THE BLOG

Iceland's First Left Majority Government: Plus Ça Change...

The Social Democratic Alliance and the Left-Green Party formally announced the creation of Iceland's first left wing majority government in its history. After two weeks of extensive negotiations, the interim coalition created after popular protests forced the resignation of the conservative Independence Party-led government in January announced that it would stay the course it started over the past three months.

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Prime Minister and leader of the Social Democratic Party, Johanna Sigurdardottir. Photo credit: mbl.is

Johanna Sigurdardottir's position as the world's first gay leader was confirmed by Iceland's electorate in the April elections. In announcing the new coalition, Johanna told a national television audience that her government would emphasize equality and social justice. The administration's comprehensive cooperation declaration comes with a 100-day plan to implement its core issues and to balance in the national budget in the coming years. Johanna stated that, if all goes as planned, economic growth and employment would reach acceptable levels, and the inflation rate would come down by the end of the term.

The main issue of contention between the parties--the reason two weeks of negotiations was necessary--was Iceland's membership in the European Union. Ultimately, the parties agreed to submit a parliamentary resolution on EU membership this spring. The nation will then vote on EU membership with one referendum, after membership talks have taken place. Johanna has indicated that she anticipates sending the formal application no later than July 2009.

The government outlined its approach for taking control over the country's desperate situation. The new parliament will try--over the next 100 days--to come up with a new budget, negotiate a settlement with Great Britain regarding English savings accounts with Icelandic banks, overhaul Iceland's Central Bank, create a new labor policy, and reevaluate the Iceland's controversial fishing quota system. Let's not forget the plan to hold a constitutional convention and fundamentally revamp the political and electoral systems.

Despite all of these ground-breaking moves, though, I can't help but feel that we're still just spinning our wheels. Perhaps the gravity of our situation still hasn't fully hit home. How will any of these actions lead to the rehiring of the thousands of newly unemployed workers? How will joining the EU help individuals make foreign currency mortgage payments that have doubled in the past year? How will opening our fisheries to foreign fleets increase our national wealth? How can we attract foreign investment until the culprits of our downfall are identified and confidence in the regulatory system is restored?

Economist Jon Danielsson of the London School of Economics has speculated that the cause of Iceland's total collapse was the recklessness of the so-called New Viking raiders and the complete lack of meaningful governmental regulation. Perhaps the new government has decided that prudence is the proper remedy to such brashness.

However, some outside observers have counseled a course almost diametrically opposed to the path the new government is taking. Economist Michael Hudson, for example, is appalled by Iceland's faith in EU membership. Rather than giving up its natural resources and a portion of its sovereignty, Professor Hudson recommends that Iceland not repay the banks' obligations, but instead use all available revenue to rebuild the nation's wealth. If the debts were run up by a "domestic kleptocracy," he reasons, it would be counterproductive to place the burden of repayment on the nation, the vast majority of whom received little benefit from the Ponzi schemes run by a few individuals.

Johanna and her partners have an incredibly difficult task ahead of them. However, forcing a quick referendum on EU membership should not be the cornerstone of our rebuilding effort. The last time I checked, EU members have not faired particularly well over the past several months. I can't imagine they would welcome Iceland into their fold unless they got something out of it (the richest remaining fisheries in Europe, for example).

Rather, we have to get our house in order, and negotiate any such arrangement from a position of strength, not desperation. Identifying the individuals who got us into our current situation, and forcing them to accept responsibility for their actions is the crucial first step. Evaluating how they were able to get away with such fraud, and setting up an effective regulatory system to prevent it from happening again is essential to restoring foreign investors' faith in our country.