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A FUNNY thing, so to speak, happened on the way to the market. Iceland, that funny island with almost more thermal geysers than inhabitants, is back, economically speaking, with a vengeance. And the world press is taking note.
Several analyses have appeared in the European media during the last month or so. And what emerges, is simply fascinating.
The Icelandic bounce-back after the total collapse of 2008 is important, for it lays bare certain conditions for economic success in the face of considerable adversity. When looking at the country from a South African perspective, we shall, however, also have to factor in the differences.
In 2008, Iceland was riding the crest of an economic boom without comparison in its history. The economy grew like mad. Icelanders made huge sums on the stock exchange, and they built expensive houses and bought lots of shiny Mercedes Benzes and BMWs. It was as near to heaven on earth as one could imagine.
Things looked so rosy that even British and Dutch pension funds invested heavily in Icelandic banks.
But there was a small problem. All this prosperity was built on credit. Ordinary Icelanders, including secretaries and waiters, borrowed money to buy shares.
And then the banking crisis of 2008 happened. Overnight, the Icelandic economy almost evaporated. With its small population of only 320 000, the national foreign debt (not the same as state debt) shot up to €90bn. It was a catastrophe.
A tenth of the population fell into serious loan default, and thousands of homes and motor cars were repossessed.
International credit rating agencies downgraded Iceland to junk status, and unemployment shot up to an unheard of 10%.
The main four banks, who had encouraged the irresponsible bubble, crashed. The enraged British and Dutch pension fund members had to be recompensed by their governments, who demanded that Iceland repay them to the tune of €4bn.
But the Icelandic voters saw things differently. Why should they suffer because of the greed of a few stinking rich bankers?
Twice the Icelandic government reached agreement with Britain and the Netherlands about the repayment of the pension funds, and twice the voters rejected it in referendums.
And then they threw out the government in an election, and the new government decided that a new, painful approach was the only way out.
They refused to prop up the bankrupt banks and let them crash, notwithstanding the huge financial loss to the banks’ clients.
The government raised taxes on just about everything they could think of, except the abundance of fresh air, and slashed spending. The suffering was considerable.
But the Icelanders, the descendants of the Vikings who had settled there in the 10th century (and even went on to “discover” and colonise North America long before Columbus), are a stubborn and hardy people. They gritted their teeth with stoic endurance.
And it paid off. All the skilled workers who had been poached by the greedy bankers became available to the real productive economy, and most found jobs in the manufacturing sector.
Unemployment is now down to just over 5%, inflation is in check and foreign investment is once again flowing in. The economy is growing by more than 2% per annum after having shrunk by more than 10% in two years.
But make no mistake, this was no mere miracle. Iceland had a sound foundation on which to build.
First of all, the small population is highly qualified, the result of decades of massive investment in education and training. The work ethic is high. Laziness is not part of the Icelandic national culture.
Iceland is relatively nearby for prosperous European and North American populations. With its breathtaking natural beauty, it is a logical destination for hundreds of thousands of tourists.
It has a fairly “green” economy. Thermal heat supplies five times the island’s energy consumption free of charge. Iceland even exports electricity to Europe.
Seen from a South African perspective there are, of course, many differences. The biggest of these is the shortage of proper education and training, the way in which the authorities are deceiving themselves regarding the matric pass figure being a case in point.
And, of course, we South Africans did not stand in the front of the row on the day when our Lord dispensed thrift and the ability to work hard.
There is, however, a big lesson to be learnt. This comes in the words of an Icelandic businessman, Jan Siggursson, quoted on the BBC’s web page: “Don’t depend on a phoney economy. It was not real and we understand that now. This was a complete bubble.”
In a word: the financial sector is like oil in a running machine. But it exists to facilitate the machine, as the manufacturing and service sector; it is not a substitute.
This is something our greedy bankers – or are they indeed “banksters”? – should mull over.
- Fin24
* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.
Several analyses have appeared in the European media during the last month or so. And what emerges, is simply fascinating.
The Icelandic bounce-back after the total collapse of 2008 is important, for it lays bare certain conditions for economic success in the face of considerable adversity. When looking at the country from a South African perspective, we shall, however, also have to factor in the differences.
In 2008, Iceland was riding the crest of an economic boom without comparison in its history. The economy grew like mad. Icelanders made huge sums on the stock exchange, and they built expensive houses and bought lots of shiny Mercedes Benzes and BMWs. It was as near to heaven on earth as one could imagine.
Things looked so rosy that even British and Dutch pension funds invested heavily in Icelandic banks.
But there was a small problem. All this prosperity was built on credit. Ordinary Icelanders, including secretaries and waiters, borrowed money to buy shares.
And then the banking crisis of 2008 happened. Overnight, the Icelandic economy almost evaporated. With its small population of only 320 000, the national foreign debt (not the same as state debt) shot up to €90bn. It was a catastrophe.
A tenth of the population fell into serious loan default, and thousands of homes and motor cars were repossessed.
International credit rating agencies downgraded Iceland to junk status, and unemployment shot up to an unheard of 10%.
The main four banks, who had encouraged the irresponsible bubble, crashed. The enraged British and Dutch pension fund members had to be recompensed by their governments, who demanded that Iceland repay them to the tune of €4bn.
But the Icelandic voters saw things differently. Why should they suffer because of the greed of a few stinking rich bankers?
Twice the Icelandic government reached agreement with Britain and the Netherlands about the repayment of the pension funds, and twice the voters rejected it in referendums.
And then they threw out the government in an election, and the new government decided that a new, painful approach was the only way out.
They refused to prop up the bankrupt banks and let them crash, notwithstanding the huge financial loss to the banks’ clients.
The government raised taxes on just about everything they could think of, except the abundance of fresh air, and slashed spending. The suffering was considerable.
But the Icelanders, the descendants of the Vikings who had settled there in the 10th century (and even went on to “discover” and colonise North America long before Columbus), are a stubborn and hardy people. They gritted their teeth with stoic endurance.
And it paid off. All the skilled workers who had been poached by the greedy bankers became available to the real productive economy, and most found jobs in the manufacturing sector.
Unemployment is now down to just over 5%, inflation is in check and foreign investment is once again flowing in. The economy is growing by more than 2% per annum after having shrunk by more than 10% in two years.
But make no mistake, this was no mere miracle. Iceland had a sound foundation on which to build.
First of all, the small population is highly qualified, the result of decades of massive investment in education and training. The work ethic is high. Laziness is not part of the Icelandic national culture.
Iceland is relatively nearby for prosperous European and North American populations. With its breathtaking natural beauty, it is a logical destination for hundreds of thousands of tourists.
It has a fairly “green” economy. Thermal heat supplies five times the island’s energy consumption free of charge. Iceland even exports electricity to Europe.
Seen from a South African perspective there are, of course, many differences. The biggest of these is the shortage of proper education and training, the way in which the authorities are deceiving themselves regarding the matric pass figure being a case in point.
And, of course, we South Africans did not stand in the front of the row on the day when our Lord dispensed thrift and the ability to work hard.
There is, however, a big lesson to be learnt. This comes in the words of an Icelandic businessman, Jan Siggursson, quoted on the BBC’s web page: “Don’t depend on a phoney economy. It was not real and we understand that now. This was a complete bubble.”
In a word: the financial sector is like oil in a running machine. But it exists to facilitate the machine, as the manufacturing and service sector; it is not a substitute.
This is something our greedy bankers – or are they indeed “banksters”? – should mull over.
- Fin24
* Leopold Scholtz is an independent political analyst who lives in Europe. Views expressed are his own.
