LESSONS IN ICELANDIC

There are plenty of lessons to be learned from the way that Iceland has dealt with the consequences of the worldwide financial collapse. Iceland has worked to reduce (or cut) its dependence on the banking and finance sector of its economy, recognising that this sector is essentially unproductive, essentially short term in outlook and draws talented people away from more productive parts of the economy.

Iceland faced with the collapse of its major banks (in 2008) something that threatened to drag the state’s public finances down. The Icelandic Krona fell 50% against all major currencies, as unemployment roared up to 10% (not forgetting that this in a country where it had previously been negligible) and money flew out of the country at a truly scary rate.

The financial storm was weathered with capital controls (something the European Union Single Market prohibits) to stop the disappearance of cash. Around 100 new taxes were brought in and public spending slashed to the bone. Iceland borrowed money from its Scandinavian neighbours and the International Monetary Fund.

The one big difference was that Iceland let its privately owned banks, which were directly responsible for the crisis in the first place, die. Despite years of bullish talk from the City of London at the first sign of real trouble most (but not all) of the big boys went whining to Westminster for a bailout (which they got). In my opinion we would have been better off if Westminster had said no, you want to life by the market then you can die by it too! In Iceland’s case this meant that investors lost everything it crucially meant that taxpayers were not burdened with their banking debt.

Oddly enough in the darkest depths of the economic crash, following the collapse of the financial sector Icelandic businesses found that they had few problems when it came to recruiting highly skilled graduates. Iceland's businesses had previously struggled to recruit skilled graduates as they were being attracted to the bonus-paying banks, with the demise or reduction of that essentially unproductive sector they found the scientists, IT graduates and engineers that they required.

Any nation’s primary resource should be its people, this is something that Iceland, but not every state has recognised. Iceland is also blessed by a handy supply of cheap clean energy – something that reduces the country’s dependence on imported oil and gas. Around 99% of the Iceland’s energy needs are supplied from hydroelectric sources or hot thermal springs.

There are even proposals to export this renewable power via cables under the sea to Denmark or even Britain. This abundant cheap energy has brought financially important industries (and jobs) such as aluminium smelting, which uses significant quantities of electricity to convert bauxite (shipped in from Australia) into aluminium products in the country.

The Icelandic people have still paid a hard price for the financial collapse with renewed emigration and austerity, but, the country has just gone through the seventh straight quarter of economic growth (averaging at 2.5%) this is something most European governments would give their hind teeth for. Additionally Icelandic unemployment has dropped to slightly just under 5% something that suggests that a degree of economic confidence has returned – can we say the same here?

One significant difference between Iceland and the rest of the world is the fact that some of the bankers and the politicians responsible for the economic disaster ended up being charged for it (and in some case duly convicted). In the immediate aftermath of the crash, as the country's unemployment rate and inflation in Iceland sky-rocketed all hell broke loose on the political front. There was a huge wave of angry public protests and the then Prime Minister Geir Haarde’s government fell in 2009 and the former PM was duly charged with negligence and got his day in court.

Icelandic democracy remained vibrant despite the economic crash, 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. 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, duly put the deal to a public vote. Back in April 2011, the voters of Iceland once again rejected the repayment deal in a referendum.  The Icelandic citizen’s 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 in the City.

What are the real lessons from Iceland for Wales or anywhere else for that matter? Don’t let your economy get driven by a voracious and grossly irresponsible financial sector might be the first. Invest in the skills of your workers might be another lesson. Don’t be dependent upon imported energy suppliers and develop and retain control of your own sustainable renewable energy resources, we may not have hydrothermal power resources but we do have significant potential for developing renewable energy (onshore and off shore) which could provide us with a good reliable base for a sustainable economic future.

SECOND TERM, SECOND CHANCE?

 US President Barak Obama

Having secured a second term, and fought his last campaign, US President Barak Obama  is as free as a US President can get when it comes with what to do with his new mandate.  He may do more with his second term than he did with his first, having no special interest groups to soothe or cultivate for future electoral support – Bill Clinton was said to have accomplished more in his last 80 days in office than in the first term and most of the second term. President Obama won re-election at a time when US unemployment stands at 7.9%, no US President since Franklin D Roosevelt has won re-election with unemployment at that level.

A poor economic situation can be pretty terminal to an incumbent chance of getting back into the White House: George Bush Sr, Jimmy Carter, Gerald Ford and Herbert Hoover being good examples. Fortunately for the 44th President of the United States, the US economy appears to be slowly recovering from the worst economic depression since the Great Depression of the 1930’s. US unemployment has dropped but it remains relatively high, standing at 7.9%, and job recruitment remains a problem, with millions of unemployed Americans seeking work this remains a key issue.  US economic growth also still remains sluggish; it was 2% in the third quarter of 2012.

Managing the Tax base is also an important issue, as on January 1st, unless Congress steps up to the plate, a raft of tax rises and government spending cuts which will affect nearly every American (one way of another) and impact on the relatively weak economy will kick in. This is no accident waiting to happen, it is a result of the 2011 compromise between President Mr Obama and the Republican dominated Congress which happened because of the need to focus on cutting the vast US budget deficit over the next few years.

A potential Iranian crisis may loom on the horizon even as other US global commitments begin to wind down i.e. Afghanistan, Iraq, etc. The Israel/Palestine situation, the war on terror in general (and more specifically in the Yemen), efforts to retain US access to energy supplies and keeping the lid on nuclear proliferation all remain major issues. The USA remains committed to stopping Iran gaining nuclear weapons while Iran continues to state that its nuclear programme is solely for peaceful purposes, and it continues to resist economic sanctions. Fending off Hilary Clinton (a hawk when it comes to Iran) may also prove a challenge for the new President.

On the domestic front the ongoing problem with the enormous government healthcare programme for over-65s and disabled Americans - known as Medicare or the third (lethal) rail of US politics - has been projected to run out of money in 2024 and may become 3.4% of GDP by 2035.  The programme (almost 50 years old) and one the Democrats' significant achievements, is under two pressure from the increasing cost of an inefficient healthcare system and the rapidly approaching retirement dates of the baby-boom generation, growing numbers of whom are increasingly eligible for benefits.

The President if he is unlucky may also find himself facing domestic legislative gridlock having to deal with a bitterly divided congress. Admittedly this is no new situation as President Obama has had to deal with it for last four years. As has been noted elsewhere a bipartisan approach would be nice and sounds good but the reality is that the political parties within the gridlocked legislature have barely looked beyond their deeply entrenched partisan positions.

There is no sign soon that Congress will cease to be divided, as the Republicans remain in control of the House of Representatives and the Democrats have maintained their exceptionally narrow (and occasionally a single-vote) majority in the US Senate. So in the short term, the Republicans (some of whom have serious personal issues with the President)  control the House and can secure enough vote in the Senate to stall any legislation, will be no more willing to compromise with the President and the Democrats in his second term that they were in his first term.

Now may also be the time for the President to revisit the banks and the problem of tax evasion.  Back in January (2009) President Obama announced two more than reasonable measures to curb the banks, the first aimed to stop banks from engaging in proprietary trading, private equity, or any other activity for their own profit unrelated to serving customers. The second measure aimed to take further steps to limit the balance sheet size of banks so that they cannot in future acquire “too big to fail” status.

The President was absolutely right to characterise his proposals as a victory for common sense and while we still have some way to go before the banks are forced to act responsibly, the first steps were undertaken. David Cameron and the Tories (despite everything that has happened in an almost unregulated, greed driven finance sector over the last few years) are still far to enamoured with their friends, the dodgy money men in the City of London.

We also need to a degree of similar rules for financial institutions across the globe, off shore must become a matter of historical record – there must be no where the financial institutions can hide and no more endless threats of taking their “ball” (businesses operations) elsewhere and relocating because they have lost their so called special status. It is important to remember, that no one, not even bankers (or MPs) are above the law and no one is above financial regulation and scrutiny.

President Roosevelt and William Jennings Bryan had a valid point - if you believe in the ‘free market’ (and the City money men claim to) then no organisation can be too big to be allowed not to fail. Basically if you claim to live by the free market then you can die by it too. The massive public subsidies effectively made some of the banks 'publicly owned’, yet they are still largely run by bankers who are so thick skinned or self interested that they carried on regardless when it came to the awarding of bonuses - would that they had been more generous when it come to advancing loans to small to medium sized and large businesses in their hour of need.

It’s also time to tackle tax evasion on a global scale because it is a global industry. The OCED estimated that some $10 trillion dollars worth of private wealth (in 2010) is hidden away in Paradis Fiscaux (tax havens). These financial dead letter drops are used by banks, multi-national companies, corporations, the super (and not so super) rich, drug dealers, dictators, terrorists, fraudsters and other criminals who use them to hide and launder their wealth. One side effect of Paradis Fiscaux is that they enable people and organisations to avoid paying their fair dues to the society in which they live, unlike the rest of us.

To put things in perspective - the $10 trillion dollar figure produced by the OCED means that the lost taxation normally accused would be more than double the entire planet's global aid budget. Gordon Brown (remember him?) waffled when it came to tax evasion, as have the Con Dems as they are in the pockets of the money men in the City or under the influence of Lord Ashcroft - who's heart may be in Belize with his wallet? President Obama, President Sarkozy and Chancellor Merkel are all on record when it comes to saying that off-shore capital needs to be properly regulated – so now may be the time for action.

THE PEOPLE SPEAK

The Lithuanians, given a chance to express their approval or disapproval of the austerity programme, appear to have voted out their Conservative Government. With some results still to come in yesterday, the two leftist parties, Labour and the Social Democrats, appear to have finished first and second, and their leaders have met to discuss terms of a coalition. Lithuanian PM Andrius Kubilius' government has been punished for cutting pensions and public wages.

Voters passing judgement on austerity in Lithuania (Associated Press)

In a seperate referendum, the Lithuanians have voted against plans for a new nuclear power station, which the government had previously said the plant would cut dependence on imported Russian energy. Environmentalists and other political parties had questioned its affordability. The result from Sunday's referendum is non-binding, but surely leaves a vast question mark hanging over the future of the proposed plant.

The former government enforced a harsh austerity programme, to stave off national bankruptcy. Lithuania’s economic output dropped by 15%, unemployment soared and thousands of young people emigrated in search of work. Of late the Lithuanian budget deficit has largely been dealt with and GDP reached growth of 5.8%.

Lithuania's harsh approach won praise from other governments and the International Monetary Fund. Yet the price paid by ordinary Lithuanians’ came far too late to be translated into a political revival for the conservative government, who have paid the price at the polls. The opposition had promised to raise the minimum wage, make the rich pay more tax and put back euro entry until 2015.

In the Lithuanian general election, with election counting complete in three-quarters of voting districts, the Labour party are on 21%, the Social Democrats on 19%. The former Prime Minister Kubilius' Homeland Union Party is on 13%. The bottom line may well be that if you give the people a change to express their option on austerity and you may get a decisive answer...this scenario may increasingly play on David Cameron's mind over the next few years.