Iceland’s President Explains Why The World Needs To Rethink Its Addiction To Finance
Here’s the full transcript of Business Insider’s interview with Ólafur Ragnar Grímsson, who has been President of Iceland since 1996, and announced last month he would be running for a fifth term. In it he explains how he had the balls to stand up against Britain, how Iceland has dealt with the crisis of 2008, and why he thinks a large financial sector can ruin a nation. The lessons for a future Scotland are writ large, in bold capitals.
How has life in Iceland changed since the meltdown?
It’s very difficult to give a short description of how life has changed. It’s absolutely clear in Iceland, like many other countries, the financial crisis came as a profound shock, not only to the financial institutions, but also to ordinary people, the economy…
So thousands of Icelanders had to struggle with fundamental change in their economic situation, loss of income, even loss of property, increased burden of loans, unemployment, and the nation as a whole also had to face — which somehow we were fortunate to realize early on — that the collapse of the banks was not just an economic or financial crisis, but also developed into a very profound political, social, and even judicial crisis.
Whereas in many other countries, until recent months, there was a tendency to read this, through 2008, 2009 into 2010, primarily as an economic and financial challenge. And I think one of the reasons Iceland has come out of this crisis earlier and more effectively than anyone could have expected, even ourselves, is that early on, we approached this not just with economic and financial challenge, but also attempted to deal with the profound profound social, political, and even judicial challenges, which the collapse of the bank brought about.
And during those final months of 2008 and the early weeks of 2009, what we saw here in Iceland was a fundamental threat to the political and social stability of the nation. Iceland is one of the most stable, open, and secure democracies you can find anywhere in the world.
How the financial system could pose a fundamental threat to the political and democratic framework of Iceland illustrates the grave political and social responsibility which the market and the financial sector carries, because if a collapse in the financial sector can bring one of the most stable and secure democracies and political structures to his knees, as happened in Iceland, what could it do in countries that have less stable democratic and political history?
So this journey in the last three years has not only been difficult for ordinary people, families, homes, many companies, but it has also been a profound learning experience for the nation, not just economically, but as I said before, politically and socially as well.
Do you look at Greece and wonder if they should be learning from the Icelandic model?
I have been very hesitant and reluctant to pass judgment on what other countries should do. I saw many misleading judgments made by people in other countries with respect to Iceland in recent years that I don’t think it is wise or fair for me to tell other countries what they should do.
But I think it is our obligation in Iceland to give an open and honest description of our own experience, of the lessons we have leaned, and other people can draw their own conclusions. I have already mentioned that if you want to deal with this economic crisis, you must treat it not only as an economic challenge but also as a fundamental social, political, and even a judicial challenge.
On the judicial side, we appointed a special commission headed by a Supreme Court judge that issued a report in 9 volumes, we appointed the office of special prosecutors, we have enacted various legislation and laws that relate to the judicial and legal system.
A second lesson, interestingly enough, is in terms of our economic policies. We have, to some extent, gone against the prevailing economic orthodoxies of the American, European, and IMF model in the last 30 years. This has even been recognized by the IMF leadership.
As you know, the IMF program finished last year, and we organized a celebratory conference in October, where we said goodbye to the IMF program, and it was attended by Paul Krugman, and other prominent economists, as well as some of the leading officials of the IMF. And it was very interesting to hear them acknowledge that the IMF had probably learned more from this experience with Iceland than Iceland had learned from the IMF. It has made the IMF reconsider some of their orthodox stances on what should be the proper economic and financial response to a crisis on this nature.
Thirdly, we have, in our economic measures, tried to protect the lowest income sectors, we have to try and protect some of the elementary social and health services, and done more of that nature than has traditionally been done in dealing with such a crisis.
As everybody knows now, we did not pump public money into the failed banks. We treated them like private companies that went bankrupt, and we let them fail. Some people say we did it because we didn’t have any other option, there is clearly something in that argument, but it does not change the fact that it turned out to be a wise move or whatever reason. Whereas in many other countries, the prevailing orthodoxy is you pump public money into banks and you make taxpayers responsible for the banks in the long run, and somehow treat the banks as if they are holier institutions in the economy than manufacturing companies, commercial companies, IT companies, or whatever. And I have never really understood the argument: why a private bank or financial fund is somehow holier for the well being and future of the economy than the industrial sector, the IT sector, the creative sector, or the manufacturing sector.
So if you add all of this together and throw in the devaluation of the currency as well, it’s clear that what some people have called the Icelandic model includes a number of measures and approaches that have not been adopted in other countries. On the contrary, it includes some methods in the process that go directly against what has been adopted in other countries. But the outcome is the Icelandic economy is recovering faster and more effectively than any other economy, including the British and the American that suffered from a big financial crisis in 2008.
One aspect of the crisis you were personally involved in, involved you effectively using your veto over the Icesave accounts and how much money to pay back to the UK and Holland. Constitutionally, you had that right, even if it was an unusual move — was that a tough decision?
It was absolutely very tough indeed, especially the first veto decision I took because every government in Europe was against me. Every big financial institution, both in Europe and in my own country was against me, and there were powerful forces, both in Iceland and in Europe that thought my decision was absolutely crazy.
And to some extent, of course, it was a complicated issue. But once I had analyzed every aspect of it, it boiled to the fundamental choice of the interest of the financial market on one hand, and the democratic will of the people on the other, and rarely in history — but it does happen — do we come to such crossroads that we are forced to choose.
And my answer was clearly, not only with respect to the democratic structure of Iceland, but also with respect to Europe’s contribution to the world. What is our primary legacy to countries and nations in modern times? Is the European democracy the right of the people? Capitalistic financial markets can exist in many other parts of the world, even without democracy. So in my opinion, Europe is and should be more about democracy than about financial markets. Based with this choice, it was in the end, clear that I had to choose democracy.
But there were other issues at stake as well. What the British and the Dutch were arguing was that somehow the European banking system was such that a private bank would operate anywhere in Europe, and if it succeeded, the bankers got extraordinary benefits, the shareholders got big profits. But if it failed, the bill would simply be sent to ordinary people back home: farmers and fishermen, nurses and teachers, young people and old. And that, I maintain, is a very unhealthy formula for the future of the European banking system. If you sent a signal to the bankers that you can be as irresponsible and daring as you want to be, and if you are lucky, you become very rich, but if you fail, other people will pay.
I don’t think that is a wise journey to enter if you want to build a healthy European financial system in the future.
In addition, the British and the Dutch government did not consult us when they decided to pay out. And as I have pointed out many times, the estate of the failed bank was sufficiently strong, as is now turning, out to pay these depositors out of the estate of the failed bank. There were predominantly three Icelandic banks that operated outside: Glitnir bank, Kaupthing and Landsbanki. Glitnir and Kaupthing have paid all their depositors and everybody in Germany and the Netherlands and Scandinavia, everywhere. It’s only the case of Landsbanki in Britain and the Netherlands, because the British and the Dutch government were not prepared to wait to see if the estate of the failed bank was sufficiently strong to shelter the payment, as it’s now turning out to be. So I think if you look at the case objectively, there are strong indications that this was political maneuvering, especially by the Gordon Brown government, who was in a tight corner during those days in October, and simply decided that Iceland was small enough for them to go up against us — in the same way that Margaret Thatcher went against Argentina over the Falklands — instead of looking at the issue from a more responsible and long-term perspective.
Do you feel like relationships are getting back to normal now with Holland and the United Kingdom?
We have an excellent relationship with Britain and Holland, and the Netherlands. Even if the Gordon Brown government decided to put Iceland under the terrorism legislation, which is something that did enormous damage to the Icelandic economy, and was a great offense to the Icelandic people — one of the most peace-loving countries in the world, a founding member of NATO, a strong ally of Britain during the Second World War — was put together with the al-Qaeda and the Taliban on the official list of terrorist organizations. And the least Gordon Brown should do is to apologize. I notice that Alastair Darling didn’t have the decency to apologize in his new book for this affront against a friendly ally. And it gets shows the nervousness and the imbalanced decision-making taking place within the Gordon Brown government during those very days.
But of course one can understand these were new times, new uncertainties… I’m not blaming anyone, I’m simply saying to put the case that here were these good fellows in the British and Dutch government acting on the behalf of the people, and there were the bad Icelanders who were not willing to pay. It’s a completely misleading and dangerous way of phrasing it, as it has turned out to be. Even now, we have already started paying out of the estate of the failed bank. They will pay what amounts to all the deposits that were in the bank, so the remaining dispute is about the rate of interest that the British and the Dutch government want to put on the money — how much money should the British and the Dutch government make out of this transaction.
And I think it is also worth remembering, because very few people at that time saw it from that perspective, that if you take the relative size of the Icelandic economy and the British economy, and you transfer over to the British economy the sum that the British government was asking the Icelandic taxpayers to be responsible for due to the failure of this private bank, would have been equal, given the relative size of the British economy, to asking the British taxpayer to be responsible for an 800 billion pound-bill from a failed British bank in Spain and Italy and Greece.
Everybody sees in a moment that that’s not a viable proposition, but that was, relatively speaking, the burden that the British and the Dutch governments, supported by all European governments, were asking the Icelandic taxpayers to shoulder in 2009. And I have often thought this is something the European Union needs to examine very honestly. How on earth was it that all the governments of the European Union supported these outrageous demands at that time?
One has to hand it to the editorial board of The Financial Times and The Wall Street Journal, that they supported Iceland’s case all along. And if The Financial Times and The Wall Street Journal, who have never been special friends of Iceland, saw through this argument by the British and the Dutch government, why on earth didn’t the other European governments do so?
I read a quote from you from 2008, which was published in a Norwegian newspaper, saying: “The North Atlantic is important to Scandinavia, the US and Britain. This is a fact these countries now seem to ignore. Then, Iceland should rather get some new friends”
I don’t know if that’s out of context or misleading, but do you think, since 2008, Iceland, long seen as part of Europe, close relationships with obviously Denmark, the U.S., do you think it’s a shift away?
No, I don’t think we can draw long-term conclusions from that. I’m simply saying if the collective decision-making structure of the European Union can take such wrong decisions and follow a misleading course and fundamentally unwise for the healthy future of the European banking system, as I advised before, Arguing that private banks should operate in a way that the profits go to them, but the losses go to ordinary people back home is something that they need to examine.
We have, however, concentrated on our recovery, and paradoxically, what we are seeing in the last two years is that many sectors in Iceland: the energy sector, the tourism sector, the IT sector, the manufacturing sector, and the fishing sector are doing better in the last two years than they did prior to the banking crisis. And you might also find it interesting that the collapse of the banks revealed to us a very interesting aspect of modern banking, which I think has been more or less overlooked in this discussion in Europe and in America in the last two or three years: the Icelandic banks, like all modern big banks in Europe and America and all the other parts of the world, are no longer banks in the old-fashioned way. They have become high-tech companies. High-ranked engineers, mathematicians, computer scientists, programmers and so on and so forth. And their success depends largely on how successful they are in hiring people with this education and capability, not necessarily those trained in business schools or finance, but in engineering, mathematics, computer science and so on.
And when the Icelandic banks collapsed, what we saw was that a great number of companies in these creative sectors, IT, high-tech, and all of those, who had the large growth potential in the previous years, but had not been able to realize it because they couldn’t get the people, due to the fact that the banks were buying up all the best engineers and mathematicians and computer scientists, suddenly had the pool of talent available to them. And within six months, all these people who came out of the banks with these qualifications had been hired. So since then you have seen a great growth period in the Icelandic IT sector, the high-tech sector, the manufacturing sector, because they could suddenly get the engineers, the mathematicians, the computer scientists.
So the lesson from this is: if you want your economy to excel in the 21st century, for the IT, information-based high-tech sectors, a big banking sector, even a very successful banking system, is bad news for your economy. You could even argue based on this that the bigger the banking sector is, the worse is the news for your economy, because their magnetic attraction of taking engineers and technically qualified people and computer scientists into the banking sector is due to high bonuses and higher salaries prevents these creative growth sectors from realizing their full potential.
We were not aware of this in the years leading up to the collapse of the banks, but once it happened, what we have seen since is an extraordinary interesting demonstration in what I have just described to you. And to me, it should urge people, both in Europe and in the United States to look at the prevailing orthodoxies of a big financial sector versus other parts of the 21st century economy, at least that’s my view. If you want to excel in the 21st century economy, it’s more important to give high priority to your creative sectors, and IT companies and high-tech companies, and not building up big banks, because if you need money you can always get it somewhere in the world in the globalized financial system. But if you lose the most valuable manpower in your creative sector, there is nothing you can do to repair that damage.
This was a very interesting lesson which in the last two years or so has become absolutely clear to us. And I think that within the U.S. and Europe, people should seriously examine what is the consequence of a high-tech, big, modern banking sector, because the banking sector today is a high-tech sector. Do you want to base your competitive advantage as a nation on that? Or do you want to do it on other companies that could become global in a relatively short time, as Facebook and Twitter and all these other companies, and Microsoft have proved. That is why you see all those companies in Iceland coming out with more growth, bigger profits, stronger marketing positions in the last two years than they have in the years prior to the collapse of the banking system.
Iceland, of course, up til the late ‘90s didn’t have a huge history of banking…
At that time, all the major banks were owned by the state. Their primary aim was to serve the Icelandic economy. Then two major transformations took place. One was the ideological emphasis in the West on privatization: the more you privatized, the more you deregulated, the more success you would have, this was the mantra. We followed that, as did many others. And that is why the state banks were privatized, but unfortunately that took place at the same time as the other shift was happening: the globalization of finance and the creation of the interlinked global financial market, which meant that these new privatized banks could go directly into this overblown global financial market and start to play there and grow big in a relatively short time. Which would have been difficult even if they were privatized.
If the global financial situation had been less favorable, and when, for example, we were beginning to hear critical voices about the Icelandic banks — in late 2006, 2007, early 2008 — when one listened to those critical voices, and were trying like myself to evaluate the sense in what they were saying, we faced on the other hand, the credit agencies who were giving the Icelandic banks a very clean bill of health, all of them, and secondly, we were seeing all these prominent European and American banks, like the Royal Bank of Scotland, Deutschebank, and others, doing extensive business with the Icelandic banks.
And I said to myself — I know it’s a mistake now — in early 2007, if all the credit agencies are giving the Icelandic banks a clean bill of health, these pillars of European banking are doing integral business with the Icelandic banks, these critical voices are not really onto what’s happening. Because neither these credit agencies, nor these pillars of banking would be doing business with the Icelandic banks if they were fundamentally unhealthy. But it turned out to be, they were, once the financial crisis happened.
So among the questions that still have to be answered after the crisis, is why did the credit rating agencies give the banks such a clean bill of health? What was wrong with their evaluating system? They haven’t really answered that question. And secondly, why did these big established pillars of western banking all seek business with the Icelandic banks if they were so unhealthy. And that question has not been answered either.
There’s a lot of talk now about the Arctic resources and who has what. And of course Iceland has a very strategic geographic position, and two of the major players are Russia and China — and I couldn’t help but notice you had pictures of yourself with Putin and Hu Jintao in your study.
Well I hope you also noticed I had a number of photos of Obama, Bush, Clinton…
Of course. But I wanted to get your perspective on what people are calling “the Great Arctic Game”…
That is a very interesting question. I started to speak out about the Arctic and being involved in the Arctic very early in my presidency. So I have been involved in this evolution for more than a decade, longer than anybody else in this position, I think. At that time, it was still the prevailing view, even among many of the Arctic countries, that this was a peripheral issue. However, in the last five or six years, it has really moved center stage. And I think there are three fundamental reasons for this. One is people have become more aware of the extraordinary resources: not just oil and gas, but also minerals on a big scale. And also clean energy: lots of people talk about the Arctic in terms of oil and gas. It may come as a surprise to many that the Arctic is already the leading clean energy region in the world, giving, for example, the importance of clean energy in Iceland, Norway and Greenland. And the potential of hydrothermal, geothermal, wind and wave power all over the Arctic.
But in general, this extraordinary richness of resources is one of the reasons everyone cares. The second is that unfortunately, with climate change the ice will melt and this will open up new new sea routes which could, in 20 or 30 years, transform global trade like the Suez Canal in its time.
And this is one of the reasons China is so interested, in my opinion, in a legitimate way, because when China becomes the leading trading country in the world, which it will be in a few decades, it goes without saying that the most efficient trading routes are going to be used by the leading trading country in the world. And these new trade routes will shorten the trading routes between China and America and Europe by almost 40 percent. But it will not be easy. It will require lot of regulations, harbor facilities, depots, hubs, you name it. If these plans are going to be effective, it needs a lot of infrastructure.
The third reason is that climate change is happening faster in the Arctic than anywhere else in the world. The melting of the Tundra in Russia, and elsewhere in the Arctic, opens up the possibility of what some people call the methane bomb exploding, which will be much more dangerous than the CO2 effect. So the breaking point in fundamental disastrous climate transformation of the entire globe will happen in the Arctic. So the need for scientific cooperation for systematic observation of what’s happening to the ice, the frozen tundra, both the sea ice and the Greenland ice sheet, and the tundra in Russia as well, is one of the most critical factors in the future of mankind. I know it sounds big, but that’s a scientific reality. At the beginning of this week, I was at the conference in Boston hosted by the Fletcher school on the future of the Arctic, and I also had meetings at MIT and Harvard on this.
In addition to what I have now described, there seems to be an indication that the melting of the ice in the Arctic is leading to new gaps in the ozone layer over America and parts of Europe. We thought we dealt with that problem with the international Montreal agreement some decades ago. If this is happening, it means that the damage to the ozone could in fact have a disastrous effect on the health and well being of the people in the advanced world, long before the ocean sea routes get really effective.
So for all of these reasons, and each of them is big enough, but when you put them all together, the Arctic has become one of the most crucial regions for the future of the world, both in terms of the economy, trade, and climate and health.
Fortunately, during this time when there was very little attention to the Arctic, the eight Arctic countries were able peacefully, almost off the radar, to develop co-operation within the Arctic Council, and to consolidate the peaceful and constructive dialogue among Russia, the United States, Canada, and the five Nordic countries.
So now when we approach this situation, we have already have a well-established, in my opinion, rather profound and strong co-operation within the Arctic Council, which, in my opinion, almost eliminates this threat which some people have been talking about, this leading to confrontation and military conflict, high political tension in the Arctic. People may say I’m naive, but I believe from my experience that what has already been achieved within the Arctic Council and the self-interest of the eight Arctic countries will lead us to continue in this harmonious, constructive cooperation. The problem, however, is the strong demands from other countries like China, South Korea, the European Union, and many others from other parts of the world that they now want a seat at the Arctic Council table. And that question has not been resolved so far.
You’ve been in this job 16 years now, and you’ve decided to run for reelection?
I first announced in my New Year’s speech that I would step down. Then I was urged by a petition of 30,000 people. Given the situation in Iceland, they asked me to reconsider the decision to stand again, which I have decided to do.
What prompted you to stay on?
In my New Year’s speech, I analyzed very openly that I thought I could be helpful on many of these issues without the daily burden of the office. But I also acknowledged that there was still a lot of uncertainty in Iceland and uneasiness in the mind of many people. Although the recovery is on it’s way and so on, the political, psychological, and social shock of the crisis is still with the nation to some extent.
So following my speech, many people were not happy with my decision. So they got together and organized a petition, which in the end, led to about 15% or so of the total electorate of Iceland signing that petition, and an additional number of people approached me and said that it would be irresponsible on my part to throw the presidency into this pot of uncertainty. So after having reconsidered that very carefully, in the end, it was a question on conscience, whether people who had shown me a lot of trust in the last 16 years and I have always seen that as a two way street, but if a nation puts this trust into you, you have obligations. So in the end, I said that since strong section of the people were urging me to stay with them on this journey for a few years more, although I would have been happy with my freedom, happy doing other things, due to this responsibility, I decided to change my previous decision.
Now, of course, other candidates have come forward, which is fine, because I have this fundamental view about the presidency, both as a former professional political scientist and also as president: All kinds of people can have it in their mind that they want to be candidates for the presidency, or they could even put themselves forward as candidates like myself, or many others. But it’s a very interesting demonstration of the democratic will of the people, which becomes a reality due to the presidential process. Ultimately, it is the people of Iceland who come together in their work places, among family and friends, and gradually they form a public will, either on one candidate, or two and so on. So whatever individuals put themselves forward as candidates, it is the democratic will of the people that decides the presidency. So what I have done is then to put this matter into the hands of the people, and if more candidates want to do it, it’s fine, because ultimately it is the nation that carries that responsibility. This is really the basis of changing my position: if this large part of the nation wanted me to continue, I would bow to that public will, but if that turned out to be not the case, it was also fine with me.
Please note the transcript has been lightly edited for clarity.