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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Air pollution: 5 steps to vanquishing an invisible killer

A new report looks at the economics of air pollution. 

110, 150, 520... These chilling statistics are the number of deaths attributable to particulate air pollution for the cities of Southampton, Nottingham and Birmingham in 2010 respectively. Or how about 40,000 - that is the total number of UK deaths per year that are attributable the combined effects of particulate matter (PM2.5) and Nitrogen Oxides (NOx).

This situation sucks, to say the very least. But while there are no dramatic images to stir up action, these deaths are preventable and we know their cause. Road traffic is the worst culprit. Traffic is responsible for 80 per cent of NOx on high pollution roads, with diesel engines contributing the bulk of the problem.

Now a new report by ResPublica has compiled a list of ways that city councils around the UK can help. The report argues that: “The onus is on cities to create plans that can meet the health and economic challenge within a short time-frame, and identify what they need from national government to do so.”

This is a diplomatic way of saying that current government action on the subject does not go far enough – and that cities must help prod them into gear. That includes poking holes in the government’s proposed plans for new “Clean Air Zones”.

Here are just five of the ways the report suggests letting the light in and the pollution out:

1. Clean up the draft Clean Air Zones framework

Last October, the government set out its draft plans for new Clean Air Zones in the UK’s five most polluted cities, Birmingham, Derby, Leeds, Nottingham and Southampton (excluding London - where other plans are afoot). These zones will charge “polluting” vehicles to enter and can be implemented with varying levels of intensity, with three options that include cars and one that does not.

But the report argues that there is still too much potential for polluters to play dirty with the rules. Car-charging zones must be mandatory for all cities that breach the current EU standards, the report argues (not just the suggested five). Otherwise national operators who own fleets of vehicles could simply relocate outdated buses or taxis to places where they don’t have to pay.  

Different vehicles should fall under the same rules, the report added. Otherwise, taking your car rather than the bus could suddenly seem like the cost-saving option.

2. Vouchers to vouch-safe the project’s success

The government is exploring a scrappage scheme for diesel cars, to help get the worst and oldest polluting vehicles off the road. But as the report points out, blanket scrappage could simply put a whole load of new fossil-fuel cars on the road.

Instead, ResPublica suggests using the revenue from the Clean Air Zone charges, plus hiked vehicle registration fees, to create “Pollution Reduction Vouchers”.

Low-income households with older cars, that would be liable to charging, could then use the vouchers to help secure alternative transport, buy a new and compliant car, or retrofit their existing vehicle with new technology.

3. Extend Vehicle Excise Duty

Vehicle Excise Duty is currently only tiered by how much CO2 pollution a car creates for the first year. After that it becomes a flat rate for all cars under £40,000. The report suggests changing this so that the most polluting vehicles for CO2, NOx and PM2.5 continue to pay higher rates throughout their life span.

For ClientEarth CEO James Thornton, changes to vehicle excise duty are key to moving people onto cleaner modes of transport: “We need a network of clean air zones to keep the most polluting diesel vehicles from the most polluted parts of our towns and cities and incentives such as a targeted scrappage scheme and changes to vehicle excise duty to move people onto cleaner modes of transport.”

4. Repurposed car parks

You would think city bosses would want less cars in the centre of town. But while less cars is good news for oxygen-breathers, it is bad news for city budgets reliant on parking charges. But using car parks to tap into new revenue from property development and joint ventures could help cities reverse this thinking.

5. Prioritise public awareness

Charge zones can be understandably unpopular. In 2008, a referendum in Manchester defeated the idea of congestion charging. So a big effort is needed to raise public awareness of the health crisis our roads have caused. Metro mayors should outline pollution plans in their manifestos, the report suggests. And cities can take advantage of their existing assets. For example in London there are plans to use electronics in the Underground to update travellers on the air pollution levels.

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Change is already in the air. Southampton has used money from the Local Sustainable Travel Fund to run a successful messaging campaign. And in 2011 Nottingham City Council became the first city to implement a Workplace Parking levy – a scheme which has raised £35.3m to help extend its tram system, upgrade the station and purchase electric buses.

But many more “air necessities” are needed before we can forget about pollution’s worry and its strife.  

 

India Bourke is an environment writer and editorial assistant at the New Statesman.