Icelandic culture goes boom

Here’s a summary.¹ Iceland was first settled by humans in the ninth century. Their dispersed settlement patterns, pastoral farming, and the Norse language that they came to share shaped the island’s society into the nineteenth century and still exert a powerful hold on the public imagination within Iceland, while also influencing the country’s brand abroad. With a more or less wholesale conversion to Christianity in 1000, integration into the Kingdom of Norway in the 1260s, and the absorption of both Norway and Iceland into a Danish empire, effectively from 1415, fundamental institutional structures were established in Icelandic society that defined its political economy into the early twentieth century. Whether the net effect of Danish rule of Iceland was exploitation or subsidy is a matter of long-running

1 Key accounts in English include Roger Boyes, Meltdown Iceland: Lessons on the World Financial Crisis from a Small Bankrupt Island (New York:

Bloomsbury, 2009); Eirikur Bergmann, Iceland and the International Financial Crisis: Boom, Bust and Recovery (Basingstoke: Palgrave Macmillan, 2014); Már Wolfgang Mixa, “The Icelandic Bubble and Beyond:

Investment Lessons from History and Cultural Effects” (Ph.D. diss., Reykjavík University, 2016).Vidar Thorsteinsson, “Iceland’s Revolution,”

Jacobin, March 14, 2016, https://www.jacobinmag.com/2016/03/iceland-banking-finance-icesave-left-greens, offers a helpful, pithy insight into an avowedly left-wing perspective on post-Crash politics.

debate, but either way, from around the 1830s, Icelandic intel-lectuals, often resident in the colonial metropole of Copenha-gen and inspired by the German National-Romantic movement, began to lobby for independence from Denmark. Large-scale commercial fishing had been undertaken in Iceland since the fifteenth century, but liberalization of Icelandic trade and fi-nance enabled the sector to industrialize around 1900, not least under the influence of the Danish-born entrepreneur Thor Jen-sen, whose name will recur in this study. From this time, in-dustrial capitalism, urbanization, and devolution from Danish rule became key forces in Icelandic society. Iceland’s population doubled from about 50,000 around 1820 to 100,000 around 1920, and hit 350,000 shortly before 2020. From 10% in 1900, the greater Reykjavík area is now home to more than two thirds of Iceland’s population, and most of the rest too now live in nucle-ated settlements. For a long time the main export, fish have re-mained key to the economy — even “the foundation of Iceland’s economic independence.”²

Strategically crucial to control of the Atlantic during the Sec-ond World War, Iceland was seized by the United Kingdom in 1940. Handed over to the USA in 1941, its strategic importance continued as a Cold War NATO outpost. While Iceland gained formal independence from Denmark in 1944, American oc-cupation was normalized, continuing until 2006. The massive influx of wartime military infrastructure spending and associ-ated opportunities for wage labor pushed the economy into a fully monetized, consumption-driven, urbanized capitalism. In the post-war period, employment was usually full, the economy generally growing quickly, inflation always high, and interest rates often negative: debt was therefore prudent, which swiftly eroded traditional aversions to indebtedness.

Post-War Iceland is often assumed by outsiders to be a Nor-dic social democracy, but its mid-Atlantic position in fact stands (not entirely coincidentally) as a good metaphor for its twenti-eth-century politics, with often rancorous public debate drawing

2 Bergmann, Iceland and the International Financial Crisis, 37.

on both Nordic welfare models and American free-marketism.

What might be called Iceland’s “natural party of government” is the conservative Sjálfstæðisflokkurinn (Independence Party): it has been a member of most of Iceland’s governments since 1944.

The beginning of its embrace of neoliberalism is marked by the formation of a short-lived neoliberal journal Eimreiðin (“The Locomotive”) in the 1970s by a group whose members would go on to prominent political, economic, academic, and media positions. The most famous of these young thinkers is Davíð Oddsson, a key player in the Independence Party’s policies.

In the 1980s, Iceland had to come to terms with its disastrous overfishing, and effectively privatized the previously common resources of the sea, distributing to vessel owners fishing quotas that were constituted as tradeable private property. This allowed a relatively small number of players to buy up others’ quotas, rapidly consolidating the fishing industry and concentrating wealth. The move also allowed quotas — essentially, the promise of uncaught fish — to act as collateral for loans, which encour-aged a growing culture of credit, debt, and speculation.

Iceland’s access to markets and capital was opened up by ac-cession to the European Economic Area in 1994, and over the ensuing decade the government also oversaw the deregulation and privatization of Iceland’s banking sector. Since the Wall Street Crash, Iceland’s banks had largely been state-owned and the country fairly closed to foreign investment, so the rapid lib-eralization of the financial system was a major shift. However, despite interest from foreign banks, the government ensured that as the Icelandic banks were privatized, they were bought by Icelanders. This policy was due to a mix of naive national-ist ideology and politicians’ cynical (if only partly successful) desire to keep control of the banking system within established networks of patronage. By 2003, after a flurry of rebranding, the main players of the Icelandic banking sector emerged as Glitnir, Landsbanki, and Kaupþing. (Tricky to translate, these might be rendered literally as “glitterer,” drawn from a place-name in Old Norse mythology; “the country’s bank”; and “marketplace.”) The details of how these came to take on debts nearly ten times the

size of Iceland’s GDP have been examined in a plethora of publi-cations, with many more yet to come, and it is not necessary to plunge into this detail here. The story includes choices, by turns cynical and deluded, by an overwhelmingly male cast of poli-ticians, financiers, and businessmen; risk-seeking machismo, cronyism and personal vendettas; exponential expansion of the financial sector; heedless exposure of the currency to interna-tional speculation; and a string of dubious and often unlawful practices including mis-selling, banks’ owners becoming those same banks’ biggest debtors, cross-financing between banks, and banks lending people money to enable them to buy those banks’ own shares. These activities correlated with Iceland’s par-ticipation in a wider, neoliberal financialization of Western so-cieties, for which Iceland stands in some ways as a microcosm, and the newly liberalized Iceland was insufficiently shielded from global financial forces — but it seems beyond doubt that the fundamental causes of the Crash, and the reasons why it un-folded in the way that it did, were domestic.

When the international credit crunch came, Iceland was not, from the point of view of the global financial system, too big to fail. However, from the point of view of Iceland’s central bank, Glitnir, Landsbanki and Kaupþing proved too big to save.

Across three days in October 2008, the big three banks therefore collapsed, followed, in effect, by the central bank itself. The Ice-landic currency, the króna, always a weak point in the IceIce-landic economy, plummeted with them, eventually losing more than half its value. The economic crisis this wrought is generally re-ferred to in Icelandic as the hrun, literally “collapse” (also kreppa

“difficulty, tight spot”) — hereafter rendered in this book as the Crash. The Icelandic government bailed out the central bank, nationalized the domestic operations of the big three, and put their international sections into administration, imposing capi-tal controls to keep foreign capicapi-tal in the country and so prevent the complete collapse of the króna.

Concerned to understand what people do in the face of crises as well as how to avert them, this book is at least as interested in the consequences of the Crash as the causes. The effects of

the Crash were of course numerous and diverse, but for most Icelanders they were felt first and foremost in terms of one of our most basic necessities, housing. Unwisely and often unlaw-fully encouraged to take out mortgages denominated in curren-cies other than the króna (on the assumption that these debts would depreciate as the króna grew irresistably stronger), 40%

of households soon found themselves signifiantly in arrears on mortgage payments.³ Faced down by three months of popular protest, the Social Democratic Alliance resigned from its coali-tion with the Independence Party, leading to a parliamentary election in April 2009. The election returned Iceland’s first ever entirely left-wing coalition — but also meant that it was this co-alition that had to bear the brunt of the Crash, not least fraught negotiations with the UK and the Netherlands, whose citizens had collectively lost something like €4.5bn in investments in the Landsbanki “Icesave” scheme. (Despite high-profile politicking at all levels of Icelandic society, these problems were eventu-ally resolved, in no small part because the banks’ assets proved sufficient to repay most of their debts.) Still, prevented by cir-cumstance from bailing out the banks, the public purse proved in good enough shape for the government to spend its way through the recession, with the help of a mixture of loans, cuts, and progressive tax increases, along with strong human capital and a real export economy that was not fundamentally affected by the Crash, but benefited from the plummeting value of the króna. The recession was over by 2011 and the budget more or less balanced by 2014.

Nevertheless, the post-Crash left-wing government managed to accrue most of the popular blame for the pain of the reces-sion, and was replaced in 2013 by the familiar coalition of the Independence and Progressive Parties, who had succeeded at the last moment in fending off constitutional reform that might, amongst other things, have reduced the disproportionate repre-sentation of their rural supporters in the Icelandic parliament, the Alþingi. This government was able to remove the last of the

3 Ibid., 129.

capital controls in 2017, in a significant way marking the end of Iceland’s financial crisis. In the intervening period, however, those whose once-liquid wealth was trapped in Iceland by the capital controls tended to invest in property, snapping up fore-closed mortgages, achieving a major shift of land-ownership into the hands of wealthy rentiers and, within a short time, pushing up housing prices and rents dramatically.

Meanwhile, following its own exponential growth, tourism now accounts for about 40% of Iceland’s foreign exchange earn-ings, twice as much as marine products. It may even have been boosted by the international media coverage that accompanied the Crash. It certainly helped drive both the economic recovery and the property boom. Thus, at the time of writing, Iceland is exeriencing a new boom, which is happily based in the real economy, but worryingly in an industry where demand is infa-mously elastic. Although Iceland is objectively a unique coun-try in various ways, and an attractive tourist destination for this reason, its success relies far less on objective attractions than on the careful cultivation of its national brand; with getting on for two million tourists passing through the country in 2016, sustaining this brand is putting strain on Icelanders’ own sense of their national identity.

As widely in the West, Iceland experiences a sharp divide be-tween generally elderly, rural voters who feel left behind by Ice-land’s development and are right-leaning, and generally young, urban voters who live in a Reykjavík that has in some ways be-come cosmopolitan, and are left-leaning.