Iceland’s electors: how ungrateful!

Five years after Iceland’s economic collapse, early returns in the parliamentary election reveal that voters are favouring the return of a centre-right government, originally blamed for the nation’s financial woes.  Electors are about to oust the Social Democrats despite their apparent adoption of Keynesian-style policies of capital controls and devaluation, so lauded by leading Keynesian economists and even elements of the IMF.

Iceland, a small volcano-dotted North Atlantic island with a population of just 320,000, went from economic ‘wunderkind’ to financial basket case almost overnight back in 2008 when its main commercial banks collapsed within a week of one another.  The value of the country’s currency plummeted and inflation and unemployment soared. Iceland was forced to seek bailouts from Europe and the International Monetary Fund.

Many Keynesians put Iceland’s response to this crisis forward as the model for policy. The government opted for devaluation, capital controls and renegotiating foreign debts.  Paul Krugman ( described the results thus: “the relevance of the Icelandic sort-of miracle… What it demonstrated was the usefulness of devaluation (and therefore of having your own currency), and the case for temporary capital controls in an emergency. Also the case for letting creditors of private banks gone wild eat the losses.  Iceland did not engage in fiscal stimulus; it didn’t have to, given the kick from a huge depreciation of the currency.  And more broadly, Iceland is a dramatic demonstration of the wrongness of conventional wisdom in these times. .. Iceland broke all the rules, and things are not too bad.

But it seems Icelanders do not agree that things “are not too bad”.  As I explained before, the success of the Social Democrat government in restoring Iceland’s economy on capitalist lines is a bit of myth (see my post,  You see, the government tried everything it could to bail out its corrupt bankers with taxpayers money.  But when the electorate was having nothing of it, eventually  it did nationalise them  but then privatised them again in record time. Two out of the three collapsed major banks in Iceland are now owned by their creditors, not the state.  The government negotiated a deal to pay back Dutch and British depositors that would have crippled the economy for decades.  The deal was rejected again and again by the Icelanders, although payback terms were eventually reached, Cyprus-style.  But Iceland’s much lauded recovery model involving devaluation of its currency coupled with capital controls is now a drag on growth.   Iceland is growing at 2%, faster than much of Europe. But the IMF had originally forecast annual growth of around 4.5% through 2011-2013. It now is under half that.

Many Icelanders say they do not ‘feel’ even this modest growth. Outside booming private sector fishing and tourism, businesses complain of stagnation.  Some 80% of households are swamped in housing loan debts indexed to inflation. Investment is under 15% of GDP, a record low in Europe! Real incomes have dropped sharply for Icelandic households as their debt is index-linked to inflation. Pretax gross income of the average Icelander has decreased by 18.3% since 2007 in Icelandic kroner. Measured in dollars, however, the fall is 42.7% since 2007.

The centre-right pro-market parties taking over summed up the reaction of voters to Keynesian policies: they “were introduced to a plan that would bring us quicker out of the crisis than has been the reality,” said possible future PM Benediktsson. “People are now looking forward and asking themselves… what kind of a plan is the most likely one to bring more growth, more job creation, to close the budget deficit, and have Iceland grow into the future?,” he said.   The answer of the right is a return to the free market and some juicy handouts.  The Progressives are promising to write off some mortgage debt, taking money from foreign creditors. Benediktsson’s Independence Party is offering lower taxes and the lifting of capital controls that he says are hindering foreign investment.

So a government pledged to the return of ‘free market’ policies and ending capital controls, encouraging foreign investment and lowering corporate taxes will take over.  Mainstream economists who support the new government claim that capital controls are strangling the economy and Iceland needs to deregulate (again!):  “The capital controls violate EU laws regarding the principle of the four freedoms – free movement of goods, capital, services, and persons. The free movement of capital is prevented by the controls.”  say two Icelandic economists based in the UK (

What is behind these arguments is the aim of the capitalist sector in Iceland to restore profitability and remove the restrictive measures imposed by the state over the corrupt banking system.  Now that the majority of Icelanders have paid for last slump with their living standards, it’s time to return to business as usual.  As I argued in that post (op cit), restoring profitability is key for economic recovery under the capitalist mode of production.  So which pro-capitalist policy has done best on this criterion?  Austerity internal devaluation (Greece) or Keynesian currency devaluation (Iceland)?

Iceland’s rate of profit plummeted from 2005 and eventually the island’s property boom burst and along with it the banks collapsed in 2008-9.  Devaluation of the currency started in 2008, but profitability in 2012 remains well under the peak level of 2004, although there has been a slow recovery in profitability from 2008 onwards.  Greece’s profitability stayed up until the global crisis took hold and then it plummeted and only stopped falling last year.  Profitability in ‘austerity’ Greece and ‘devaluing’ Iceland is now about the same relative to 2005 levels.  So you could say that either policy has been equally useless.


That’s the problem with either pro-capitalist policy.  The capitalist mode of production remains and the ‘whole crap’ (as Marx called it) just starts all over again.  The social democrats at first tried impose IMF austerity and then opted for Keynesian devaluation, which created galloping inflation that increased household debt and the cost of living.  The bankers escaped retribution and the banks were returned to the private sector.  A proper default on Iceland’s debt was never implemented because this small island still has to trade with a capitalist Europe and its banks.  And the social democrats did not help themselves by saying the solution now was to join the euro!

4 thoughts on “Iceland’s electors: how ungrateful!

  1. What about the interests of the working class? Social democrats secured nearly full employment in Iceland. Who else can claim this in the euro area where there is a debt crisis? Yes, they may be fools wanting to join the euro but the Keynesian adjustment program did deliver better outcomes for wage earners than the neoliberal euroarea recipe.

  2. Do Icelanders produce enough stuff that the country can sell at “world market prices” and with the proceeds buy the stuff that Icelanders consumed in a recent year (less what they produce for themselves, of course)?

    It seems that a country so small could start with this question and work out a solution from there.

  3. Iceland’s future lies in the export of geothermal energy to mainland Europe and maybe even to Canada and the US by way of High Voltage Direct Current undersea cable transmission. In the meantime they have cod and some tourism. It is a fully-fledged modern capitalist state of the harsher kind – brutal class divisions grating against an egalitarian Nordic Viking communal tradition that was very badly weakened by the centuries-long Danish occupation.
    The bloody-mindedness and survival capacity of the people is well-illustrated by the resounding popular rejection of the original IMF/EU dictates. But bloody-mindedness and survival doesn’t create a socialist alternative to capitalist exploitation and oppression. It does show up the anti-popular character of bourgeois knee-jerk responses to crisis, however, as Mike’s account demonstrates.

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