Iceland's election is a signal to the rest of Europe
Iceland's response to the financial crisis has been taken as a model for how a country should react to a dramatic economic shock. However, international observers should also take note of our country's recent election result. Despite guiding the country through a difficult but impressive recovery, the governing parties were ousted. The parties that were blamed for the financial crisis won a slim majority. This raises a fundamental question: in our age of austerity and slower growth, can politicians maintain popularity without the proceeds of a bubble economy? Put differently: can any politician meet the unrealistic expectations of Europe's voters?
After Iceland's 2008 collapse, nearly the whole financial system went bust, inflation hit 18 per cent and the currency plunged. Unemployment spiked from 1 per cent to 9 per cent. Debt rocketed and commentators asked when we would default.
The Icelandic recovery was not based on the sort of austerity measures seen elsewhere in Europe. Low-income groups and the unemployed were protected. Debt on homes with negative equity was written down. The International Monetary Fund rather unexpectedly lauded Iceland for retaining our Nordic welfare system.I was part of the ousted centre-left coalition that stopped the slide. At the time of last month's election, the deficit was turning into a surplus, the currency had stabilised, inflation had dropped to less than 4 per cent and unemployment had halved.
Politicians caught in economic crisis south of Iceland would give a lot for our metrics. Presumably, however, they would not care for the coalition parties' election result, as together their vote fell by 27.7 per cent from the last election – the biggest swing in the country's history.
There is no simple answer as to why. Some say the government did not boast enough about its success. Disunity within the coalition on the implementation of difficult measures was also a factor. Others say that the government tried to implement too many changes, too quickly – and there is a time lag for the impact of policies to be felt by Iceland's households. However, the truth is that we were beaten by the enormity of the task and the importance of public expectations.
The two centre-right parties that implemented the policies that led to Iceland's crash have emerged victorious. It is a stunning result. Their election manifestos feature familiar jargon of boosting the economy through low taxes and deregulation. Extravagant measures have been promised to improve consumption in an economy that needs to focus on minimising government debt after the personal spending binge in the pre-crash years. The vote went for short-term consumption instead of long-term and stable foundations.
Policy makers across Europe face the difficult question of how to survive a crisis. Taking tough but necessary measures to save a country's economy does not always win votes. Voters want immediate returns, so government leaders are pressurised to pursue policies that facilitate consumption. There is little understanding that growth has to be sustainable. That paves the way for opportunistic promises by opposition parties that everything will prosper if voters choose based on short-term needs or desires. These are the materialistic ideologies of the day – and the pre-crisis era – making it impossible for a democratic system to be long-sighted.
It is important to ask whether governments implementing recovery measures can maintain power long enough to emerge from a crisis, if they cannot immediately deliver the same standards of living as citizens enjoyed during a bubble economy. Iceland has come a long way but it still faces huge tasks, such as the lifting of capital controls.
The result from Iceland should prompt introspection not just from politicians, but from voters as well. Are our expectations realistic? Is the only way to meet the insatiable demand for growth to build economies based on quicksand? For that is a recipe for an ever more destructive boom-and-bust cycle.