukip led the way to Brexit, but now the party is on less than 10 per cent in the polls. 

Ukip could be finished. Ukip has only ever had two MPs, but it held an outside influence on politics: without it, we’d probably never have had the EU referendum. But Brexit has turned Ukip into a single-issue party without an issue. Ukip’s sole remaining MP, Douglas Carswell, left the party in March 2017, and told Sky News’ Adam Boulton that there was “no point” to the party anymore. 

Not everyone in Ukip has given up, though: Nigel Farage told Peston on Sunday that Ukip “will survive”, and current leader Paul Nuttall will be contesting a seat this year. But Ukip is standing in fewer constituencies than last time thanks to a shortage of both money and people. Who benefits if Ukip is finished? It’s likely to be the Tories. 

Is Ukip finished? 

What are Ukip's poll ratings?

Ukip’s poll ratings peaked in June 2016 at 16 per cent. Since the leave campaign’s success, that has steadily declined so that Ukip is going into the 2017 general election on 4 per cent, according to the latest polls. If the polls can be trusted, that’s a serious collapse.

Can Ukip get anymore MPs?

In the 2015 general election Ukip contested nearly every seat and got 13 per cent of the vote, making it the third biggest party (although is only returned one MP). Now Ukip is reportedly struggling to find candidates and could stand in as few as 100 seats. Ukip leader Paul Nuttall will stand in Boston and Skegness, but both ex-leader Nigel Farage and donor Arron Banks have ruled themselves out of running this time.

How many members does Ukip have?

Ukip’s membership declined from 45,994 at the 2015 general election to 39,000 in 2016. That’s a worrying sign for any political party, which relies on grassroots memberships to put in the campaigning legwork.

What does Ukip's decline mean for Labour and the Conservatives? 

The rise of Ukip took votes from both the Conservatives and Labour, with a nationalist message that appealed to disaffected voters from both right and left. But the decline of Ukip only seems to be helping the Conservatives. Stephen Bush has written about how in Wales voting Ukip seems to have been a gateway drug for traditional Labour voters who are now backing the mainstream right; so the voters Ukip took from the Conservatives are reverting to the Conservatives, and the ones they took from Labour are transferring to the Conservatives too.

Ukip might be finished as an electoral force, but its influence on the rest of British politics will be felt for many years yet. 

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