From Iceland — “Iceland’s Recovery: Lessons and Challenges”

“Iceland’s Recovery: Lessons and Challenges”

Published November 4, 2011

“Iceland’s Recovery: Lessons and Challenges”

Harpa, Iceland’s new mega opera house, emblematic for the boom and bust of  the country’s economy in 2008, was the venue for this conference on the October 27, co-hosted by the Ministry of  Economic Affairs, the Central Bank of  Iceland and the International Monetary Fund (IMF).
The event was staged in Harpa’s Silfurberg Conference Hall, before a full auditorium, chief amongst the audience the President of Iceland and a good mix of Icelanders and the expatriate community.
The discussions did not produce much new insights into the crisis, but reaffirmed the known, affirmed modestly positive news as regards to latest developments, while pointing out persisting problems.
There were stern reminders that the Icelandic crisis was one of the—if not the—severest crisis in human history, causing losses to the tune of roughly 100 billion USD. It was a disaster of scale that had clearly outgrown the small state’s capacity (pop. 320.000) for prevention or as a sole responder. Paradoxically, it was at the same time Iceland’s smallness that allowed rapid decisions which would then take equally rapid effect on the ground.
The IMF austerity programme, which ended August this year, was a success.
Today, three years after the “perfect storm” (Árni Páll Árnason, Minister of Economics),  GDP growth for 2011 is expected at around 2–3%, better than forecast;  inflation hovers around 6%, and unemployment at around 7% which is bad but was anticipated to be worse.
What might simply sound like a series of textbook actions could not have succeeded without cooperation with the IMF and a 2.1 billion dollar loan, aside from loans by the Nordics, Poland and the Faroe Islands. While not the government’s first choice, this cooperation with the IMF was ultimately the only choice, a lender of last resort after other options had fallen through.
The cooperation with the IMF succeeded because it was eventually based on pragmatism and compromise. The government accepted IMF loan conditionalities while in return the IMF ideologues gave up on free market dogmas and accepted the government’s fencing of social welfare against austerity cuts, easing taxes for lower income segments while charging higher income groups, and even tolerated currency restrictions.
As to persisting problems, the grim facts remain that today the public debt is much higher than before the crisis, standing at around 100 % of GDP, roughly 12 billion USD, or 40.000 USD per capita, while currency restrictions prevent foreign investment and GDP growth. Worse still, the debt is much larger when one takes into account the very large debts by households, businesses and communities.
The speakers were a melange of illustrious local and international prominent figures and experts, the IMF and media. Jóhanna Sigurðardóttir, Prime Minister of Iceland, made welcoming remarks, Árni Páll Árnason, Minister of Economic Affairs , gave a topical introduction, and the Minister of Finance, Steingrímur Sigfússon, delivered a lunchtime speech.
Among the discussants were the Nobel laureate economists Paul Krugman and Joseph Stiglitz (the latter via taped message), Martin Wolf, chief economics commentator of the Financial Times, Simon Johnson, Massachusetts Institute of Technology, as well as Willem Buiter from Citigroup, the Governor of Iceland’s Central Bank, and professors of sociology and economics from the Iceland and Reykjavik Universities. Nemat Shafik, represented the IMF as its Deputy Managing Director.
Stiglitz (via taped message) appealed to leave room for local investments alongside austerity measures. Krugman said Iceland was right, unlike Ireland, to let banks go into bankruptcy, so as not to socialize losses and privatize profits. Wolf, underestimating the size of Iceland’s society and economy, couldn’t imagine that  a 2 billion USD aluminium smelter could lead to distortions in the financial sector, and the economy or even the society at large.
Somewhat of a highlight came towards the very end during the panel discussion when Wolf as moderator basically asked if the Icelandic currency was viable or just part of the problem, not the solution ?
Some answered to peg the Icelandic króna, to another currency, perhaps the Canadian Dollar or the Norwegian krone or even the Chinese renminbi. Others thought aloud about the creation of a new currency zone “uniting” Norway, Russia, Canada and Iceland. Again others brought up the EU membership, and consequently the adoption of the Euro. Or, some wondered, will Iceland have to pay the price, and continue living with the króna and its volatile swings?
As said, this was a conference on the macroeconomics of the crisis. The wider implications, historically, ideologically, politically, domestically and internationally, or socially remained very much in the margins. The Prime Minister was more explicit in her welcoming remarks and made reference to the relevance of justice and accountability or the need to prevent the financialisation of society.
Upon leaving Harpa one could breathe a whiff of dissent as only a handful of protesters braved the cold laying claims on social equality and social justice. This wasn’t their day nor their conference. But one could sense they need not worry because they do have a cause.

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