Iceland was recently described as a success story of the economic crisis in a Financial Times article. Just free from under the International Monetary Fund’s wing, Iceland was considered an interesting experiment in getting out of a crisis of this kind, moving quickly from a bubble economy based on finance to an economy based on real things. The article noted that Iceland had allowed the banks to fail, the country’s debts had been reduced to a manageable 65 percent of GDP, and government bonds had been moved from trash to investment rating. With growth reaching 2,5 percent for this year, Iceland’s future seemed quite bright.
The Financial Times article called Harpa—the new conference centre and concert hall on the Reykjavík harbour front—a symbol of Iceland’s recovery. Building such a house in a city with less than 200 thousand inhabitants could be considered a megalomaniac folly—and surely construction started during the boom years, when Icelanders were in the grasp of what has been called collective madness—but since its opening in May last year, it has been a great success.
A VERY UNPOPULAR GOVERNMENT
It could be considered a paradox that the government—a coalition between the Social Democrats and the Left-Green Movement, which came to power shortly after the crash—has not been reaping the benefits of the country’s recovery. Quite the opposite; its confidence rating now rests at 28 percent, making it the second most unpopular government in Iceland’s history, right behind the government that was in power during the crash. It must be noted that a while before the collapse the government’s approval rating was 83 percent. It is now common knowledge that at that time, in 2007, the economy was totally out of control, resulting in the collapse of all the banks in October 2008.
Prime Minister Jóhanna Sigurðardóttir of the Social Democrats and Left-Green Party Chair Steingrímur J. Sigfússon are deeply unpopular politicians, who are often talked about in a hateful manner.
One of their problems is that they are not very good at communicating their policies, though they themselves would say that they are too busy cleaning up the mess. Another problem is the supreme propaganda flair of the opposition, The Independence Party, which has dominated Iceland’s political history. This party, which is a broad right-wing alliance, was in power for eighteen consecutive years leading up to the crash. It enjoys a lot of support in the business, fishing and industrial sectors and is able to inflict serious harm on a government it does not like.
A LIST OF FAILURES
Still, there are also a number of failures that can be put squarely on the doorstep of Jóhanna Sigurðardóttir and Steingrímur J. Sigfússon. One is household debts, which rose steeply after the crash and the collapse of the króna. Unfortunately, the government’s solutions have been found to be seriously lacking—despite Jóhanna promising to build a protective fortress around the homes in the country. This has caused large demonstrations in the city centre, and will likely be a big issue in the upcoming elections, set for April 2013.
Another is Icesave, a deal with the UK and the Netherlands on how to repay money deposited into savings accounts that the Icelandic bank Landsbanki operated in the two countries before the crash. This has been a serious international dispute for Iceland, and a deal has been reached twice, both times supported by the government and narrowly passed in Parliament, and both times—in early 2010 and 2011—vetoed by President Ólafur Ragnar Grímsson and put to a general referendum where the government got duly thrashed. These are blows—which caused them to lose a lot of supporters—from which Jóhanna and Steingrímur will never recover.
There are other big issues causing serious friction. As the Euro crisis deepens, an application to join the EU has become deeply unpopular; a process of rewriting the Constitution has met with filibustering in Parliament; and, not least, the government has opened a real Pandora’s Box in the process of trying to reform the fishing quota system, an issue which tends to make everybody in Iceland hopping mad with anger.
Some might say that the government was too ambitious for its own good at the outset. It took over when everything was in disarray, now it has a very hard time living up to its promises.
DEVALUATION OF THE KRÓNA
Nonetheless, there has been a recovery, which even the opposition has had a hard time denying; it actually uses this recovery as an argument against joining the EU. Unemployment has not risen to figures seen elsewhere in Europe, the welfare state has mostly been protected, and Iceland seems to be better off at the moment than other countries which suffered such economic shocks—Ireland, Greece, and Latvia.
Of course this is somewhat due to the devaluation of the króna, down from less than 90 krónur to the euro to 168 to the euro now. One of the reasons for the crash was a totally overvalued currency, but now when the króna is down on the skids, it is helping the export industries—mainly fish and aluminium—and tourism is blooming like never before. There is a sizable trade surplus to pay the country’s debts, which is a great change from the times before the crash when deficits rose to twenty percent of GNP.
In Iceland, however, there is a different perception. The króna has in a way been both the sickness and the remedy. The collapse of the currency put a heavy burden of debt on the back of the population, both in the form of loans in foreign denomination—which were a kind of a craze before the crash—and loans indexed to inflation—a system that has been called madness by prominent foreign economists. Inflation is now 6,8 percent, the highest in Europe, and whenever inflation goes up, the loans become more expensive.
The value of the króna is now propped up by strong currency restrictions. One euro is worth about 168 krónur, but on an offshore market you get up to 250 krónur for one euro. Those who are most vehemently against joining the EU see the króna as a prerequisite for Iceland’s sovereignty, but even so, export industries—including the fishing industry, which is anti-EU in Iceland—have increasingly been in favour of switching to the euro.
To adopt the euro, Iceland would have to join the EU which, despite the application to join, seems a distant possibility. Other ways have been mentioned, for example adopting the Norwegian krona—the Norwegians do not seem to be thrilled—or the Canadian “loonie”—the Canadians have been rather polite about this.
FROM A HOLE IN THE GROUND TO A FULL HOUSE
Perhaps Harpa is after all very much a symbol of the recovery. It was originally going to be built by the oligarch Björgólfur Guðmundsson of Landsbanki bank. Then he and his bank and everything around him collapsed. In 2008 we had a big, ugly hole in the ground, which stayed that way for a while. Many said it should remain a hole in the ground as a reminder of the crash, but in the end the house was built. The state and the city adopted the project and put a lot of money into it. That was not uniformly popular.
But it has been a success. People seem to like the architecture and artist Ólafur Elíasson’s huge glass façade. It is a nice experience seeing the house from different angles. The acoustics are also very good. The building gives Reykjavík the feeling of a big city, making it a great meeting place. And people flock to the concerts. The Icelandic Symphony Orchestra—a surprisingly good one—came from an old concert hall that seated 800 people and seldom sold out. Now it fills Harpa’s largest concert hall almost every time it plays, which means that attendance has about doubled.
Björk did a series of concerts in the house, and local favourites like Páll Óskar and Helgi Björnsson have perormed to full houses. There have also been foreign artist such as conductor Gustavo Dudamel, tenor singer Jonas Kaufmann, soprano Kiri Te Kanawa, John Grant and Yoko Ono—and among those who are expected in the next months are piano virtuoso Arcadi Volodos, Elvis Costello, James Taylor, Bryan Ferry and Tony Bennett. Even Iceland´s most celebrated marching brass band, called The Swans, has played in the house two years in a row.
It is nearly always full. Who knows if it will last, but the period after the crash has actually been quite good for culture in Iceland.