• The Mission of the Icelandic Left: Rescue the Welfare State

  • Στέινγκριμουρ Σίγκφουσον , Ρούρικ Χολμ | 20 May 09 | Posted under: Ισλανδία
  • Steingrímur Sigfússon, the Minister of Finance and the leader of the Left-Green Movement, in conversation with Ruurik Holm from transform! europe on the financial crisis of Iceland.


    The wind of the North Atlantic has started to blow leftward. The crash of Iceland’s banking sector has not only wiped out some of the larger prosperous sectors of the country’s economy but also its long-lasting neoliberal hegemony. Now the left agenda has become the dominant one – even to the extent that right-wing supporters sometimes feel their views are no longer respected. The April 25, 2009 elections will show what the future will be like: either public spending cuts advocated by the right or holding society together by increased tax revenues promoted by the left.

    After the so-called Kitchen Revolution, a series of huge protests in front of the Icelandic parliament culminating in the late-January 2009 demonstrations, the old coalition government led by the conservative Independence Party had no option but to resign. On February 1, the new government of the Social Democratic Alliance and the Left-Green Movement took office. Since then, the framework of policy-making has been dictated by financial necessities and, above all, by the IMF rescue deal guaranteeing a $ 2.1 billion loan for the Icelandic government for taking care of its immediate liabilities. During the period of economic liberalisation and concentration of power in the hands of a few rich people Iceland has followed a road slightly different from the rest of the Nordic countries. The income tax rate, for example, has contained only one progressive step, not the whole progressive scale customary in Nordic countries. The capital income tax rate has been a very moderate 10 %. However, the main cause of the current crisis in Iceland, besides of course its export dependency, was the privatisation of banks in 2002 when the problems of a lack of external monitoring could no longer be ignored. Having three relatively large banks operate freely in the world market while they rested on a nation of only 300,000 people was like playing Russian roulette – except that those suffering in the case of loss would be the Icelandic people, not the players themselves.

    Power in Icelandic society has been very concentrated in a fraternal network of a few rich people and the conservative Independence Party. Iceland’s first billionaire, Thor Bjorgolfsson, has been involved in many aspects of business life. He has, for example, been a strong figure in the Icelandic media. He has also supported the arts and culture, and the combination of these interests with Bjorgolfsson’s media connections has resulted in a highly centralised power structure in many parts of society. It can be almost said that the country gradually degenerated into a kind of mafioso society where getting your voice heard required befriending the right people. The aftermath of the banking crisis is thus not only about dealing with the economy but also about fighting against corruption and democratising Icelandic society. This means that for instance the media ownership relations will have to be restructured to guarantee a multi-voiced and democratic public debate.

    Left-Green movement in charge of the treasury

    The new government in office, led by the Social Democrat Jóhanna Sigurdardóttir, has taken an active stance toward the threatening collapse of the welfare system. According to Steingrímur Sigfússon, the Minister of Finance and the leader of the Left-Green Movement, one of the new government’s most important measures has been the stop on the foreclosure of people’s homes for a six-month period. Moreover, under discussion in the parliament is a proposed law allowing people to pay, in a 3–5 year period, what they can of their mortgages, after which their situation is to be re-evaluated. However, all policy measures will have to fit in the overall picture, which is extremely tight.
    “We have to bring down the state deficit to zero in a period of 3–5 years”, says Steingrímur (it is customary in Iceland to use only the first name). There has been some speculation about the actual conditions of the IMF loan to Iceland. According to Steingrímur, the details can mostly be gotten from the IMF internet pages and those of the Icelandic government.
    “Practically nothing is being kept secret. I remain a critic of the IMF, with respect to what they are doing in third world countries and so forth, but Iceland is a different case since Iceland is not a developing country. This is the first time the IMF has come to the Nordic region and the first time in over 30 years that they have come to an OECD country. And they have also learned something. Twenty years ago they would have come to Iceland and they would hardly have spoken to anyone. They would not have held any press conferences. And at the conclusion of their visit they would have told the country what must be done. Instead, however, the process has been a dynamic one, worked out in a good cooperative manner”, Steingrímur explains.

    Holm: However, although the IMF is not as straightforwardly authoritarian as it is in many countries of the global South, aren’t they the ones who need to be persuaded about the adoption of any policy that may consume the country’s excess revenue?

    Steingrímur: We decided to accept a limited possibility of raising funds from private pension insurance accounts. Normally these funds are not accessible until you are 60 years old. The government and the municipalities get a little income by taxing these payments. We have a tax deduction system in which you get part of your mortgage payments refunded, relative to your income. In this way, low-income people can get assistance to keep their homes. Now we are increasing this system enormously by putting 2.1 billion Icelandic crowns (13.3 million euros) into it. We explained to the IMF that this is a social-security measure for low-income households. After tough negotiations and many meetings the IMF finally agreed. They said that we have argued this well and that they accept it.

    Two options: raise taxes or cut public expenditure

    Holm: The present Icelandic government is considered a transition government before the new parliamentary elections of April 25, 2009. The current minority coalition is aiming for a majority government as polls now forecast more than 30 % support for the social democrats and around 25 % for the Left-Green Movement. However, one may ask how wise it is to volunteer to clean up the mess caused by the previous government and the Independence Party. Is there not a danger that the left will have to follow a line of policy which may look very right-wing to the people, with cuts in the public sector and social benefits, etc.?

    Steingrímur: We will clearly differ from the right-wing option in one way: We will try to defend the welfare system in a totally different way than they do. We won’t try to solve the crisis only by cutting, although some reductions of public expenditure will be necessary. Of course, we will need money for avoiding excessive cuts and we are prepared to introduce more taxes. For instance, we will let those people who are fully employed and have good salaries pay more taxes. The expenditure-cutting approach advocated by the right is going to be harmful for the welfare state. The choice is thus clear: Do the voters want right-wing methods or do they want us to do what must be done, but in a socially fair way? One additional thing is certain: The people know what they already had, they know the consequences of neoliberal privatisation policies. We can ask the people if they want that system again, the system that brought Iceland to its knees. The system was not only economically harmful, but everyday we have more information about the corruption and the greed that existed in that system.

    The EU and the euro

    Iceland’s unemployment rate in February was 8.2 % and the forecast for March is around 9 %. By the end of the year about 10 % of the labour force is expected to be unemployed. Although under the current circumstances this forecast could seem rather optimistic, the downward spiral of the Icelandic economy has stopped. In the streets of central Reykjavik, life goes on as usual, perhaps not in as hectic a way as in the peak of the economic boom, but still the overall picture is a prosperous one. Price levels have dropped but Reykjavik is still quite expensive, which means that the average salary of an Icelander of about 2,000 euros doesn’t buy much in the capital. A notable sign of recession is the halting of construction on the new concert hall because of lack of funding. Another conspicuous sign of crisis is the emptiness of the vast Keflavik airport, which has about 30 departure gates for only a handful of daily flights.
    Neoliberal policies may be able to destroy a society, but if the implementation of those policies is stopped early enough, society remains viable although possibly temporarily damaged. Iceland has become the first country where a right-wing hegemony has really been brought down in a politically consequential way. For the success of the left in coming years it is essential to convince the people that it provides a socially just and economically sustainable alternative. Considered in these terms, the Icelandic left may face the need of more radical changes regarding ownership rights and the concentration of economic power – otherwise those in control of the assets may start to dominate the course of politics again.

    Holm: One main theme in the elections is whether to join the European Union and adopt the euro as Iceland’s currency. The social democrats are in favour of immediately initiating the membership negotiations, but the other parties either hesitate or are against it. The Left-Green Movement is against it, for reasons having to do with the general neoliberal character of the EU but also with a view to the fishing industry, one of Iceland’s main export industries. Since the new government will probably be a bi-partisan one with the Social Democrats and the Left-Green Movement, a compromise has to be formulated with respect of the European issue.

    Steingrímur: Both parties have stated that they want to continue in the government. This is because the situation is really very simple: either you want the Independence Party back in power or you don’t. If you don’t, obviously these two parties are the main players in an alternative government. The Left-Green Movement has been very outspoken about this and we have practically excluded the possibility of working with the Independence Party. The Social Democrats have not been quite as clear on this but they have also stated quite clearly that they are interested in continuing.
    About the European issue the two parties disagree. How do we deal with this then? Two previous governments in Iceland have consisted of parties which have opposed EU membership, and so does the present one. So why couldn’t the next one also? We propose dealing with the European question in an open manner. The ultimate decision should be made by the people in a referendum. A majority for joining the European Union could easily be the result at some point in the future. But the danger is to end up in a situation like Norway, where the people have already said “no” twice in a referendum. Therefore we are in favour of voting first on whether we should even file an application before entering into long and tedious membership negotiations. However, nothing has been decided on this and the debate is going on.

    Holm: The exchange rate of Iceland’s own currency, the Icelandic króna, has stabilised at around 1.60 króna per euro. Obviously a currency with very big fluctuations can be harmful for the economy, and in the case of small countries the currency may be especially vulnerable to external shocks. So why does the Left-Green Movement not support joining the EU so as to have the possibility of adopting the euro currency?

    Steingrímur: One thing is sure: the króna is going to be our currency for some years to come. First, I think the idea of unilaterally adopting a foreign currency is not realistic anyway. Second, it would take us several years to negotiate and ratify EU membership. After that we would have to fulfil the Maastricht criteria, unless of course we were given some special treatment. Now we are in weak position to negotiate. So the euro it is not a solution to our immediate problems. It is a dangerous illusion to claim otherwise, to sit back and say that one can solve our current problems by adopting the euro.In fact, the króna could actually serve us very well in getting us out of the crisis. With the króna we are not bound to another currency, as Latvia is and they are now paying the price of binding the lats to the euro. Latvia is using valuable foreign reserves to keep that connection and they are paying the cost by higher unemployment and a lot of problems in the economy which we could avoid to a great extent. The króna helps us by keeping the export sector healthy and balance of trade positive, which is necessary to be able to pay back the loans. It can be easily argued that precisely because of the crisis, regardless of other things, it is important for us to have our own currency.

    Holm: Thank you very much for the conversation.

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