A new post-crash constitution in Iceland?

The 2008 banking crisis eventually led to the rewriting of Iceland’s constitution.

Kaupthing was one of the three banks in Iceland that collapsed in October of 2008 [Henry Rose/Solutions Journal]

“When countries crash, a natural thing for their inhabitants to do, inter alia, is inspect their legal and constitutional foundation to look for latent flaws and to fix them.” -Thorvaldur Gylfason, From collapse to constitution: The case of Iceland

For much of the past decade, Iceland enjoyed surprising economic growth. Following the privatisation of its three major national banks in 2000, a mania of privatisation gripped the country. This once staid, conservative community of 320,000, sheltering on a volcanic island in the mid-Atlantic, seemed to turn overnight into a jet-setting class of financiers.

For the first time, national resources like fish and geo-thermal energy became part of an overheated commodities market. Investment companies took out vast loans to fuel a boom; the people involved, generally referred to as the Viking raiders, were young, hip and male nouveaux riches. All of a sudden, they “owned” department stores, shops and banks across Europe. They travelled in private jets and paraded impressive boats, cars and houses.

They holidayed together in St Moritz and Cote d’Azur, and sometimes they had the Icelandic president, Olafur Ragnar Grimsson, in tow. It wasn’t just the Viking raiders who took part in the party. The general public took large loans, not only for houses and cars, but also for the consumption needed to “keep up with the Joneses”.

So when Iceland’s three banks collapsed in October 2008, recording the largest banking collapse in history, the nation went into shock. This was the scene when I returned home to Iceland at the end of 2008, after studying and working abroad for 30 years.

When I was offered the job of dean of the School of Engineering and Natural Sciences at the University of Iceland in early September, the outlook was bright. Funds were being brought in for establishing a new Science Park that would focus on that perennial buzzword, innovation. When I signed my contract with the university on October 6, the three banks had collapsed over the weekend and my response to the personnel manager when she asked me where my salary should be paid in was, “I don’t have an Icelandic account and as far as I can gather we now have no banks in Iceland.”

That day, on my way back to the UK (where I was still working), I stood in a crowded bar at Reykjavik’s international airport listening to the prime minister give a national address spelling out the scale of the disaster, and ending with the desperate plea, “God bless Iceland”. The atmosphere was heavy as those in the bar tried to take stock of their vanishing world.

In spite of the bleak outlook, I decided to move to Iceland at the end of November. At the very best, the financial crisis might make people open to new ideas, and I came to Iceland with the underlying agenda of making it a sustainable country. 

“The public was reacting to sweeping cuts that seemed to offer much suffering but little in the way of rebuilding the country to prevent another crisis.”

On my first day of work on December 1, I was invited, along with other university officials, to the residence of the Icelandic president on the outskirts of Reykjavik. The plush reception room was filled with government ministers. The mood was surreal. We were chatting with the very men and women who had led us to destruction.

Two months after the crash, no visible signs of change had occurred, no policies been announced, no apology made. Anger was mounting outside the residence, which would culminate the following year in street demonstrations – a rare occurrence in demure Iceland – following the 2009 budget. The public was reacting to sweeping cuts that seemed to offer much suffering but little in the way of rebuilding the country to prevent another crisis.

Demanding new elections, beating pots and pans, and lighting bonfires in front of the Icelandic parliament, those who gathered experienced their own Arab Spring. The right-wing-led government, which had ruled for 16 years, collapsed at the end of January 2009. A new, left-wing, interim government was set up by the president in February with the Social Democratic Alliance leading, including the Left Green Movement. This same composition of government was voted in by the spring of 2009. The public had spoken, but would there now be a change?

Steps taken to rectify the process

A severe recession inevitably followed the crash, as the new government scrambled to salvage the country’s finances. As in the US, the first step by the conservative government was to bail out the banks to the tune of 45 percent of gross domestic product (GDP), leading to government debt of 110 percent GDP.

This conservative government that had led Iceland to destruction secured the savings of everyone in the collapsed banks. That way, they looked after themselves and the ruling class. But huge disputes arose due to the dubious savings accounts set up by Landsbankinn (Icesafe) in the UK and Holland.

Over a million foreigners, or three times the population of Iceland, had put their money into these Icesafe accounts because of their high interest rates (15.5 percent). In the aftermath of the collapse, a diplomatic dispute arose between the Icelandic government and the governments of the UK and Holland. Since Icelandic savers had had their savings secured, they demanded that their nationals enjoy the same luxury. While the conservative government set an emergency law stating that the foreign account owners would get the maximum of 22,000 Euros required by EU law, they and the new government refused to pay more.

There has been a widespread misunderstanding in the international media that Icelanders refused to pay foreign depositors. That was not the case. They did, however, refuse to pay more than the maximum required by law. The two contracts that were rejected in referendums demanded by President Olafur Ragnar Grimsson stipulated that Iceland would pay more than the security. They also included very high interest rates. By renegotiating after the referendums, the interest rates were lowered and the maximum deposit agreed according to law.

Such savvy moves could only partially shield the economy. Without enough money in the system, the Icelandic Krona fell sharply in value, foreign currency exchange was more or less stopped for weeks (and we still have restrictions in capital flow in and out of the country), the market capitalisation of the Icelandic stock exchange dropped over 90 percent, and the economic decline was 13 percent of GDP.

The only solution was to proceed with the budget cuts proposed by the conservative government, leading to layoffs, wage reductions and reduced services. Many people lost their jobs and their homes, unemployment soared to 9 percent, and some are still angry that the write-offs are big for business but not for families.

undefinedPrivatisation of banks pressed natural resources, like fish, into an “overheated” commodities market [Niklas Sjoblom/Solutions Journal]

The constitution-writing process as one solution

This bleak outlook was, however, tempered by the new left-wing government’s decision to embark on a constitution-writing process, which satisfied a demand of the “pots-and-pans” revolution and initiated an important process of envisioning a new direction for Iceland.

The current constitution of Iceland was adopted from the Kingdom of Denmark in 1944, with the promise to revise it shortly. The constitution has long been seen as unfit for a parliamentary democracy because it is, to a large extent, built on the Royal Danish constitution.

The rewriting process started in October 2010, with the establishment of a National Assembly of 1,000 randomly selected individuals (with some tweaking to ensure the right gender and age distribution). The aim of this gathering was to open discussion of the values and pillars upon which to build the new Iceland.

The assembly, in turn, submitted its findings to a Constitutional Committee comprised of seven people from different political persuasions and headed by Gudrun Petursdottir, director of the Institute of Sustainable Development at the University of Iceland. A strong message was duly delivered the following year: the public should have ownership of the natural resources and the electoral process should be more transparent.

The problems started with the next, crucial step in the constitution-writing process: election to the Constitutional Assembly of the 25 people that would actually draft the document. There were 523 candidates, including myself, and a new electoral methodology was used: single transferable vote (STV), which had previously been tested in Ireland, Scotland and Australia. Yet media coverage was scant, limiting campaigns to Facebook and Twitter. Voter turnout was a disappointingly low 30 percent.

More discouraging was the behaviour of the formerly ruling right-wing parties after the results were declared. The Independence and Progressive Parties have been able to count around 60 percent of combined votes for parliament for the past 60 years. The Independence Party led the Icelandic government for 16 years to state collapse and, with the Progressives, they were responsible for selling Iceland’s three banks, which paved the way for superheating the economy.

These two parties have a stake in the constitution remaining as it is due to their connection with the dubious privatisation of the banks, and links to the former banking leadership as well as to powerful fishing and farming consortiums, which also own much of the media. People connected with the Independence Party filed a technical court complaint about the voting procedures.

The High Court, whose judges had been appointed primarily by the Independence and Progressive Parties in their reign prior to the collapse, deemed the Constitutional Parliament elections null and void, demonstrating the power of vested interest, nepotism, and corruption in Iceland. The parliament, led by the two left-wing parties, responded by appointing the 25 elected to the Constitutional Assembly to the Constitutional Council. 

Redrafting Iceland’s constitution started by convening 1,000 randomly selected individuals [Matt Riggott/Solutions Journal] 

The draft constitution

Could the draft constitution help wrench back some of the power to the people? After four months, the Council proposed a new draft constitution that built on earlier proposals for public ownership of natural resources.

It defines specifically what the natural resources of Iceland are – marine stocks, resources of the ocean and its floor, water and water-harnessing rights, the rights to geothermal energy and mining – and stipulates that their use must be in accordance with sustainable development principles using a permit system. The rights of nature and coming generations to healthy ecosystems are also enshrined in a proposed law for the first time.

Regarding transparency, the new draft constitution has stronger checks and balances between the three branches of government and more clearly defined accountability for politicians should they make the sort of bad decisions that led to the collapse. The draft constitution also has important articles concerning the rights to information, freedom of the media, appointment to public office and the independence of key state agencies.

Opposition to the draft from the two right-wing parties has been strong, a sure sign that the status quo is in danger of being challenged. During the drafting of the constitution, both parties have come under increasing pressure to own up to their role in the collapse. In 2009, the new parliament appointed a Special Investigation Committee (to examine the crash’s causes. Its report, delivered in 2010, was a devastating exposure of the criminal wrongdoings of the banks and serious negligence by several politicians, public officials and administrators as well as auditing firms.

Dozens of cases of financial fraud have been referred to court, including the then-prime minister, who was subsequently found guilty by a parliamentary court (assembled for the first time in Iceland’s history) of violating the constitution and the law of ministerial responsibility.

But despite the pressure, the two right-wing political parties appear to have regained their influence and are predicted to gain a majority again in upcoming elections in 2013. Whether they can derail the draft constitution remains to be seen. In a referendum in October 2012, the majority of those who voted (49 percent) wanted the proposal for the constitution to be the grounding for a new constitution with natural resource ownership devolved to the people.

Since much resistance has come from the Conservative and Progressive Parties, the likelihood of a new constitution being accepted by this parliament is increasing. The constitution will have to be voted for in two consecutive parliaments. The government has promised a national referendum on the constitution bill and hopefully it will take place at the parliamentary elections on April 27, 2013.

In the meantime, the tepid pace of the national recovery continues. Unemployment is now at 5.6 percent, although this figure is skewed by the fact that many have left Iceland and gone to work in Norway and other countries. A more sustainable political system remains a possibility, but it may require more banging of pots and pans to bring it about.

Kristin Vala Ragnarsdottir is Dean of the School of Engineering and Natural Sciences at the University of Iceland. She is currently working with the Idea Ministry in Iceland, a grassroots organisation that focuses on solutions for the future, as well as with the Prime Minister of Iceland to find sustainable solutions for the country after the economic collapse in 2008.

A version of this article first appeared on Solutions Journal