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Crisis on the island

Published on March 27, 2012 by: in: Politics

The financial collapse of 2008 forced Icelanders to reach for total revaluation of methods according to which the country has been run. The most revolutionary changes are of constitutional kind; they are to introduce new constitutional model. Where the road taken by Iceland will lead it?

photo: ezioman

photo: ezioman

The very word “crisis” became meaningful in 2008 as a result of several complex co-occurring factors. Experts claim that some serious structural problems and erroneous monetary policy being developed simultaneously with American financial collapse are mostly to blame.

Period preceding the collapse was a time of undisturbed economic growth (between 2003 and 2007 Iceland’s GDP rose by 25%). At that time the banking sector was thriving; three national banks were placed among the biggest three hundred in the world. But all that success was a result of reckless and incompetent actions and also because the domestic market was too small for them. Practices introduced by the banks were often risky and led to situations like the one immediately preceding the collapse when their foreign assets were ten times the value of Iceland’s GDP. As a consequence a balance in the markets was ruined, private sector run significantly into debt and inflation edged up. Soon after that, in the presence of increasing uncertainty in the domestic market, the Central Bank of Iceland (consisting of politics mostly, not economists) decided on an introduction of high interest rates which led to an increase in flow of the capital (mostly foreign). That in turn led to revaluation of Icelandic króna and fostered import of foreign goods purchased for the most part on credit. A combination of high interest rates, significant capital inflow and revaluation of the currency brought insolvency of Icelandic economy in the end.

Long before the recession Icelandic government has been warned repeatedly by various foreign institutions about a sign of oncoming crisis. However, the warnings have been ignored, the government foolishly believed in invariability of the prosperity in domestic markets. The Icelanders did not abandon those risky financial practices which shortly afterwards led to loss of country’s credibility and devaluation of the króna. That in turn brought about loss of financial liquidity of the three aforementioned Icelandic banks: Glitnir, Landsbanki and Kaupthing. To save the situation the Icelandic government, led by right-wing prime minister Geir Haarde, decided on taking control over aforesaid banks and thereby taking responsibility for the debts hanging over them. Substantial part of the liabilities amounting to 5 billion pounds was made of foreign clients deposits since one of the banks was offering web services for customers in Netherlands and Great Britain. Initially Icelandic government refused to pay the banks’ debts claiming that they were private entities but actions taken by Great Britain to make Iceland return British citizens deposits were very definite. London decided to refer to the antiterrorist law enabling the government of one country to seize properties of hostile organizations, in that case Iceland. Guided by the regulation the British froze local assets of Landsbanki and deposits of Kaupthing which led to critical economic situation in Iceland which in turn almost froze Britain out. On top of that Iceland’s public debt increased by 70% and GDP fell by 65% (!).

Initial shock and fear brought out by constantly deteriorating economic climate of the country made the prime minister resign and make room for his successor, the leader of social democratic party, Jóhanne Sigurðardóttir. Taking over by the representative of the left wing and her later winning in 2009 election gave rise to a number of changes that have been introduced and implemented since. The most important reason for such changes was a dramatic decline of public trust expressed towards politicians and financial institutions. According to one of many opinion polls merely 11% of Icelanders claim to trust the parliament called Althing and only 6% claim to trust banks. For the sake of comparison it is worth noting that the same poll presents 80% level of trust expressed by the citizens towards police.

Without any doubts, the decreasing level of public trust in not the only outcome of the financial crisis in Iceland. Another result, and by the way the key issue for the public sphere, is an initiation of public debate about foundations of Icelandic society and the government’s role in it. The financial troubles revealed an advancing development of the society and a number of issues to be settled. Modern threats and challenges that citizens must deal with are incomparable to those included in primary constitution of Iceland. Therefore, the crisis revealed some important questions to be answered as soon as possible.

President instead of monarch

Public debate being carried out at present concerns internal affairs above all. Since recession revealed not only weakness of Icelandic authorities, but also deterioration of state’s controlling function. It is unbelievable that symptoms of crisis were being overlooked, or worse – ignored, for such a long time.

For the most part the Icelandic constitution has been in force since its promulgation by the king of Danes in 1874. Obviously many amendments have been added since then, especially since 1944 when Iceland achieved independence. Nevertheless, the fact is that according to the constitutionalists the document does not comply with modern challenges facing the state. There is no clear division between executive and legislature; the parliament cannot fully perform its controlling role over executive. Moreover, as it is suggested by Björg Thorarensen – professor of the University of Iceland, the document does not refer directly to ideas such as democracy or nation. The role of the president within the state is also expressed in a non-standard way. While implementing the new constitution in 1944 a simple solution has been agreed upon to replace the word “monarch” existing in the former document with “president” and more detailed resolution of the issue was to be introduced later. In reality the problem has not been addressed to this day which results in occasional disputes between the head of the state and government as well as parliament.

Immediate consequence of the financial crisis in Iceland was significant decrease of public support for government’s actions. To prevent this Althing decided to introduce some structural reforms to improve efficiency of governmental actions and to reinforce democratic instruments available for the citizens. First decisive move of the new social democratic government was to arrange general election to select members of the Icelandic Constitutional Assembly which was expected to draw up a draft of future fundamental law. There were supposed to be twenty five delegates constituting the body, out of which seven were to represent parliamentary Constitutional Commission and the remaining eighteen were to be elected among citizens of Iceland (non-politicians, possessing civil and political rights). Thirty to fifty sponsors of their campaigns were to be members of the body as well. Election held in November 2010 appointed the representatives but the turnout was very low (36%). Soon afterwards a number of complaints concerning methods of electoral conduct followed which were addressed to the Supreme Court. Some of them were deemed legitimate and the elections were cancelled. Eventually it has been decided not to repeat them though, and pursuant to a special law accepted by the parliament the chosen representatives were brought into permanent cooperation with the Althing’s Constitutional Commission to jointly create a draft of the new law.

The proceedings began in April 2011. Domains in need of reforms were numerous, thus a compromise on homogeneous proposal of the act was difficult to reach. First draft was ready at the end of July the same year. It included references to all most important values present in most European constitutions, such as human rights or democracy. It also introduced some detailed regulations concerning particular bodies of the state. The parliament is to become more powerful thanks to its controlling authority towards the government. The cabinet on the other hand will be able to control legislature. Independence of judges was reinforced too. All of those solutions are to implement the classic rule of check and balance. The draft of the new constitution introduces limitations on the role of the head of the state by taking away  legislative initiative and place it into the parliament. A substantial number of new rules concerning election of members of parliament and nomination of judges was proposed.

Probably the biggest innovation concerning the way of introducing the constitutional changes was to make it thoroughly available to the public. The use of social networking services provided by Facebook, Twitter or You Tube resulted in, as one of the members of the Constitutional Commission put it, the fact that “for the first time the Constitution is actually created via Internet.” The method is to familiarize Icelanders with the process of law creation and enable them to express their opinions about particular proposals. Received comments are instantly verified and discussed during proceedings on individual regulations.

The new fundamental law is being worked on. It seems that some more time will pass before the project will be put to the vote in Althings first; then its faith will be decided in referendum. With regard to the complexity of the document heated discussions are taking place whether putting the project to the public vote is a good idea. The prime minister Sigurðardóttir officially supports the idea but time will tell what will be decided by Icelandic parliament struggling to regain the public support.

Learning from mistakes

Without a doubt, the whole trick is to avoid crisis situations for it proves our wisdom. Learning from failures happening to us is far more impressing though. Scrutinizing Iceland’s example it is visible that the authorities drew some conclusions. Maybe not all guilty of the 2008 financial collapse were pointed out and not all still struggling with social disparities and significant financial difficulties were compensated yet. However, what should be admired is that the causes of the crisis were identified almost instantly and a decision of immediate eradication was made. Step by step the authorities that lost their legitimization (as important for them as financial stability for an ordinary citizen) have begun to improve those domains that should have been amended long ago. It turned out that even in Scandinavia, the backbone of democracy, the democratic principles are not being observed.

Perhaps Iceland will change its political system soon and become a parliamentary republic. Although the future of the country is still uncertain, the Icelanders not only proved to be able to learn from mistakes but also presented their resourcefulness. Hopefully other countries struggling with similar difficulties turn out to be as reasonable and resourceful as the small island to the north of Europe.

Translation: Małgorzata Jędrocha

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About Ewa Litke

Graduate of the Politics at the Department of the International and Political Relations at Łódź University. Studied at the University of Eastern Finland in Joensuu and in 2011 did internship at the European Parliament. She is interested in nearly all issues connected to Scandinavia, mainly political. Great fan of lounging around Finnish lakesides, secretly in love with Swedish kötbullar.

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