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Egill Helgason

The problems of the Nordic welfare government

It is actually fitting that the Nordic model should be the subject of this last issue of Analys Norden. There are a few things we Nordic citizens regularly get asked about our northern societies, which for many stand out as excellent role models in welfare, gender equality, freedom and human rights.

Feb 23, 2012

When liberalism was the dominant ideology in the West, it was in fact fashionable to denigrate the Nordic system - it was said that it had stagnated, was in the way of private initiatives and so expensive that it could not continue in the long-term.

These voices have fallen silent - at least for now. There are other types of societies which have proved to be less effective and have come out of the financial crisis far worse - societies where the laissez-faire ideology dominated. Again one looks to the Nordic Region to find role models in government and welfare.

The age of Liberalism

Iceland is in a unique position in the Nordic Region, and has been for a long time. There are several reasons for this: influence from the USA was stronger here than in Scandinavia and we have never had a large and traditional social democratic movement as in the other Nordic countries. Icelanders have always seen themselves as individualists, and there has been a widespread attitude that welfare and equality in the Region seems stifling. In a report from Iceland Chamber of Commerce (Viðskiptaráð Íslands) in 2006, when the Icelandic economy was at its height, it is stated that Iceland cannot learn anything from the other Nordic countries, the country is superior in most areas.

The ideology which prevailed in Iceland then had come mostly from the USA and especially from Great Britain. Davíð Oddsson, Iceland's powerful prime minister in the period 1991 to 2004, was a keen supporter of Margaret Thatcher. The social democratic alliance (Samfylkingin), which was founded by several smaller parties in 2000, had Tony Blair and his New Labour as an important model. In this way there was little opposition to the financialisation and liberalisation of Icelandic society between 1990 and 2008.

An eye towards the Nordic Region

After the financial collapse in October 2008 it can be said that all values were taken up for reassessment in Iceland. Old party coalitions still apply to some extent, but it is sometimes difficult to see who is where in the political landscape. At the beginning of 2009, the government that took over quite simply called itself after the Nordic system. The Nordic welfare government. The name signifies two things: Firstly, a promise to protect the welfare state in a time of crisis, and secondly, a plan to change course away from the liberal right-wing politics which had dominated for 18 consecutive years.

In this period the financial market had been liberalised, the supervisory institutions were weakened or shut down, property taxes were lower and the tax burden for the highest incomes had decreased. It has been said that more than 90% of the suggestions made by the Chamber of Commerce in this period were passed as law.

When the welfare government took over, it was a new situation. People took to the streets and protested against this unregulated capitalism. There was talk of creating a New Iceland now - and the most important role models were the Nordic countries which hardly anyone had paid any attention to for a long time. The government which took over was led by Jóhanna Sigurðardóttir, a sworn Social Democrat who had been against the Blair influence - she was very respected and popular because of her fight for social welfare. The more liberally oriented Social Democrats pulled back and Jóhanna's most important partner in the government was Steingrímur J. Sigfússon, leader of the Left-Green Party (VG), a party which had always been opposed to market liberalism.

The government parties split and lose support

Now, three years later, the government of Jóhanna and Steingrímur is very unpopular. According to a new opinion poll their parties are heading for a disastrous election. In this poll the Social Democratic Alliance gets 12%, the Left-Green 8%, the Independence Party (Sjálfstæðisflokkurinn) 35% a new party led by MP Lilja Mósesdóttir, who recently resigned from VG, gets 21%. Lilja claims that her party Solidarity (Samstaða) is neither to the right nor the left in politics, its main concern is to improve the situation of household debt.

Now it can be said that Jóhanna and Steingrímur have kept their promise of protecting the welfare state to some extent. Cutbacks have been less than in other state sectors. Foreign economists, who attended a conference on the Icelandic economy last autumn, praised the Icelandic government for the good development of the state finances and for having managed to protect the welfare state. This group included two Nobel prize winners, Paul Krugman and Joseph Stiglitz. It was also mentioned that the International Monetary Fund (IMF) had actually been lenient to Iceland when it saved the country's economy towards the end of 2008. It did not make tough demands on cutbacks here as it had done earlier in similar situations.

Is the crisis over?

Of course the question is asked of whether Iceland can afford a strong welfare state now that salaries have gone down and tax revenues have been reduced - this is in spite of various tax increases. In the health sector there have been considerable cuts, and, in particular, wages have lagged behind compared with the neighbouring countries. A stream of doctors and health care professionals have gone abroad - many have settled there, and a shortage of doctors has begun to be felt both in the hospitals and elsewhere.

Nevertheless, it is difficult to say anything other than that the government has been quite successful in this field. Now there is economic growth in Iceland, and the forecasts indicate that this will continue in the future. Some ministers have even said that the crisis is over.

Explanations of the government's unpopularity

Why is the government so unpopular? There are several explanations:

The application for EU Membership which was submitted already a year after the financial collapse was very controversial. The opponents of the EU have been very loud and their version has been strengthened as the economic situation in Europe worsens. The government stands by the application but, for the moment, it seems unthinkable that it will be approved.

Mistakes in the Icesave case. The government negotiated two agreements on the Icesave deposit accounts which Landsbanki operated in Great Britain and the Netherlands. Ólafur Ragnar Grímsson, Iceland's President, put both agreements to a referendum and the people responded with a resounding 'no'.

The burden of household debt. This has been the most difficult issue for the government. This is also about a conflict on currency loans and the index regulation which rests on financial obligations in Iceland. The centre of Reykjavik has been filled with demonstrators several times because of this - nothing has undermined support for the government as much as this.

Unlikely return to market liberalism

Most indications suggest that the welfare government will lose the next election. According to schedule it will be held in April next year but it is possible that the government will have to throw the towel in the ring before then. The government only has a majority of one, and sometimes it has to negotiate with members of the opposition to get matters through. It faces major problems with getting big issues through - amongst them is the halt on the work of revising the constitution, and the marine resources law which the government has long claimed would be passed soon.

This does not mean to say that there will be a return to the market liberalism from the years before the collapse. The pendulum has swung and Icelandic politics have moved to the left. All the parties say that they are supporters of the welfare system and no one even tries to propose privatisation of schools, health services and energy resources, even though questions like these were highly topical before the crash. Privatisation has almost become a term of abuse, and it is now generally known that the privatisation of the Icelandic banks was characterised by party politics, camaraderie and nepotism. Privatisation of the fish resources began with transferable quotas towards the end of the last century - this is still a contentious issue which is an open wound in Icelandic society.

The search for stability

So the Nordic countries appear reasonably attractive to Iceland in the current situation - quite independent of the unpopular Nordic welfare government. Icelanders think that politics in the rest of the Region seem less tough than at home. In the Nordic countries there is a tradition for minority governments which work together, while a one-track party policy weighs heavily on Iceland. A stability which Icelanders almost thought was dreary was prevalent during the time of the financial bubble - but now it can be said that they have begun to yearn for that kind of stability. Iceland has long been at the mercy of instability and there are several reasons for that: Ups and downs in the fishing industry, a strong tendency to inflation, financial mismanagement and a gold digger mentality have often characterised the society.

This is reflected in the Icelandic krone which has risen and fallen over time like a tub on the open sea. It has been calculated that the krone has fallen by 99.5 per cent in relation to the Danish krone since 1920. There is now a certain balance in the economy since the collapse but it is, in fact, a false sense of security because Iceland is protected by strong currency restrictions which remain in place in the coming years. There are even indications that a small financial bubble is developing under these restrictions. The application for EU membership is not least an expression of a desire for stability - in line with other options such as Icelanders could begin to use the Norwegian krone, the dollar or even perhaps the Canadian dollar. Ideas of a Nordic confederation have met with approval from many people in Iceland.

Ideological chaos

Ideologies are in turmoil no matter where you look. Both the right-wing and the left-wing seem to have gone ideologically bankrupt after the financial crisis. The left-wing parties have lost power many places in Europe and it also appears as if they have lost the ability to provide leadership for a discontented people - they have primarily technocratic solutions to offer. In the USA dissatisfaction is showing itself in the right-winged Tea Party Movement, whose solution for too much freedom in the market seems to be even more freedom. It all seems rather contradictory, but increasingly the struggle seems to be fought between the people and the financial elite who have secured their grip on the politicians.

These days the Nordic model with its co-operation, its welfare and mixed economy seems particularly tempting. It is perhaps an embellished image, but in a number of areas the Nordic Region is like a haven where disharmony reigns outside. This will perhaps not last forever, but for Icelanders who have been half in and half out, it seems like a good option.

The views expressed are those of the author.

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