FT-CI

Iceland:

The First European Government to Collapse as a Result of the Economic Crisis

20/02/2009

The First European Government to Collapse as a Result of the Economic Crisis

Last January 26th, amidst mass mobilizations and the economic collapse, the Icelandic government resigned. The government was lead by the right wing Independence Party conservative prime minister Gier H. Haarde, who governed in coalition with the Alliance Social Democratic, formed in May 2007.

Since October 2008, when the economic crisis exploded in this little European country with 320,000 habitants, a process of mobilizations was developing that reached that reached its peak in mid-January. Thousands of people (between 5,000 to 10,000) blocked off the parliamentary building and surrounded the car transporting Haadre, which had to be rescued by security.

For the first time since the protests against the incorporation of the country into NATO in 1949, the police suppressed the protesters with tear gas and arrests. This situation finally brought the coalition government to a terminal crisis with the renouncing of the Alliance Social Democrats and the resignation of Haarde.
The politics of financial liberation that developed during the last 20 years had converted Iceland into an attractive market for the international speculators, especially for the investors from Great Britain and Scandinavian countries, by offering high bank interest rates pegged to inflation. This created a credit and financial bubble that represented nine times the GNP of the country.

After a decade of “prosperity,” they sounded the alarms in May 2008 when the Danish, Swedish and Norwegian Central Banks granted the country an extraordinary loan of 1,500 million euros in order to handle their obligations. The bubble burst last October, shortly after the Lehamn Brother’s collapse. In just one week the Iceland’s three most important banks collapse along with the loss of millions of European investors’ dollars. In that moment Iceland owed foreign creditors over $40,000 million, in addition the currency value dropped and inflation reached 20%.

The government ended up nationalizing the banks, under pressure from Great Britain, Holland and other European governments so that Iceland would respond to the foreign investors. Iceland agreed on a 6 billion dollar loan with the IMF, Denmark and other countries in exchange for a set of conditions; the 2.1 billion loan from the IMF is on condition that Iceland reduce pension salary and implement important cuts in public spending.

For the majority of Icelanders this crisis had disastrous effects and analysts don’t hesitate to compare the Nordic country’s economic collapse with the Argentine crisis in 2001.

Around a third of the population lost their savings, unemployment rate quickly rose and they calculated that around 70% of the businesses are in bankruptcy. The outlook for next year is grim: according to The Economist’s estimates, the economy is going to contract at least 10% and unemployment could reach 9% (it’s currently 4.5%). With the fall of the local currency around 40%, the price of imported goods, which represents an important portion of mass consumer goods, haven’t stop rising; thus, leading to a further fall in salaries and standard of living.
After Haarde’s resignation, the Social Democrats were entrusted with the formation of a new government alliance with the Left Green Party (formed from a break with the Social Democratic party at the beginning of the decade in a neoliberal turn), with the social democrat, Johanna Sigurdardottir, a very popular political figure for her militant support for sexuality rights and because of her marriage to a female journalist.
The country’s ruling class hopes that the change in government will weaken the state of mobilizations, although this could happen at the beginning, the situation will probably continue to be instable. This will be a weak government that relies on a few parliament majority - 34 of 63 parliament members- and will also have to be based on the support from the Progressive Party, the right leaning conservatives. The upcoming elections will be held April 15.

The Prime Minister already announced her plan to get out of the crisis is to join the European Union and adopt the Euro, which the Icelandic political elite have opposed throughout the years. However, Sigurdardottir, with some difficulty, can argue that joining the EU will prevent the population as a whole, from having to pay for the crisis. While the European block economies are in open recession, we’ve seen the first signs of mass resistance against the bailout of banks, business and millionaires, like in Greece, eastern European countries and France. The European young and the working class have to prepare to confront the government’s plans to back the employers.

Iceland was the first country to suffer the blow of the economic crisis that quickly transformed into a political crisis, but it will hardly be the last. The mobilizations that caused the government to fall in Iceland along with the manifestations in Bulgaria, Letonia and other European countries are the beginning signs of the unstable times that have come.

Translation by Sara G.

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