Ssshhh..whisper it quietly but that austerity “stuff” just isn’t working. You’d never have guessed it but only now, as for example Spain reverses into negative ‘growth’ and 51.5% of its young adults are unemployed, are the great and good of the IMF, the E.U., the ECB and the World Bank beginning to question the ‘wisdom’ of austerity.
That’s right, an economic puzzle, that even high school children studying economics could figure out wouldn’t work, isn’t working. Cut millions of jobs, cut public spending and people either can’t spend or won’t spend (due to deep seated fears of financial insecurity) and the economies laden with ‘austerical’ dogma, delivered with such religious zeal by an army of technocratic apparatchiks, find reverse gear. A deep recession is now back on the radar for the Eurozone even if the ‘small’ matter of Greece is supposedly solved this week.
Yep, we never saw that coming did we? Sprinkle anti growth dogma, like throwing weed-killer on a healthy lawn in summer time, and the result might be contraction. The real concern is that the banking and political elite did “see it coming” they knew exactly what’d happen to the economies and ergo the welfare of the citizens of the PIIGS if these austerical measures were introduced, but they followed through as their remit was to save the system, their system, irrespective of the price the majority would ultimately have to pay for generations to come.
Despite the constant hand wringing and prophecies of doom by our political leaders back in 2008-2009 there were other ways to repair the monetary system without redress to the methods western govts preferred. Let’s not forget that Asia still refers to the potential collapse in 2008-2009 as the “western banking crisis”. And as many of us were at pains to point out in 2008-2009 avoiding a great recession then could have unforeseen consequences in the form of a greater depression later on..
Evidence of an alternative is and was Iceland. There’s been a virtual black out of news regarding how well Iceland has recovered and in such spectacular fashion given the relative short short space of time which has passed. Whilst Iceland’s decision makers’ didn’t completely give the global banking system the finger, (they did accept an IMF bailout in millions as opposed to billions) they took the blows and have recovered. Their banks and more importantly the shareholders who took the risk, were to all intents and purposes wiped out.
Iceland did not bale out their banks and they’re experiencing growth of 3% (and no austerity measures whatsoever), this is ten times the current ‘growth’ level of Spain. Now as Iceland was, (as we were led to believe at the time) the country in the biggest mess, surely their recovery, in such a short period of time, proves that bailing out banks; transferring the debt to tax payers and calling it sovereign debt and imposing austerity measures, is in fact economic suicide.
It’s certainly worth taking time out to consider the plight of Iceland versus that of Spain, Greece, Ireland, Italy and Portugal..oh and France. What follows is a brief history of the crisis and the opinion of luminaries such as Joseph Sitglitz which you can watch below: “The lessons from Iceland’s Economic crisis”, “Iceland’s crisis and recovery”
The 2008–2009 Icelandic financial crisis was a major ongoing economic and political crisis in Iceland that involved the collapse of all three of the country’s major commercial banks following their difficulties in refinancing their short-term debt and a run on deposits in the United Kingdom. Relative to the size of its economy, Iceland’s banking collapse is the largest suffered by any country in economic history.
The financial crisis in Iceland had serious consequences for the Icelandic economy. The national currency fell sharply in value, foreign currency transactions were virtually suspended for weeks, and the market capitalisation of the Icelandic stock exchange dropped by more than 90%. As a result of the crisis, Iceland underwent a severe recession; the nation’s gross domestic product decreased by 5.5% in real terms in the first six months of 2009. The full cost of the crisis cannot yet be determined, but already it estimates suggest that it exceeds 75% of the country’s 2007 GDP. Outside Iceland, more than half a million depositors (far more than the entire population of Iceland) found their bank accounts frozen amid a diplomatic argument over deposit insurance. German bank BayernLB faced losses of up to €1.5 billion and had to seek help from the German federal government. The government of the Isle of Man paid out half of its reserves, equivalent to 7.5% of the island’s GDP, in deposit insurance.
Iceland’s financial position has steadily improved since the crash. The economic contraction and rise in unemployment appear to have been arrested by late 2010 and with growth underway in mid 2011. Three main factors have been important in this regard…
Firstly the emergency legislation passed by the Icelandic parliament in October 2008 which served to minimise the impact of the financial crisis on the country. The Financial Supervisory Authority of Iceland used the emergency legislation to take over the domestic operations of the three largest banks. The much larger foreign operations of the banks went into receivership.
A second important factor was the success of the IMF Stand-By-Arrangement in the country since November 2008. The SBA includes three pillars. The first pillar a program of medium term fiscal consolidation, involving painful austerity measures and significant tax hikes. The result has been that central government debts have been stabilised at around 80–90 percent of GDP. A second pillar is the resurrection of a viable but sharply downsized domestic banking system. A third pillar is the enactment of capital controls and the work to gradually lift these to restore normal financial linkages with the outside world. An important result of the emergency legislation and the SBA is that the country has not been seriously affected by the European sovereign debt crisis from 2010.
Despite a contentious debate with Britain and the Netherlands over the question of a state guarantee on the Icesave deposits of Landsbanki in these countries, credit default swaps on Icelandic sovereign debt have steadily declined from over 1000 points prior to the crash in 2008 to around 200 points in June 2011. The fact that the assets of the failed Landsbanki branches are now estimated to cover most of the depositor claims has had an influence to ease concerns over the situation.
Finally, the third major factor behind the resolution of the financial crisis was the decision by the government of Iceland to apply for membership in the EU in July 2009. One sign of the success was revealed as the Icelandic government successfully raised 1$ billion with a bond issue on 9 June 2011. This development indicates that international investors have given the government and the new banking system, with two of the three biggest banks now in foreign hands, a clean bill of health.
Joseph Stiglitz – “The lessons from Iceland’s Economic crisis”