Iceland and the International Financial Crisis

Boom, Bust and Recovery

Eirikur Bergmann

• Publisher: Palgrave Macmillan
• Year: 2014
• ISBN:
  9781137332004
• Topic: Politics & International Relations
• Subtopic: Trade & Tariffs
• Index: Politics & International Relations

Eirikur Bergmann explains the exceptional case of Iceland's fantastical boom, bust and rapid recovery after the Crash of 2008 and explores the lessons for the wider EU crisis and for over-reaching economies that over-rely on financial markets.

Part I

Rise and Shine

1

Birth of a Nation – A Postcolonical Project

Iceland was settled in 874¹ by Norwegian explorers, allegedly fleeing tyranny and the increased tax burden of King Harald. According to historical tales a small society descended from Irish clergy had by then already died out. Half a century later, the Icelandic state was formed with the establishment of the Alþingi in 930. The Alþingi was a parliamentary court held in a rocky gorge where the European and American tectonic plates meet. The cliffs created a natural loudspeaker so that all attendees could hear the voice of the person occupying the podium. The site, located inland in the south of Iceland, was in accordance with its function named Þingvellir, meaning ‘parliamentary fields’. After troubled times of fierce battles between the main noble families, Iceland entered into a union with the King of Norway by an agreement that is now referred to as the Old Treaty. The importance of the Alþingi gradually diminished but it wasn’t formally cancelled until the year 1800.

The end of the first millennium saw increased clashes between Christianity and the old pagan religion. The matter was referred to the sage Þorgrímur Ljósvetingagoði, who, after a period of reflection, ruled on a compromise in the year 1000: that Icelanders should publicly convert to Christianity but still be allowed to continue worshiping their pagan gods in private. When Norway fell under Danish rule in 1380, Iceland was brought in line with it. Copenhagen did not, however, gain complete control over the country until Icelanders were forced to accept the absolute power of the Danish king in 1662. From then on, the Alþingi was only occasionally convened and solely in the capacity of a local court, having been stripped of its legislative powers. When absolutism was finally ended in Denmark in 1848, after a lengthy struggle for democratic reform, born out of the Enlightenment, Icelanders started to fight for their independence, and the notion of a separate Icelandic nation was born.

The first step towards independence was taken in 1844, when the Alþingi was ‘resurrected’ as an advisory parliamentary body in Reykjavik. A new democratic constitution came into force in Denmark in 1849 and, after ending Iceland’s domestically elected Constitutional Assembly (Þjóðfundurinn) by force in 1951 and unilaterally deciding to keep control over the country in the Position Law’s (Stöðulögin) of 1871, the Danish king finally handed Icelanders their own constitution in 1874. Iceland was granted home rule in 1904, but with very limited executive powers. More importantly, sovereignty was won in 1918, which included full internal independence and for the most part external control within a personal union with the Danish monarch as head of state. Full independence was to follow in 1944 – against the will of Denmark, when it was still under Nazi occupation (for more, see Karlsson, 2000).

Most students of Icelandic politics acknowledge the importance of the independence struggle in the development of its contemporary political identity. In this chapter I will explain how the myth of Iceland’s history was used to construct a cultural-political identity that emphasizes formal sovereignty as well as a desire to be recognized as a partner in the Western world. As I will illustrate, Icelandic politics have been dominated since the end of the 19th century by the nationalist discourse developed during the independence struggle. As will become further evident in Chapter 4, which discusses the boom years, this nationalistic postcolonial political identity was indeed the driving force behind the Viking-like endeavours of Icelandic businessmen in Western Europe around the turn of the millennium. I therefore maintain that any model developed to study Iceland’s political and economic development as well as its foreign relations cannot afford to ignore the extensive influence of the colonial past. This is in line with, for example, Penny Griffin (2011), which frames poststructural analysis within critical International Political Economy, emphasizing the importance of studying historical links of exploitation, domination and force – for example in postcolonial relations.

Postcolonial theories emphasize the importance of analysing the impact of colonial contact on contemporary politics and the cultural legacy of colonialism, and thus critically explore the link between the past and the present – which I claim is central to an understanding of the development of Iceland’s politics and economy. It is through that relationship that Iceland’s postcolonial national identity was created. It is therefore not a question of a temporary situation fading out over time after the country had gained independence, but rather an established and regularly reconstructed political culture, still ongoing in contemporary politics.

The independence struggle

In the realm of contemporary Icelandic politics, the legacy of the more than a century-long independence struggle in the 19th and early 20th century (1830–1944) is still very present. The publication of the journal Ármann á Alþingi, edited by Baldvin Einarsson, in Copenhagen in 1830 can be viewed as the starting point of the struggle. Further journals promoting Iceland’s autonomy followed, written by groups of Icelandic intellectuals in Copenhagen. The journal Fjölnir (1835–1847), edited by a group of romantic nationalists, and Ný félagsrit (1841–1873), led by Iceland’s independence hero Jón Sigurðsson, were the most influential.

The struggle was fought with legal argumentation rather than with arms; that is, with words rather than violence, thus emphasizing rhetoric over force. It was led by a small group of Icelandic intellectuals in Copenhagen, who, by referring to Iceland’s history of independent Vikings, developed a national myth that served as a justification for their emphasis on sovereignty and independence. The term myth is here used in the sense that Iceland’s history was creatively interpreted to fit the claim for self-rule. According to the myth, Iceland is a unique nation and it is the duty of all Icelanders to actively guard its sovereignty and independence. History professor Guðmundur Hálfdanarson (2001: 96) explains how Iceland’s independence hero Jón Sigurðsson has since become the symbolic father of all Icelanders.

Icelandic historian Jón Sigurðsson (1811–1879), living in Copenhagen, gradually emerged as the leader of the struggle and has since become Iceland’s national hero. Out of the myth interpreting the history of Iceland’s settlement republic (930–1262) he was instrumental in formulating the claim that Icelanders had a natural right, as a separate nation with a unique language, to declare its self-rule. Sigurðsson became President of the Icelandic Literary Society in Copenhagen and later President of the resurrected Alþingi. Even though he was never President of Iceland, he is still referred to as ‘President Jón’ (Jón forseti). Iceland’s national day is on his birthday, 17 June. Historian Páll Björnsson (2010) documents that all camps in Icelandic politics – conservatives, communists, nationalists and liberals alike – refer to Sigurðsson to advance and indeed to legitimize their arguments in contemporary politics.

Iceland’s political identity, carved out in the independence struggle, is based on a fundamental belief in formal sovereignty, which still dictates our foreign relations to a great extent. Growing from a population of around 60,000 inhabitants in the mid-19th century to 330,000 at present, Iceland borders on being a microstate. However, as is evident from the following discourse analysis, even though its smallness surely puts limits on its administrative capacity to operate a fully functioning modern independent state, no alternative is ever voiced in Icelandic political discourse. To propose otherwise would be considered blasphemy, which no politician would dare be accused of.

Counting as a separate nation was instrumental to the demand of creating the Icelandic nation state. Young as the nation is, Icelanders can to a greater extent than perhaps most other social groups claim to constitute a nation. As an island located far out in the Atlantic Ocean Iceland is isolated from other countries. Icelanders speak their own language and are of the same ethnicity and most accept traditional Christian values. Most Icelanders, furthermore, have a similar understanding of their history and are united in valuing their literary heritage.

The colonial heritage

Only a handful of scholars, mainly those analysing Icelandic cultural relations, have studied the importance of the country’s colonial past. Anthropology Professor Kristín Loftsdóttir (2011), for example, analysed how the colonial experience was instrumental in shaping our national identity, which was formulated in close dialogue with European colonial identity. Since then it had been ‘constantly remanufactured through various discourses and praxis’ (Loftsdóttir, 2011). By studying the representations of the Viking image in Icelandic rhetoric Ann-Sofie Nielsen Germaud (2010) examines the importance of the colonial past in Iceland’s contemporary discourse. She concludes that the Viking notion is a central but changeable element in the modern collective Icelandic self-image. Referring to Claude Lévi-Stauss’s division of societies according to their ‘hot’ or ‘cold’ relationship with the past, Nielsen Germaud categorizes Iceland as a clearly ‘hot society’ ‘where history is an internalized generation that helps to contextualize the future through historically based cultural memory’ (Nielsen Germaud, 2010). The discursive representation of the past is indeed continually present in Icelandic politics. Accordingly, it can be argued that the contemporary political condition in Iceland is very much a result of its historical relationship with neighbouring countries.

Evidence for this was, for example, found in Prime Minister Gunnlaugsson’s first address to the nation, on Iceland’s national day, on 17 June 2013, in which he discussed Iceland’s ‘No’ vote in the referendum on the Icesave agreement. Referring to the Viking heritage, he explained that precisely because they were descended from Vikings, Icelanders were independently minded and would thus not surrender to foreign authority (Gunnlaugsson, 2013).

This is in line with Andreas Huyssen’s (2001) claim that a framework for understanding the present is built through remembering past events, where the past even constitutes the source of understanding for complex global interrelations in the present. Importantly, he points out that this involves a successful marketing of these collective memories. The constant and continuous remembrance of the past thus provides a framework and context for an understanding of the present. Anthony Smith (1993) explains how collective memories in relation to a colonial past can even be contradictory and inconsistent.

Along these lines, Loftsdóttir (2010) stresses that the Icelandic case indeed indicates how relationships and identities of the late 19th- and early 20th-century colonial/imperial world are remembered in a particular way, and thus continue to haunt the present. She explains how contemporary interpretations of the state of the economy stand in a dynamic relationship with a notion of its past. Interestingly, however, despite many scholars’ reference to the importance of the postcolonial relationship when analysing Iceland’s political identity, no wide-ranging study has until now been made on how it has affected the development of our political economy and foreign relations.

The colonial past is also vividly present in contemporary popular culture, as can be found in Björk’s song ‘Declare Independence’, which she dedicated to Greenland and the Faroe Island and also performed in Tibet. In an interview with The Australian she explained how being a colony of Norway and Denmark had left its mark on her nation’s psyche, bringing, for example, ‘lack of confidence’ and ‘mistrust of foreigners’ (quoted in Westwood, 2008).

The national myth

Iceland’s national myth, which developed in the independence struggle, creates a Golden Age starting with the settlement in the year 874, peaking after the state-like formulation in 930 and ending when Iceland fell under foreign rule with the Old Treaty with Norway in 1262. Further deterioration occurs when falling under Danish rule in 1380 and with introduction of Absolutism in 1662. Several texts were later influential in reaffirming this myth. Jón Jónsson Aðils (1869–1920), who in 1911 became Iceland’s first history professor, described the society of the Golden Age as superior to all others and its unique and pure language as the key to its soul. He claimed that Icelanders not only had enjoyed the highest standard of living but that their culture was so rich that it ‘only compares to ancient Greece during the highest period of civilization’ (Jónsson Aðils, 1903).

According to the myth, Icelandic society started to deteriorate after the country entered into the Old Treaty. A period of humiliation followed after it fell under Danish rule. But Jónsson Aðils and his followers explain that, however weak and humiliated the people may have been, the Icelandic national spirit never died, and at last, in the early 19th century, courageous and wise men finally rose up and reclaimed the nation’s own worth and lifted the national spirit by fighting for its independence. As Nielsen Germaud (2011) explains, the myth creates a U-shaped curve of history, whose two peaks – in the distant past and at the end of the story – represent autonomy and the avoidance of external influence.

Importantly for future development, the purity of the nation and language is emphasized. Jónsson Aðils expressed the hope that Icelanders would in the future have the opportunity to demonstrate to other nations their importance in world culture, thus articulating Icelanders’ desire to be recognized as equals by their powerful neighbouring states.

This myth was kept alive throughout the 20th century, for example, in schoolbooks. One was written by Jónas Jónsson frá Hriflu, an educator who later became the leader of the Progressive Party and one of the most influential figures in Icelandic politics and culture. According to his textbook, read by all elementary students for decades, Iceland’s economic prosperity is directly attributed to its gaining independence from Denmark. Icelanders are furthermore pictured as the finest ‘selection’ of Norwegians, descendants of the strong and independent-minded farmers who fled the oppression of King Harald to protect their freedom. He then claims that this noble breed of Norway’s finest social class was through the centuries shaped by the harshness of the natural surroundings, creating the unique Icelandic nation, which compares to no other. Historian Guðmundur Finnbogason (1925) further claimed that the harsh Icelandic environment had through the centuries weeded out the weakest and thus even increased the quality of the population. As I will explain further in Chapter 4, this is the myth our President was tapping into in the boom years when explaining how Icelanders were all but destined for greatness in the new global economy.

Kristín Loftsdóttir claims that these ethnocentric images need to be understood in the context of Iceland’s marginal position in Europe at the time, ‘as a poor subject nation with a population of less than a quarter of a million in search of national independence’ (Loftsdóttir, 2011). This is also in line with philosopher Frantz Fanon’s (1963) claim that nationalism in colonized countries might seem more aggressive as its liberation movements use it to separate themselves from its colonizers by emphasizing their distinctiveness. Interestingly, however, in the Icelandic case, the independence struggle not only expressed the desire to be different but also the desire to be recognized as a partner in Western culture.

Iceland’s independence movement clearly drew its ideas from international trends at the time, most importantly the Enlightenment and Romanticism. However, when the policy for sovereignty and later full independence – Icelandic nationalism – was being developed, its creators looked back a thousand years, to the settlement republic, for arguments to justify their claim rather than to current international development (Hermannsson, 2005: 83). The emphasis was on drawing an unbroken link to the Golden Age rather than on linking the independence struggle with international ideological developments of the time. Iceland’s path to modernization and progress was therefore seen through its own unique past rather than with reference to international trends (Hermannsson, 2005: 252, 292). Illustrative of this trend is the naming of Iceland’s new Parliament in Reykjavik in 1844 after the Alþingi. The old parliamentary court in Þingvellir (parliamentary fields) had become the holy site of the Icelandic nation, in which it is forever recreated through collective memory.

In his landmark study, Guðmundur Hálfdanarson (2001: 36–39) explains how this sense of nationalism was stronger than in most other European states at the time, being based on a historical conviction that justified the full formal sovereignty and independence of the nation. The nation became almost a concrete natural fact in the Icelandic mind. A free and sovereign Icelandic nation became an integral part of the self-image of the nation. Icelandic nationalism was thus created on the basis of a romantic notion of a natural and pure, or at least special, separate nation. This notion became a vital force in the independence struggle.

The Icelandic History Association has repeatedly tried to correct this myth – without much success. For example, it announced that an official report on Iceland’s image in 2008 (which I will discuss further in Chapter 4) was in stark contrast to contemporary historical research. Still, the myth was constantly reconstructed and easily survived The Crash. In his book on Iceland’s economic collapse the former Chief Economist of Kaupthing Bank, turned Lecturer in Economics after The Crash, Ásgeir Jónsson (2009) starts his analysis by reproducing the myth of the Golden Age in a long introductory chapter, where he explains how Iceland was built by free-spirited Norwegians who were fleeing oppression in Norway and ...