The Panama Papers have put Iceland’s Gunnlaugsson on stage with autocrats and alleged tax dodgers. An article by PhD student, Ragnar Hjalmarsson.
Iceland’s Crash and the fallout of the Panama leaks, are related. They both damaged Iceland’s reputation and caused people to take to the streets. More tellingly, the Prime Minister’s crisis is due to his refusal to learn the lessons of Iceland’s economic collapse.
What the leak revealed
The leak has brought out from the shadows that the PM’s wife’s assets, estimated at around 10m EUR, are stashed in a company in Tortola —a British Virgin Island that is a byword in Iceland for the corrupt business practices that led to the 2008 crash. Moreover, the PM was a joint owner of the account until the end of 2009, when he, then a parliamentarian and leader of his party, sold his share to his wife for a single US dollar.
In addition, the Prime Minister failed to disclose that his wife owned 3.5m EUR worth of claims on the estates of the bankrupt banks. This is problematic because the PM was a central—if offstage—participant in the recently concluded negotiations with the creditors of the failed banks on the terms under which they might obtain their assets given Iceland’s capital controls regime.
For reasons only known to him, the prime minister did not inform his electorate that he was on one side of the table during the negotiations, while his wife was on the other.
“I base my ethics on the letter of the law”
In any other Nordic country, the Prime Minister would have resigned immediately. But in Iceland, it took three weeks of denial after first news surfaced in domestic press, and then two days of turmoil after Iceland became an international story for the prime minister to reluctantly face the inevitable.
“I base my ethics on the letter of the law”, the PM said when news of the Tortola company first surfaced in mid March. Irony has it that on that same March day Parliament amended the law governing financial disclosure by parliamentarians: under the amended law, the PM would need to declare his wife’s assets.
Be that as it may, the PM opened himself to a perception of conflict of interest by keeping the Tortola investment secret. Moreover, the legal path he is treading as he fights for his political life, is excruciatingly narrow, as we will see.
For one thing, the PM sold his share in the Tortola company one day before the passage of tax code amendments which would have forced him to disclose his ownership.
Second, with respect to negotiations with the creditors of failed Icelandic banks, it has emerged that the PM’s name was not put on a list of negotiators with insider interests. He was therefore exempt from the restrictions placed on insiders, which included not having any perceived conflicts of interests. Yet he was a central actor in the process.
Finally, the PM has resisted calls that his government pass into law a ministerial code of conduct which would have required him to declare his wife’s assets.
The lessons
After the crash in 2008 there was a loud demand in Iceland that politics and business practices be reformed, and that politicians in power as well as Iceland’s business oligarchs be held to account.
In subsequent years a special prosecutor imposed prison sentences, some of them lengthy, on the CEO’s of Iceland’s three largest banks, as well as some the banks’ owners and senior staff. Iceland’s track record stands in stark contrast with the more limited steps taken in other crisis-hit countries.
Also notable was the establishment of an independent Truth Commission. In its 2.400 page report the commission gave an in-depth account of the banking collapse and exposed egregious governance failures. Based on the findings of the commission Iceland’s parliamentary parties —including the PM’s —unanimously adopted an agenda for institutional reform and declared that the report’s “criticisms of Icelandic political culture should be taken seriously and lessons should be learned.”
One of the responses to Truth Commission’s report was that the government adopted a ministerial code of conduct for its cabinet ministers. This code of conduct—the one which the PM refused to pass into law–has now painfully proved its relevance.
It is telling that of the 147 witnesses interrogated by the Truth Commission, not one admitted any responsibility for Iceland’s calamities. Many sheltered behind a narrow legalism: the financial system might be going over a cliff but so long as state institutions were following the law they could not be held responsible.
Had the PM heeded these lessons, he would not find himself running towards the cliff. However he failed to do so. When his government came to power in 2013, on the back of promising generous across-the-board “corrections” of mortgages, the learning of lessons and reforming political institutions was put on the backburner.
Dealing with the past in Iceland went from being a political and societal project to a corrective project that was to be solved with monetary transfers to households, the return of robust economic growth and business as usual.
Iceland’s current economic position has become enviable. Unemployment is at 3.1%. There was 4.0% economic growth last year and public debt has dropped to 14.5% of GDP. Once again money is flowing in Reykjavik. But the mood is sour.
This week, Iceland is rocked with protests even larger than after the economic collapse. Just as in 2008 there are calls for “New Iceland” and reform of the political culture. Not an economy of tax shelters and narrow legalism, but a more moral economy where everyone pays their dues and politicians are responsive to demands for transparency, accountability and truth.
The main lesson of the present is that it is dangerous to give up on learning from the past. Inconvenient truths and difficult lessons always rear their heads — and not only in Iceland. As Rabbi Hillel advises ‘if not now, when?’
Die Welt published this op-ed in German on 6 April 2016: Chaos in Reykjavík nach Rücktritt vom Rücktritt.