Thursday, 8 March 2012


Its no secret, but, I have never been one for elites, whether they be elective, self-selective, cultural, social or sporting (something which may explain a slight dislike of Manchester United on my part). I noted with interest that the trial of Iceland's former Prime Minister Geir Haarde, who is accused of negligence in his handling of the 2008 financial crisis that severely undermined the Icelandic economy, has begun in the capital, Reykjavik. How refreshing for an elected politician to face real consequences for his actions?

Iceland fell into recession when the country's major banks, including on-line bank Icesave's parent company Landsbanki, crashed in the autumn of 2008. The Icelanders woke up to find that they owed six times the island's total gross domestic product (GDP), the world's credit markets promptly dried up, they were left high and dry unable to refinance loans. The county’s three big banks, who's business web stretched across Europe (with customers that included some of our local authorities), collapsed under billions of dollars of debt.

The country's economy had largely been based on and around fishing, but through the 1990s, the country's banks boomed and expanded abroad and Icelanders benefited from cheap credit just like the rest of us. In the immediate aftermath of the crash, the country's unemployment rate and inflation in Iceland sky-rocketed, and on the domestic political front all hell broke loose. A huge wave of angry public protests followed and the then Prime Minister Geir Haarde’s government fell in 2009.

The ex Prime Minster has been accused of negligence because he had not ensured financial safeguards were in place. He has denied the accusation, saying he was only doing what he thought was best for the country at the time. The ex PM could face up to two years in the slammer if convicted. Ironically he was one of four politicians blamed in a 2010 parliament-commissioned report for contributing to the country's financial collapse, yet is the only one on trial.

In September 2010, the Icelandic Parliament decided that only the ex Pm should be tried on charges relating to the financial crisis, the trial is expected to last until 15th March. The former PM was left carrying the can as two current ministers (Prime Minister Johanna Sigurdardottir and Foreign Minister Ossur Skarphedinsson) were not referred to the court, along with some of his former colleagues including the former foreign, finance and business ministers.

In the March 2010, Icelandic voters rejected overwhelmingly via a referendum the proposal to pay the UK and the Netherlands 4 billion euros (£3.4 billion) they lost when the Icesave bank collapsed. The Icelandic citizens view was that they should not be made to pay so much for their banks' bad decisions. Now this is a feeling that I suspect is shared by most of us, save for our elite who are busy making the rest of us pay off their mistakes and the mistakes of their friends.

Back in December 2010, Iceland the UK and the Netherlands agreed a new repayment deal. The country's parliament (in February 2011) voted yes to a new plan to repay the UK and the Netherlands for reimbursing 400,000 citizens who lost their savings in the collapse of Icesave's parent bank, Landsbanki. Iceland's president, Olafur Grimsson, put the deal to a public vote. Back in April 2011, the voters of Iceland once again rejected the repayment deal in a referendum.

Now Iceland has been through one of the most severe recessions anywhere in the world when the markets crashed in 2008. The country's economic output fell by about 12 per cent in two years. Yet the latest report on Iceland by the International Monetary Fund shows that growth is resuming. GDP is expected to increase by a relatively healthy 2.5 per cent in 2011. The Icelandic public finances are on a sustainable path too with government debt projected to fall to 80 per cent of GDP in 2016.

Iceland's output is still more than 10 per cent down when compared to pre-crisis levels. The country's unemployment level is around 6.7 per cent, this is considerably higher than it was pre 2007. The Icelandic standard of living is also well down and there is limited access to foreign currency. The risks to recovery still remain and Icelandic Central bank interest rates are currently going up in order to curb inflation, something that could have an impact on growth. Yet despite all of this the outlook for the Icelandic economy looks much healthier than other distressed economies across the water in Greece, Ireland and Portugal.

Closer to home, there are plenty of people across the Celtic Sea who are less than happy with the choices made by the Irish elite and the fact that they have largely got away without punishment for their crimes, misdemeanour's and bad decisions. Some have called for a fresh start and new republic literally writing off the past (and the debt). In recent history in Ireland (and elsewhere on the European mainland) referenda have produced the wrong result, at least as far as the elite are concerned.

Peadar Kirby and Mary Murphy exposed the winners and losers from the current Irish model of development and related the distributional outcomes of the use of power by Irish elites, in their book Towards a Second Republic. The authors analysis of Ireland's economics, politics and society, and draws some important lessons from its cycles of boom and bust. They also look at the role of the EU and compare Ireland's crisis and responses to those of other states. The book includes a proposal to construct new and more effective institutions for the economy and society, I suspect that it won't be on the summer reading list of any elite near here any-time soon.

Even closer to home there have been no real consequences (or punishments for that matter) for the banking crash for the inhabitants of the Westminster village or the bankers (other than the loss of the odd bonus). The Royal Bank of Scotland (RBS) intended to reward its chief executive Stephen Hester a bonus of £1.4 million despite a fall in share prices. The announcement came days after RBS effectively pulled the plug on profit-making fashion retailer Peacocks who went into administration leaving thousands of livelihoods at risk, only serious public criticism led to the rejection of the bonus.

RBS was bailed out with billions of pounds of taxpayers' money during the financial crisis, but showed a marked reluctance to lend to a profitable business during its time of need. The UK financial sector, on the back of Thatcher's plundering of state assets, created a culture of rewarding failure and neglecting responsibility, encouraged by the hands off approach of New Labour. The Conservative dominated Westminster government, shows a marked reluctance to regulate the excesses of the banking sector, perhaps it might cause a few awkward moments in the club...

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