Iceland and Greece: a tale of two nations
September 14, 2015
Iceland and Greece, two of the countries hardest hit by the financial crisis, have followed two very different trajectories since 2007.
As Icelandic MP Gulli Thor Thordarson explains in this speech he gave at the European Young Conservatives’ Freedom Summit in Cambridge earlier this month, Iceland’s independence allowed it to make the tough policy choices that have helped the country get back on its feet. This is in stark contrast to Greece, which, as a member of the EU and eurozone, can no longer freely choose its economic, monetary and fiscal policies, and now appears resigned to years of recession.
Ladies and Gentlemen, first of all I would like to thank you for inviting me to be with you here today.
I am very proud to be one of the founding fathers of this good organisation and I am very pleased to see that young people from all over the continent are lending their voice for the cause of freedom.
Just as we hoped, when I – on behalf of the youth organisation of the Independence party – and my fellow chairmen of the youth organisations of the young conservatives in Denmark and the UK, Claus Bunk Pedersen and Andrew Rosindell signed the Helsinki resolution in 1993, EYC is now thriving and a fundamental part of the fastest growing political movement in Europe.
At that time, we were tired of hearing the same old federalists ideas over and over again and wanted to see a greater emphasis placed on the freedom of the individual and free markets rather than the centralisation of power in Brussels.
Today I would like to talk about Greece and Iceland and compare the two in terms of development after the crises. First we must keep in mind that we are talking about two very different countries. Greece is of course better known in the world. A beautiful country, with a great history.
Long before the first settlers came to Iceland, Greece had a prosperous democratic society, cities like no other in the world, the greatest philosophers and culture.
Iceland was the poorest of the countries of western Europe in around 1900 but has gone from poverty to be one of the richest countries in the world. In the year 1900 there was hardly any infrastructure in the country at all.
Reykjavík, the capital city, or rather a village back then, had just 5,000 people, mostly farmers. The population was less than 80,000 in the whole country.
The country got independence from Denmark in the year 1944. After being occupied by Britain and the US during the war after the Nazis invaded Denmark, the economy started booming after the Second World War but not without cost.
Unfortunately Icelanders lost the same percentage of men as the US during the war. German submarines killed all of them when they were transporting fish to Britain.
After the Second World War, Iceland continued to prosper and you could say it really took off in the 1990´s with trade liberalisation, lower taxes and fiscal discipline.
In the year 2007, before the bank crises, Iceland had the second highest GDP per capita of the Nordic countries, second only to the oil rich Norway. Today, Iceland’s GDP is similar to Denmark’s.
It is safe to say that Iceland has come far. Higher education, a good health system, a sustainable fishing industry and the highest use of renewable energy use per capita in the world has greatly benefited our nation.
The Icelandic banks were nine times the size of the whole economy output in the autumn of 2008, although smaller than the Swiss and Scottish banks in relation to GDP.
Greece did not, to my knowledge have a very big banking system but was hit hard by the credit crunch.
But why has the development after the crises been so different between these two countries?
I have identified twelve reasons:
Iceland is not a member of the EU
It is a member of European Free Trade Association (EFTA). There are four countries in EFTA: Switzerland, Norway, Lichtenstein and Iceland. These countries are different but they do have one thing in common: they used to be poor and are now very rich. The EFTA countries would still be poor if they didn´t have access to other markets.
That is the reason EFTA has a number of free trade agreements all over the world and the number is growing every year. Each EFTA country can make their own free trade agreements (FTA). Iceland for example has a FTA with China, something the countries of the EU do not have.
Every EFTA country is in control over their own trading policy and that means for example that Iceland can lower its tariffs freely and that is what the country is doing right now. Tariffs of almost 2000 products will be abolished in the next 2 years.
Iceland, Lichtenstein and Norway are members of the European economic agreement which means the countries are members of the common market without the cost of being a member of EU. In practical terms it means the countries only implement 7-9% of the EU regulations and laws and pay only a fraction of the cost of being a member.
One could say the EFTA countries did not influence the regulations as much as the members do. That might be true but the members do not control their own trading policy, fishery and agriculture policy and other important policies. And honestly, do you, as voters or politicians really feel that you have direct influence on the policies in Brussels?
The reason I ask is that I have been all over Europe and I still haven’t met anyone who feels they have any real influence on policy-making in Brussels. What Iceland has managed to do would not have been possible if it had been a member of EU.
Iceland did pay its debts
Both Greece and Iceland received better credit ratings at the beginning of the century. Greece because it had the Euro and Iceland because the economy was doing good and the country was paying its debts and pension liabilities. This is very important. Iceland paid its debts so when the crises hit the country it was better prepared than it had been before.
Greece on the other hand had a lot of public debts and should not have been allowed to join the Euro. They simply changed the numbers to get into the Euro and the leaders of the EU knew it, but that it was so important to unite Europe so they let them in and now both Greece and EU countries are paying the price.
Iceland had a better infrastructure and less corruption
Even though the banks collapsed in Iceland, other parts of the economy are built on sounder foundations. Fisheries, industry and high-tech are all thriving. The health, educational and social welfare systems are good compared to other nations. In the last century Iceland has become a modern society.
The most important act after the crises was without a doubt the emergency act. Prime minister Geir Haarde managed to set an emergency law in the parliament in 24 hours. It simply meant that the deposits of the banks were secured and prioritised so all the assets in the fallen banks were used to guarantee the deposits.
The owners of the banks lost everything and the creditors who financed the banks lost most of their assets as well. This should be a rule not an exception. No one should think that it was an easy decision for the prime minister at the time. It took courage and bravery.
Iceland did not take over private debts
It was fortunate that the western world decided to let Iceland fall. Because the banking system was saved by taking over private debts. It is a dreadful capitalism when the owners take the profit and the taxpayers the loss. Icelanders did twice say NO in Icesave referendum to take over private debts and the government decided to let the banks fall.
Iceland has it own currency and monetary policy
A small currency is not perfect but it helped Iceland in the aftermath of the crises. The devaluation of the krona helped the export industries and tourism blossomed as never before.
Iceland did not use the IMF loans
Iceland didn’t use the loans it got from the IMF other than as a safety buffer.
The capital controls
Iceland imposed capital controls at the outset of the financial crisis and has now introduced a comprehensive liberalization strategy that paves the way for the full liberalization of capital controls in the near future.
The liberalization measures are directed at the large stock of capital, as high as 70% of GDP according to IMF, that could flow out of the economy in a relatively short period of time when capital controls are removed, addresses the root of the problem and protects the well-being of Icelandic people.
Iceland has a young and productive labour force
The Icelandic population is relatively young compared to other European nations and willing to work. The thriving development of tourism in the country is a good example of that.
Our fishing industry is sustainable
As mentioned we are not a member of the common fisheries policy of the EU. OECD studies show that Iceland is the only country in the organization that doesn´t subsidise the fishery industry. On the contrary they pay high taxes.
Tourism is now the third pillar in Iceland’s economy.
The devaluation of the Krona made Iceland an attractive destination for tourists. We grabbed the opportunity with both hands.
We cut public spending
The budget is now with surplus and Iceland will reduce it´s debt fast. It is a realistic goal that we will be without debt in 10 years time. Although it will depend on who is running the government.
Finally, to sum it all up.
The lessons we can learn from Iceland and Greece is that independence works. It is beneficial for a nation to have freedom. It is now obvious that to be part of the the EU does offer stability and security for a small nation . But we must never forget that with freedom comes responsibility. A nation or an individual can never be free unless they are financially independent.
That is something we conservatives have always known.