Default, devaluation, nationalisation of banks. Guardian’s financial analyst explains the secrets of the Icelandic success.
Some months ago, the British newspaper Guardian decided to focus on the EU periphery – the so-called PIGS of the European integration. Instead of sending just another journalist, the journal chose to assign the mission to its economics leader writer. Aditya Chakrabortty has been turned into a sort of “war correspondent” of the financial crisis by travelling to every corner of the planet that experiences the collapse of their economy. He had a first-hand experience of the collapse of the East Asian tigers a decade ago, and now he is watching the crisis of the global periphery striking at the heart of the financial metropolis of the West.
After travelling in Spain and Ireland, he arrived in Athens last week. And, as he explained, this last stop changed forever his perception not only of the Greek economy, but also of the entire Eurozone.
For him, the solution to the problem cannot be found in the European South but in the borders with the Arctic Circle… in frozen Iceland, which managed to avoid destruction by taking drastic and radical measures: payment default, control of the speculative capital flow, nationalisation of the banks and currency depreciation. The problem, according to Chakrabortty, is that almost none of these options can be implemented within the Eurozone. And if a solution is not found soon, he explains, Greece risks complete rupture of the social and political fabric.
Does it make sense to group the countries of the European south that face financial problems? Can a common solution be found for the so-called PIGS?
I believe there are many significant differences and one similarity. But let’s start with the differences. I think the term PIGS is pejorative. Putting in the same boat countries like Spain, Portugal, Ireland, Greece and possibly Italy indicates some sort of analytical laziness on the part of economists and politicians in Northern Europe. The same goes for the characterisation BRIC –in fact there is no connection between Brazil, Russia, India and China besides the fact that they have significant growth rates. But even in this case, the growth rate in Russia is not so great. Such aggregations show weakness of thought and ignorance of the history.
If we take a look at the countries that are characterised as PIGS, we realise that all of them had the opportunity to use cheap credit but each did it differently. In Iceland, for instance, we had an unusual revival of the Viking spirit with entrepreneurs, high on testosterone, buying everything in their path. The Spaniards were led to the tremendous growth of the housing market in which banks were involved resulting in their collapse. In Ireland we had a small country with a gigantic banking system, which eventually ate the whole country. And then you come to Greece to realise that it is not about a debt problem in the private sector, as in Spain and Ireland, but a problem of public debt.
Therefore, there are major differences between these countries that are usually hushed.
But there are similarities too. All these countries used the low credits of the last decade in a disastrous way –although I cannot think of any country in the world that has used them in a positive way. Secondly, it is about countries that are trying to escape their history. Ireland wants to forget that it is the place of Catholic priests and the potato famine. Spain is trying to overcome the fact that it has always been treated as an underdeveloped country in comparison to the European north. The same goes for Greece that wants to forget that it is the entrance for Asia and avoid any association with the Ottoman Empire. Even Icelanders want to escape the snow and cold –and you cannot blame them for that (laughter).
But there is another feature and this is probably the only case we can categorise them: during the 2008 great crisis, when the problem of the financial sector turned into a debt crisis, the markets managed to entrap all these countries.
The fact that such diverse economies ended up facing almost identical debt problems has led some to the conclusion that it is perhaps the functioning of the Eurozone that is responsible.
I think we can say this for two reasons: First, there is the issue of competitiveness which particularly concerns Greece. Over the past decade Germany pressured its employees, who did not see any positive results from the development of the German economy –whichever that was. It’s worth pointing out that it is only after the financial crisis that the German economy began to seem powerful, because economists and politicians, I can remember, during the previous decades would treat Germany as the “sick man of Europe”. In that period, Germany presented some amount of growth but with very low rates. Nevertheless, German employees did not gain anything. All the benefits went to the bosses and the capital and not to the Labour. Germany was learning all the “tricks” from the UK and the USA for dealing with workers. One of the by-products of this process was that the countries of the European South presented differences in competitiveness.
But since growth rates in Germany were low for too long, German bankers and bankers from other Northern European countries began to seek other markets to invest their money. Northern Europe began to lend Southern Europe in order for the later to be able to buy products from the North. In some sense, it is exactly what China is doing with the US. American employees are no seeing any improvement in their salaries, relative to the state of the economy, and thus they begin to borrow in order to maintain their standards of living. And who are they going to borrow from? China, of course. So that leads us to a tragicomic situation in which a worker in the car industry in Detroit is actually borrowing money from China to buy a house in his own town.
So, apart from the responsibilities of the Eurozone, there are the responsibilities of globalisation.
The only country in Europe that seemed to have escaped the debt crisis was Iceland. How did they do it?
While all the journalists are busy looking at countries like Greece because of the problems they face, Iceland is, in my opinion, the most fascinating issue that ought to be concerning us. The country should have already collapsed under the weight of the problems but on the contrary managed to escape. You ought to remember that Iceland made the exact same mistakes as countries like Ireland. When the 2008 crisis broke out, the Icelandic government was prepared to rescue the banking system, but at the very last moment changed direction realising that it is practically impossible to rescue the banks. So the inhabitants of Reykjavik told the rest of the world: “We apologise but we cannot save our banks and we cannot pay you what we owe you”. It was the only rational move on their part and also the only good political move on the part of the government, if the government wants to claim to be serving the voters’ interests and not those of the foreign stockbrokers and bankers. But that was also the right way to deal with all those who had invested in the Icelandic banks. If there is something that capitalists must know is how to avoid such situations.
Subsequently, Iceland imposed restrictions on the movement of capital and thus reduced the speed of speculative money feeling the country. And thirdly, they consciously devalued their currency resulting in 50% reduction of the value of the Icelandic kroner. Today, no one can claim that this policy did not work.
The case of Iceland reminds me of Malaysia during the period of the Asian financial crisis –which I followed closely. Malaysia also followed the same policy as Iceland despite the tremendous pressures exerted by the IMF. So the country managed to escape much faster the Asian crisis than for example Thailand that followed the instructions of the IMF.
How applicable is this to Greece?
First, Greece could also nationalise the banking system. In fact, I am truly surprised that you have opted for keeping the banks in intensive care under mechanical support.
The second important issue is of course the devaluation. Obviously, this cannot be done with the country remaining in the Eurozone. In fact, Greece cannot even proceed to payment default because in the Eurozone the orders come from Berlin, Paris and Frankfurt.
So, there are the so-called two Ds that Greece should follow: devaluation and default –like Iceland did. Instead, Greece follows the third D, deflation, basically stomping on the neck of Greek employees. The wage reductions by 25% in the public sector combined with the redundancies is the weight that has been transferred onto the backs of the employees.
But when you come to Greece and walk around the streets of Athens you realise that there is a certain limit to how long this situation can go on. If the government pulls more rope it will break. My suggestion would be to consider leaving the Eurozone and certainly proceed to payment default.
After your arrival in Athens has your perception of the Greek crisis changed?
To be honest, everything has turned upside down. Of course in terms of the finances, nothing has changed because I always thought that Greece cannot service its debt and I could not understand why you take orders from Europe. But two very important things changed in my mind. First, if you are sitting in your office in London reading the Financial Times or listening to discussions among politicians and economists you realise that they are dealing with the problem in purely technocratic terms. They are talking about restructuring and bond swaps or renewals, anything they can think of in order to avoid using the word default. But when you come to Greece you understand that the discussion has completely different characteristics. The North-Europeans, with their technocratic attitude, agree among themselves that Greece must take more austerity measures. In Greece, the debate is how much longer the society and the entire political system can endure this austerity before collapsing. So my experience in Greece has changed my perception of the on-going discussion concerning the Eurozone.
The rest of the world congratulates themselves for avoiding the great recession following 2008. But then you come to Greece and realise that recession is already here. You have had three consecutive years of recession; one out of six employees is unemployed etc. And there seems to be no way out of this situation. Europe seems to forget that when we are in recession at some point there will be a reaction from the lower social strata.