Lessons from Iceland: Capitalism, Crisis, and Resistance

Published on Monthly Review, by Martin Hart-Landsberg, 2013, Volume 65, Issue 05 (October),

If we are to build support for an alternative to capitalism we need clarity on the causes and consequences of the contemporary capitalist drive for greater liberalization and privatization, as well as the benefits from and limits to state direction of capitalist economic activity. Although a small country, Iceland’s recent experience has much to teach us about capitalist dynamics and strategies of transformation.  

In 1991, the Icelandic government began an aggressive program of liberalization and privatization which gave rise to the hyper-expansion of three Icelandic banks. Their highly leveraged growth fueled massive stock market and housing bubbles, all of which combined to make Iceland’s per capita GDP one of the world’s highest by the mid–2000s. Iceland’s economy collapsed in October 2008 when the three banks were forced into bankruptcy; the country suffered one of the deepest downturns in the world.

In a response that remains unique in Europe, the Icelandic people forced the political leaders responsible for the neoliberal program to resign. They then elected a social democratic coalition government which aggressively intervened in financial, currency, and housing markets, and engaged in a targeted expansion of key social programs. As a result, Iceland has experienced one of Europe’s most rapid and broad-based economic recoveries. Unfortunately, the scope of these state actions was limited by still powerful capitalist-class relations. Working-class gains may well be reversed, particularly with the political reversal in April 2013, and the election of a conservative government representing the dominant interests.

Capitalist Class Dynamics and Neoliberalism: … //

… Growth and Crisis: … //

… Resistance, State Intervention, and Recovery:

  • Protests against the Icelandic government began in late October almost immediately after the start of the crisis, anchored by ever-larger Saturday rallies at Reykjavik’s main square and Monday evening meetings in Reykjavik’s main theater. The most common demands were for the resignation of the prime minister and the election of a new government. In January 2009, two thousand demonstrators banging pots and pans outside the parliament building were attacked by riot police. This touched off what the Icelandic press labeled the “pots and pans revolution” as demonstrations grew in size and militancy.
  • Unable to pacify popular anger, the ruling Independence Party first announced new elections for April 2009. Then, when its coalition partner the Social Democratic Alliance withdrew its support, the prime minister and cabinet resigned. An interim government headed by the Social Democratic Alliance and the Left-Green Movement filled the vacuum and the same coalition emerged victorious in the April voting. “To date, Iceland’s remains the only government to have resigned as a result of the global financial crisis. It is also the only country to have shifted distinctly to the left in the aftermath of September 2008.”27
  • Iceland’s progressive government took a series of policy actions over the following years that were quite different from those of other European governments. Most importantly, rather than try to resuscitate existing structures and patterns of economic activity through austerity measures, it actively intervened in financial, currency, and housing markets, as well as strengthened targeted social programs that protected majority interests. The results, as the editors of Bloomberg View describe, have been impressive:
  • Few countries blew up more spectacularly than Iceland in the 2008 financial crisis…. Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year [2012] will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”28
  • Although far from radical, the Icelandic government’s response to the country’s crisis was indeed unconventional. It was also more successful in promoting economic recovery and protecting majority well-being than the more conventional responses of other European governments.

Financial Policy: … //

… Currency Policy: … //

… Housing Policy: … //

… Social Policy: … //

… The Limits of Reform:

  • While the Icelandic experience demonstrates that state action in defense of popular interests can be effective, it also reveals the fragility of popular gains when state policy remains bounded by capitalist-class logic. Iceland was ruled by a coalition government led by the Social Democratic Alliance and the smaller Left-Green Movement from January 2009 to April 2013. And, as we have seen, that government had generally pursued policies responsive to the popular movement that put it in power. However, capitalist-class interests placed serious limits on the reform process, ones that appear likely to lead to the weakening of state capacities and the undoing of many of the gains achieved to this point.
  • Icelandic activists were well aware of these limits and their political and social consequences, even though many outside of Iceland were not. As Árni Daníel Júlíusson explains:
  • In December 2010 and January 2011, Attac Iceland started to receive a lot of questions about the quiet revolution in Iceland from members of Attac France and Attac Spain.48 Activists even started to visit Iceland to find out about the quiet revolution.
  • When Attac Iceland was slow to respond—and when it did it would not be ready to agree that there had been any sort of revolution in Iceland—it was pointed out by the international activists that the Icelandic banks had been nationalized, that the government had been forced from power, that the governors of the Central Bank of Iceland had been replaced, that Iceland had shown true grit by the rejection of the Icesave treaty. All of which was true, but Attac Iceland has not interpreted this as a revolution, even if it certainly can be viewed as a very powerful and successful protest movement, one of the most powerful popular responses to the collapse of the neoliberal order, and up until 2011 certainly the most powerful….
  • So, for the Icelandic activists and anti-neoliberalist, the situation is a bit awkward. When finally Iceland produces something worthy of admiration of the international activist community, the activist groups in Iceland have been reluctant to admit to it being what the foreigners perceive it to be. Why is this?49
  • One reason was the nature of the government’s bank restructuring process. As discussed above, the Icelandic government allowed the country’s three major private banks to collapse and then created three new state banks, each built on a transfer of loans and deposits from the old to the new. At the time of the process, many foreign creditors held bonds issued by the three private banks. With the collapse of the banks, most creditors, despairing of recovering any value, sold their bonds to “vulture” investors for pennies on the dollar. When the government, under IMF pressure, committed to privatizing two of the newly created state banks, these investors were well placed to take advantage of the situation. In short, they traded the government their bonds in exchange for controlling shares of the new banks.
  • Loans made by the old banks were heavily discounted when transferred to the new banks. While the government intended the new banks to share the discount with the borrowers, this was never made mandatory. As a result, “Household debts acquired at 30 to 50 percent of face value have been re-valued at up to 100 percent…. So unpayably high debts are kept on the books, at transfer prices that afford a windfall to financial predators, dooming debtors to a decade or more of negative equity.”50
  • The government still has an 81.3 percent stake in the third newly created bank, Landsbankinn. However, it is committed to selling enough of its stock to bring its holdings down to a two-thirds share. It has also made clear its willingness to sell its remaining small shares of stock in the other two banks.51
  • Another reason for Icelandic activist concern was the government’s public commitment to unwind its system of capital controls. The government’s original target date was 2013, but it appears that this has been pushed back until 2015. Still, powerful export firms and financial interests pressed the government to move as fast as possible.
  • But a central contribution to the defeat of the Social Democratic Alliance in the April 2013 elections was its determination to pursue Icelandic membership in the euro area, which would have meant the country would not only have to abandon its capital controls but its currency as well.52 Iceland applied to join the European Union in July 2009. Formal negotiations began approximately one year later and continued to move ahead. According to the New York Times, “Iceland has now finished 10 of the 35 ‘chapters’ of EU laws that new members must work their way through—a pace that Enlargement Commissioner Stefan Fule said was the fastest for any country since new rules were adopted in 2006.”53 Up to a few moments before their defeat the Social Democratic Alliance led government continued to pursue membership in a euro area in crisis. The new government immediately dropped the bid to join the euro zone, to general relief.54
  • A revolutionary process would include, at a minimum, an increasingly popular supported state commitment to a publicly owned-and-controlled banking system and a system of capital controls, both key elements in any effort to establish a domestically rooted, full-employment growth process. In contrast, what we saw was quite the opposite. The Icelandic government not only gave up ownership of two of its three large banks to foreign vulture investors, it did so in a way that has allowed those investors to exploit its citizens.

Lessons from the Icelandic Experience:

  • The popular movement in Iceland deserves recognition for its achievements and support as it struggles to learn from its electoral defeat in April 2013. More generally, I believe that the Icelandic experience offers useful lessons for all those working to build movements capable of initiating meaningful social transformations. The first lesson is that countries do not adopt neoliberal policies because of a policy mistake or the takeover of government by extremist elements. Rather it is an expression of a generally shared capitalist desire for bigger profits coupled with the realization that this requires greater market freedom, both regulatory and geographic. The fact that the adoption of these policies may cause a shake-up of capitalist-class relations does not change this conclusion.
  • The second is that expansion generated by neoliberalism contains the seeds of its own undoing. Capitalism is a contradictory and unstable system and the more unchecked are market forces, the faster the economic rise and the more dramatic the economic fall. The Icelandic experience, in particular, offers a frightening illustration of how easily our well-being can be threatened by the machinations of financial interests.
  • The third is that states can effectively intervene in multiple, interconnected markets and achieve impressive results. More to the point, comparing the experience of Iceland with that of other countries makes clear that active state intervention in restructuring and directing markets is the key to a socially desirable response to crisis.
  • The fourth is that crisis alone is not sufficient to deter capitalist interests from their support for liberalization and privatization. In most countries, the same capitalist interests that orchestrated the adoption of the neoliberal policies that generated the crisis remain adamant defenders of the same policies. Iceland was unique in that popular forces succeeded in forcing the responsible government out of office and replacing it with a more social-democratically oriented one.
  • However, the previous governing interests remained in powerful positions and never ceased to agitate for their return to power. For example, the media never ceased to be under Independence Party control; Oddsson, the former Prime Minister, is the editor-in-chief of the leading Icelandic daily newspaper. “Majority opinion in the Independence Party continues to believe that ‘alpha Iceland was hit by a perfect storm from abroad,’ meaning that ‘the crisis was not our fault’ … Polls show that it has succeeded in convincing a majority of the population that the current [Social Democratic] government is somehow responsible for their troubles.”55 The Independence Party and the Progressive Party were the overwhelming winners of the April 2013 elections, receiving over 51 percent of the votes compared with 23 percent for the Social Democratic Alliance and Left Green Movement.
  • The fifth is that social democratic policies, regardless of how successful they may be in defending popular interests during a period of crisis, do not automatically generate support for an agenda of social transformation. One reason is that social democratic parties tend to present their interventions as temporary, made necessary by unusual circumstances. Once stability is regained, capitalist interests are well positioned to argue that such interventions need to be undone so as not to become fetters on expansion.
  • The final lesson is that to advance a meaningful revolutionary process, activists must not only build popular support for expanded public ownership and state capacities to direct economic activity, but they must do so as part of a movement that directly challenges the legitimacy of capitalist imperatives and encourages new visions of social ownership and patterns of production and distribution.

(full text, notes 1-55).


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