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«Written by: Carsten Berg, Germany Published by: democracy international democracy international is the global network ...»

-- [ Page 1 ] --

From Crisis to Direct Democracy? –

The Case of Iceland

Written by: Carsten Berg, Germany

Published by: democracy international

www.democracy-international.org

democracy international is the global

network promoting direct democracy. Our

goal is to bring together those who want to

be actively involved in developing and

expanding civic engagement and direct

democratic participation at all levels. We

offer all members a platform for exchange,

support and collaboration

January 2012 contact: berg@democracy-international.org Content From Crisis to Direct Democracy? –

The Case of Iceland

1) Introduction

2) Iceland’s democratization process in the context of the financial crisis.................. 3 3) 'Let banks fail' – one of the key lessons from Iceland’s crisis?

4) Iceland’s First Popular Vote Since 1944 – The “Icesave” Referendum

5) Will Iceland’s citizens give themselves a new Constitution?

6) What innovations are there in terms of Direct Democracy?

7) The problem of issue exclusion

8) Sources:

1) Introduction After the big financial crisis starting in 2008, Iceland has the potential to reinvent itself.

In response to the devastating economic collapse caused by irresponsible bankers and politicians, Icelanders became active politically and struggled to find new ways of selfdetermination and democracy. First of all they started the so-called “pots-and-pans” revolution (so called because protesters were banging their pots and pans loudly) in the streets of Reykjavik that led to a new government in 2009 and a demand for a fully newly designed Republic of Iceland. In addition, Icelanders organized two referendums, in 2010 and 2011, to decide on the fate of two government bills regarding deposit guarantees. Last but not least, a total revision of the national constitution has been launched and a first draft presented in July 2011 which includes new instruments of direct democracy. All these elements were good reasons to travel to the world’s most northerly capital and explore Iceland’s latest direct democracy developments in more detail. Read the report by Carsten Berg.

2) Iceland’s democratization process in the context of the financial crisis Three years ago Iceland was the first country to be hit painfully by the global financial crisis. The Lehman Brothers bank failed on September 15, 2008. By October 9, Iceland’s three big banks – Glitnir, Landsbanki and Kaupthing – had collapsed. From then on Iceland was unable to refinance its loans and became the first Western European nation (since the UK in 1976) to get a loan from the International Monetary Fund. As happens in many countries these days, Iceland’s political agenda was determined from outside. In exchange for rescue money Iceland had to implement the austerity measures dictated by the International Monetary Fund (IMF). To give only a

few socio-economic indicators to show how greatly Icelanders suffered from the crisis:

the unemployment rate tripled, the Icelandic Króna lost more than 50% of its value compared to the Euro, external bank accounts were frozen when the UK government bizarrely applied anti-terror legislation1 to freeze icelandic assets abroad, and thousands of Icelanders, many of them young and educated, left the country.

How did this happen? As elsewhere, responsibility for Iceland’s crisis does not rest solely with the global finance industry. There also had to be politicians in the various countries affected who either accumulated too much debt, or - and this applies to Iceland - gave the banks too much freedom. That’s precisely why many Icelanders want to hold their politicians to account. Many of them see David Oddsson, who as former head of government privatized the banking sector, giving it very wide room for maneuver, as the one primarily responsible for Iceland’s financial plight - not least also because, as the subsequent CEO of Iceland’s central bank, David Oddsson was later among those responsible for overseeing the banking sector. However, the first politician to be taken to court as a result of the global financial crisis was the former Prime Minister Geir Haarde2. Whatever the outcome of this particular case, Icelanders are very clear that the crisis is a result of human actions i.e. a problem brought upon themselves as a result of their current political system and of their elected representatives - the politicians; a problem which almost led the country into bankruptcy at the end of 2008. At that point in time Icelandic banks ultimately owed more than six times the country's GDP, a world record. In other words, Iceland’s crash was the costliest financial crash on record relative to the size of the country (Gylfason 20113).

3) 'Let banks fail' – one of the key lessons from Iceland’s crisis?

When the world's credit markets dried up, the Icelandic government was unable to pay back its loans. As a result, the Icelandic banks ended up defaulting on more than EUR 60 billion. In other words, instead of bailing out private banks with taxpayers’ money as other countries in the world are doing, Iceland let its banks default. For the world these banks were not “too big to fail” and Iceland was simply too small to save them by bailing them out. Iceland’s Finance Minister Steingrimur J. Sigfusson stated that http://news.bbc.co.uk/1/hi/uk_politics/7662027.stm http://www.guardian.co.uk/business/2011/jun/07/iceland-former-premier-trial-bankingcrisis http://www.voxeu.org/index.php?q=node/7077 defaulting wasn’t really a choice, but was rather happening under coercion.4 He concluded that: "People should be careful when it comes to drawing comparisons between Iceland on the one hand, and Greece, Portugal, Spain and Ireland on the other. Iceland didn’t have the ability to save the banks". In the view of some renowned economists, however, the key lesson from Iceland’s crisis is “let banks fail”; for them Iceland is a model for other debt-stricken European nations. "Where everyone else bailed out the bankers and made the public pay the price, Iceland let the banks go bust and actually expanded its social safety net", said Nobel Prize-winning US economist Paul Krugman in a recent New York Times piece.5 Taking a similar stance, Martin Wolf has recently described “How Iceland survived the fire”, analyzing the lesson to be learnt from Iceland and expressing the view that "Iceland is to be congratulated on having escaped the Irish folly".6





4) Iceland’s First Popular Vote Since 1944 – The “Icesave” Referendum After the three large private Icelandic banks ended up defaulting, Iceland transferred domestic loans and savings into new state-owned banks, but were not able to transfer foreign assets and debts into the new banks. This caused the so-called “Icesave dispute” between Iceland on the one hand and the United Kingdom and the Netherlands on the other. The dispute centres on the private creditors of the privately owned Icelandic bank Landsbanki, which had taken private deposits from more than 400,000 British and Dutch customers (by comparison, Iceland’s total population is 320,000) through its branches in London and Amsterdam, through an Internet product known as "Icesave". However, when the bank collapsed, Iceland was not able to guarantee repayment of their deposits. As a result, the UK and Netherlands governments compensated their own citizens, but pushed for Iceland to repay the EUR

3.8 billion their citizens had lost when the Landsbanki failed.

Even though this issue was legally and politically questionable, in late 2009 the Icelandic parliament agreed, by a narrow margin of 33–30, on the so-called “Icesave” bill to compensate British and Dutch citizens. The Icelandic government agreed that the money would be paid back between 2017 and 2023. However many Icelanders were unhappy with the bill and organized themselves through the grassroots group InDefence7, which initiated a campaign that resulted in the two biggest petitions in Iceland’s history. One petition to protest against the use of the Anti-Terrorism Act by the UK Government against Iceland, and the other for a referendum on the Icesave bill (see also the excellent presentation8 by InDefence at the international conference “Towards Direct Democracy in Iceland - The Swiss experience and lessons to be learned”). The first petition turned out to become the largest petition in Icelandic history.

The 83,300 signatures were handed in to the British Parliament in March 2009. In November 2009, InDefence launched a second successful petition signed by more than 60,000 people that finally triggered a referendum on the Icesave bill to be held on 6 March 2010.

http://www.bloomberg.com/news/2011-06-15/greece-ireland-can-t-default-likeiceland.html http://www.nytimes.com/2011/10/28/opinion/krugman-the-path-not-taken.html http://blogs.ft.com/martin-wolf-exchange/2011/11/21/how-iceland-survived-the-fire/ http://www.indefence.is/ http://stofnanir.hi.is/mannrettindastofnun/sites/files/mannrettindastofnun/DirectDemocra cy15Sept2011.pdf Since the current Icelandic constitution does not provide for any binding right to citizeninitiated referendums, there was only one means of triggering a public vote - via the President. Article 26 of the Icelandic Constitution9 states that bills passed by the Althing (Icelandic Parliament) must be countersigned by the President or be put to a national referendum if he refuses to do so. After President Grimsson finally had a face-to-face meeting with campaigners from InDefence in early January 2010, he declared a few days later that he would not countersign a bill into law that was opposed by a quarter of the citizens. Consequently he called for a referendum to take place on 6 March 2010, the first to be held in Iceland since independence in 1944.

Grimsson’s decision was followed by aggressive reactions from the UK government and media. (For just one example from a British TV channel of how President

Grimsson had to defend his and the citizens’ choice for a public vote, see this clip:

between 6.00 and 7.

00)10. In 2008 the then UK Prime Minister Gordon Brown had even announced his intention to launch legal action against Iceland making use of antiterrorism rules11. In response InDefence demanded “a reasonable Icesave agreement to avoid national bankruptcy” (see Press Release12). According to InDefence, Icesave is not Icelandic debt. Instead the UK, the Netherlands and the EU must share responsibility with Iceland for a failure in the financial supervision of cross-border banking. For InDefence and for most Icelanders it was not about a categorical refusal that any repayments should be made. What they were really angry about were the conditions of the repayment agreement - according to which Iceland would have to pay fixed interest of 5.55% on the repayments - amounting to about half of the entire cost of the Icelandic health system. They also protested against the fact that the Icelandic state should have to guarantee the payments. According to InDefence the responsibility and costs for flawed banking regulation must be shared. They considered a payment obligation representing €48,000 per Icelandic family as highly disproportionate. Many Icelanders also felt that they were being treated unfairly in being expected to pay for the mistakes of private banks which grew on debt money and then collapsed as a result of the global financial crisis. As InDefence said: “It is unacceptable that private banks are able to reap the profits, but pass their losses on to the taxpayers”. In addition, they referred to the unclear legal basis of the Dutch and British claims which would have to be clarified with the EFTA court and complained about the "draconian nature of the proposed Icesave settlement and the preceding aggressive use of anti-terrorism legislation against Iceland by the British government”, adding that they felt that “larger and more powerful European nations would have been treated in a very different manner". The last point also referred to the UK and Netherlands’ intention of “blocking vital IMF loans until Iceland forcibly signs this imposed repayment”.

The running sore between Iceland and the UK would not be healed, but even worsened. It appeared that in contrast to their representatives, the Icelanders themselves were not prepared to be browbeaten. While the representatives in parliament had already voted in favor of the Icesave bill, a clear majority of 93% of the citizens voted against it in the referendum, with less than 2% in favour, on a high turnout rate of over 62%. A second referendum on the same issue (but with better interest rate and other terms) was held a year later, on 9 April 2011. According to an opinion poll carried out in Iceland on 20 and 21 February that year, 57.7% would vote http://www.government.is/constitution/ http://www.youtube.com/watch?v=e2VuElk5_Bg http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aXjIA5NzyM5c http://dl.dropbox.com/u/3133428/InDefence%20Press%20Release%2010%20Feb%202010.pdf to accept the legislation. However, in the end a clear majority of 59.8% rejected the bill, again on a high turnout of 75%.

Iceland’s Prime Minister Jóhanna Sigurðardóttir tried to defend the democratic decision morally, but not legally: “This sentiment among the Icelandic public is quite understandable and is presumably a sentiment shared among the public all across Europe in the aftermath of the financial crisis. People ask themselves: why do we, as taxpayers, have to shoulder the burden of problems caused by the behaviour of irresponsible bankers? Taxes should be used for public services, for the welfare of ordinary citizens, but not because of huge losses by financial institutions.”13 At the same time Prime Minister Sigurðardóttir did not represent and defend her people in practical and legal terms, stating immediately after the results of the referendum were published that "the worst option had been chosen".



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