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Lesley Riddoch: ‘Bumble-bee’ economy flies again

The Harpa concert hall and conference centre in Reykjavik, completed despite the financial crisis

The Harpa concert hall and conference centre in Reykjavik, completed despite the financial crisis

THEY like T-shirts in snow-covered Iceland. Five years ago, when Prime Minister Gordon Brown placed the world’s most peaceful country on the UK Terrorism Register, “Brown is the colour of poo” quickly became popular.

In 2010 when world travel was halted thanks to volcanic eruption, “Oops Iceland did it again,” was followed by, “What part of Eyjafjallajokull don’t you understand” and the uncompromising “We may not have cash but we have ash.”

Actually, these days Iceland has a bit of both. Two other sizeable eruptions took place after Eyjafjallajokull but southerly winds swept the ash cloud away from Europe and beyond the headlines. Iceland’s economic recovery has been equally fortunate but less accidental.

As President Olafur Grimsson put it: “We bailed out the people and imprisoned the banksters – the opposite of America and Europe.” Indeed, there’s a new joke doing the rounds – the new prison planned for Reykjavik is actually a retirement home for bankers, accountants and lawyers.

In fact, Iceland starts 2013 in good economic shape – just about every creditor has been paid back, the country has a BBB+ credit rating and a projected growth rate of 2.3 per cent.

How did they do it? Suddenly everyone wants to know Iceland’s “secret” – just as they did when the banks and businesses of this tiny nation owned assets on high streets across the world.

Then, of course, the booming bank sector (with assets ten times Iceland’s national wealth) went into meltdown taking 320,000 Icelanders, their economy, government and personal savings with them – and about £20 billion belonging to British savers and councils.

After 2009 elections, a new social-democratic, green coalition government was formed, led by Prime Minister Johanna Sirgurdsdottir, which decided to play hardball with an unforgiving world and softball with its own stricken people. They did not bail out the banks.

Rather than saddle taxpayers with bad debts, the Icelandic government let the errant Landsbanki, Glitnir and Kaupthing go into administration, foreign creditors were forced to convert loans into shares, a ban on capital movements stopped cash leaving the country and though Iceland did raise taxes and borrow from the IMF, the country managed to avoid Britain’s double, even triple dip, recession.

The path taken has been characteristically and stubbornly Icelandic – perhaps Gordon Brown’s unsympathetic two fingers providing the needed spur for this far-flung, self-righting nation.

The dry facts of economic recovery are all true. And yet human solidarity played as big a role. Locals are keen to tell you the first £30m loan in those dark days arrived from the neighbouring Faroese (3 per cent of GDP among just 50,000 people) followed by the other Nordic nations. British banks might have been “too big to fail”, but Iceland was too warmly-regarded by its Nordic neighbours.

The new Icelandic government took the dramatic step of forgiving domestic debt (then 13 per cent of Iceland’s economy, now 2 per cent), placed an upper limit on mortgage repayments and converted loans in foreign currencies back into more manageable Icelandic kronur debt.

The Nordic “social safety net” was preserved – indeed once stability returned Iceland “celebrated” by raising benefit payments for families with children. In 2011 steps were also taken to “mend the roof” (constitutionally speaking) by an extra-parliamentary People’s Constitution which revised the system inherited from Denmark upon independence in 1944 and persuaded parliament to put the resulting document to Icelanders in a six-question referendum in 2012.

Icelanders were lightning-quick to take advantage of currency devaluation. A weaker krona – down 50 per cent against the euro in 2008 – boosted exports of Iceland’s traditional big earners, aluminium and fish, and massively boosted the import of visitors. Even in 2010 after a three-week volcanic-eruption and travel ban, the year ended with a net rise in tourists eager to see the once prohibitively expensive land of ice and fire. As the tourism minister put it: “The eruption proved to both Europe and America that Iceland is not so far away.”

Now you can take helicopter trips to see the simmered down Eyjafjallajokull (and nearby glaciers), stay in Icelandair hotels renovated at the height of the “crisis,” visit the new Fontana geothermal spa built by locals during the downturn and sample Europe’s best tomato soup at Fridheimar – Iceland’s largest hydroponic greenhouse which helps produce the lion’s share of tomatoes for the domestic market by taking advantage of non-EU-regulated cheap geothermal energy (house heating averages just £30 pcm) and higher costs of importing food from stronger currencies.

New businesses like Ossur (makers of the running blades used by Paralympian Oscar Pistorius) also benefitted from the influx of young talented workers once destined only for the banking sector. And The Scotsman carried news last week of Icelandic plans for a North Sea cable to export more of their baseload energy.

Iceland has bounced back – thanks to a little luck and a lot of independent-mindedness, hard work, quick thinking and bold capital investment. The new centrepiece of the Reykjavik skyline is Harpa, a magnificent concert hall which opened in 2011 – against all the odds. In 2008 it was part of a waterfront redevelopment including a 400-room hotel, luxury flats, shops, restaurants and new bank headquarters. The whole project went on hold when the financial crisis hit, until the government decided to fund construction of the half-built venue.

The result is a home for the Icelandic Symphony Orchestra and Opera and an awe-inspiringly beautiful, shimmering glass cathedral – a tribute to Iceland’s new economy built on what’s real, not leveraged or illusory.

Creativity in Iceland is very real. There are 7,000 creative arts businesses in this population of 320,000 people – famous names like Bjork, and aspiring names like Dogma (the makers of those provocative T-shirts). Two of the three offending banks, Glitnir and Kaupthing, have gone. Landsbanki remains pending the outcome of the Icesave case being decided in a Luxembourg Court later this month.

Although Iceland has only 7 per cent of Scotland’s population, it has mended itself. This smallest part of the Nordics’ puzzling “bumble-bee” economy has resumed its science-defying flight. According to Nobel laureate and economist Paul Krugman: “Iceland broke all the rules yet things are not too bad.” Quite.

How many times will small Nordic countries “break the mould” before we question the mould, not their persistent, successful “exceptionalism”?

 

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