“Frozen Cash”- Iceland’s Big Decision

When arrived in Vienna in early January of 2009, headlines of every newspaper discussed the decline of Iceland’s economy and soon the countries government.  The government had become ridiculously overexposed in Baltic and US mortgages after bailing out the top 3 national banks in second half of 2008.  During this period of distress the Iceland’s króna lost half its value, inflation went from the normal 3-4% to 14%, and the country’s ruling coalition crumbled when the prime minister stepped down.  So even thought this country was a minuscule player in the global market, they were suffering a major economic collapse as a result of the global financial crisis.

Now Iceland is a small island country with the population of a little over 300,000.  It’s located between the British Isles and Greenland.  Icelandic culture has remnants of Norse traditions and characteristics.  They’re government is a constitutional republic and boasts the longest standing legislative assembly established in 930, the Althing.  The Icelandic economy is very dependent on the fishing industry which provides 40% of their export earnings.  They also have moved to a service economy, which now makes up almost 80% of their labor force.  For the years preceding the 2008/2009  economic collapse, Iceland enjoyed economic growth.  The World Bank country profile shows an increase foreign direct investment from $ 155 million in 2000 to more than $3 billion per year in 2005-2007.   This growth investment helped increase GDP, but also began a trend of risky investing by the larger banks in Iceland.  The risky investing was in volatile Baltic and US mortgage securities. The result of the collapse of the banks and the economy was the loss of all the Foreign Direct Investment (FDI) besides IMF loans.  But since the beginning of the 2009 Iceland has been slowly stabilizing their countries infrastructure.

Now in 2010 things have calmed down.  The new Icelandic government is working with the EU to obtain EU membership and the UK and Dutch government to begin repaying the 3.8 billion Euros borrowed.  Though the Iceland’s government is prepared to make the deal, Parliament has signed the repayment plan, the Icelandic people aren’t.  A month ago people were able to get a quarter of the population to sign a petition for their president, Olaf Ragnar Grimsson, to veto the plan.  Presently polls show 70% don’t want the plan signed giving Grimsson little option but to put the matter before the voters.

This topic is controversial:  if the plan is signed Iceland will be strangled by debt for decades (debt is reaching 1000% of GDP), but UK and the Netherlands will support Iceland entering the EU.  If the plan is not signed, then the UK and the Netherlands are not going to support Iceland’s (guaranteeing they will be denied), further decline in the Icelandic króna, and Iceland’s government will have to institutte austerity in order to plan back debts.   Now the vote is in the hands of the people, who share conflicting goals than their government leaders.  But which choice is really better?  The acceptance of debt (i.e. responsibility), EU membership, and further IMF assistance, or denial of debt, denial of EU membership, and lack of IMF assistance making the government to cut spending?

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4 Responses

  1. **An idea to draw people into our blog**

    An article I read had a comment section that deals with the question I asked at the end of this post. If you comment on that my question, copy and paste your comment to the comment section from this article.

    I created an account for everyone to use since you need to create one post comments.
    email: mcw010@bucknell.edu
    password: blorg
    Penname: Blorg Theory

  2. I would be really surprised if the EU allowed another nation with so much debt to join its monetary union. They already have enough on their plate with Greece, Spain and Portugal (to an extent). Adding Iceland probably wouldn’t help things.

  3. Many people would agree with that, but amazingly the EU has plans to accept Iceland into the EU in 2012. Normally I wouldn’t rely so heavily on Wikipedia, but they have a great page on this exact topic. They discuss the history of the topic and modern developments. It seems that Iceland is a member of European Economic Area, which mean they have implemented 2/3 of the EU laws and are a better candidate than many Eastern European countries. Their debt is a huge issue, but what seems to be the biggest obstacle for Iceland’s accession into the EU is itself. If this debt repayment plan is not signed, it will ensure that Iceland will not be allowed into the EU.

  4. In the past couple of days Iceland finally delivered the report about the finding of their banking crisis. Like the list of steroid users in the Major League Baseball investigation report, there was a list of mean blamed and found responsible for the banking crisis happening and for being as bad as it was. The list included some of the countries most prominent politicians and civil servants. The list included the prime minister from 1991-2004, who was ironically the chairman of Iceland’s central bank at the time of the crash. Other people named are the former finance minister, the former minister of commerce, two other former governors of Iceland’s central bank, and the former head of the financial supervision authority (FME). With a list like this, it’s a surprise that the entire government wasn’t responsible for the banking crisis that has plagued Iceland.

    The blog post that I read made a funny comment about how he “hopes that when the US finally gets around to doing its report on the financial crisis, they will name names and prosecute. The 9/11 commission was a sorry whitewash that only delivered the traditional “nobody did anything wrong” report that we’ve come to expect.” I guess we’ll have to hope and see.

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