EUROPEAN DIARY:Repaying €3.8 billion in lost deposits will be onerous, but without it the country's prospects of joining the EU look much more faint
ICELAND’S PAINFUL efforts to overcome its economic collapse ran into serious trouble last week when President Olafur Ragnar Grimsson refused to endorse a Bill that would see the tiny country repay €3.8 billion to Britain and the Netherlands for deposits lost in the meltdown of its banking system.
The issue could complicate efforts to secure the island’s stability via the EU and, ultimately, the euro.
The matter now goes to the Icelandic people, who must decide in a few weeks’ time whether to back the contentious legislation in a referendum.
Although the EU accession process does not directly hinge on the repayment scheme, it seems clear that the door would close to Iceland if it was in default with two powerful EU members.
More immediately, the issue threatens to curtail the availability of crucial loans from Iceland’s Nordic neighbours.
Thus the government of prime minister Johanna Sigurdardottir has a mountain to climb to marry the concerns of wary voters with its determination to ensure Iceland meets its international obligations.
Although many in Iceland feel their country has been bullied into submission by the might of the Dutch and British, Reykjavik has repeatedly stressed that the argument is not about the principle of repayment but the terms.
For Icelanders, crushed by an economic imposition that brought a once prosperous country into the arms of the IMF, the affair illustrates just how disastrous its dalliance with risky financial excess proved to be.
Although the question of EU membership divides the public, moves to join the union are designed to strengthen Iceland’s fiscal defences and foster exchange rate stability as its economy is rebuilt.
“The crisis was extremely tough psychologically for everyone, but we are resilient as a people and we’ll manage to navigate out of this,” says Stefan Johannesson, Iceland’s ambassador to the EU. “People generally feel we are going through a very rough patch but the long-term perspective is really not that bad.”
On the immediate horizon, however, difficulties abound. Measures to compensate the British and Dutch governments for bailing out depositors who held money in Icesave, a branch of the collapsed bank Landsbanki, have become a lightning rod for anger at the financiers, whose dazzling deal-making turned to ashes.
With a swingeing austerity programme under way, politicians charged with cleaning up the mess have also come under fire.
No less than 60,000 people, about a quarter of the electorate, then signed a petition against the legislation, prompting Mr Grimsson’s referral of it to a referendum. That the scheme has become known locally as “Ice Slave” sums up derisive attitudes to an affair that will cost each citizen more than €11,000 and which is widely held to be unfairly punitive as they struggle in the maw of recession.
In the Wall Street Journallast week, a former board member of Iceland's central bank said the burden, when compared with the size of the country's economy, was on a par with the reparations imposed on Germany after the first World War.
Shrill warnings from London last week that the island risked becoming a pariah state if it didn’t repay the money stoked resentment at Britain since Gordon Brown’s administration invoked anti-terrorist legislation against Icelandic interests at the height of the crisis in 2008.
For all that, foreign minister Ossur Skarphedinsson said he had received assurances from his British counterpart, David Miliband, that the controversy would not affect Iceland’s candidacy for EU membership.
In a strict legal sense, that is correct. The incoming European Commission is expected to provide its response to Iceland’s membership application within the next couple of months. Officials in Brussels believe the Commission will call on EU leaders to begin accession negotiations, making way for Iceland to become the 29th EU member alongside Croatia in 2012.
This analysis is predicated on the fact some two-thirds of the statute book in Iceland is already in line with EU law. It assumes, however, that the country can find a way of resolving the Icesave question and that public opinion will row in behind EU membership after recent polls showed a majority against joining.
Although recent opinion polls on Icesave suggest opposition to the Bill has weakened, the long-awaited report of a powerful parliamentary committee on the banking collapse is due in a few weeks.
The report, which will apportion blame for the crisis, could come before the referendum, with huge potential to harness public opinion against the measures. If the Bill fell, fulfilling EU membership criteria would be least of Ms Sigurdardottir’s troubles.
