The European dream is turning into a nightmare because of the great mistake of adopting the same currency, the euro, in most of the European Union, even if many member states were totally unprepared for it. This was the conclusion of François Heisbourg, one of Europe’s best known experts on security and international affairs, at an RNH meeting 5 April 2014. Heisbourg pointed out that economic growth in the last few years had been much faster in the US, China, Brazil and India than in the eurozone. Because of the euro, some countries in Southern Europe had not been able to adjust to new economic realities. The euro rate was too high for them, while it was too low for Germany. The idea that the same size would fit all was not only unrealistic; the fact was that it fit none. A generation of young Europeans knew nothing but unemployment. The EU has been established to protect peace on the continent and to provide a framework for the four freedoms — the free movement of people, goods, services and capital between European countries. To save the EU, the euro had to be abandoned. It was the least bad of many options.

Briefly discussing Iceland in his lecture, Heisbourg said that in the 2007–9 financial crisis it had worked well for Iceland to stand outside the eurozone and to be able to stimulate exports by devaluing the currency. However, the British and the Dutch governments would probably not have treated Iceland as brutally as they did, if it had been a member state of the EU. An economist at the Central Bank of Iceland, Stefan Johann Stefansson, protested that if Iceland had been a member state, the EU would have forced it to shoulder much heavier financial obligations than it eventually had to take on. Dr. Asgeir Jonsson, an economist at the University of Iceland, asked Heisbourg if the French were really prepared to adopt the franc, which had before the adoption of the euro been more or less tied to the German Deutsche Mark. Heisbourg agreed that for the French it had been almost a matter of national pride to replace the D-Mark with the euro. But the impact of abandoning the euro would not be significant on the French economy, while it could be very important for the Southern part of Europe.

During his Iceland visit, Heisbourg met Prime Minister Sigmundur David Gunnlaugsson and Foreign Minister Gunnar Bragi Sveinsson, also giving a talk at the foreign affairs committee of the Independence Party. His lecture at the RNH meeting led to much debate. Bjorn Bjarnason, former Minister of Justice, blogged about his message, the daily Morgunbladid published on 5 April a long interview with Heisbourg, and both television channels, RUV and Station Two, talked to him.

Gissurarson giving his lecture in Torshavn. Photo: Heinesen.

The smallness of nations can be an opportunity as well as a constraint, Professor Hannes H. Gissurarson, RNH’s Academic Director, said at a meeting of the political association Framsokn in the Faroe Islands, in Ostrom House in Torshavn, 22 March 2014. In his lecture, Professor Gissurarson gave a brief analysis of Iceland’s history. In a Malthusian trap for centuries, the population never reached more than 50,000: a few wealthy farmers, backed by the Danish king, hindered the development of the Icelandic fisheries, the only sector of the economy with any growth potential. Until 1940, living standards in Iceland were only half as good as in Denmark. From then on and until the last decade of the 20th Century, the Icelanders enjoyed a partly spurious prosperity: they profited both from the hot and the cold war, those of 1939–45 and 1948–89; they increased their resource base dramatically in four extensions of the fisheries zone, driving out foreigners (who had previously harvested half of the total in the Icelandic waters); and they over-exploited the fish stocks, first the herring stock, which even disappeared for a while from the Icelandic waters, and then the cod stock. Then, in 1991 they changed course. A new government ceased to subsidize unprofitable enterprises, inflation was brought under control, the government deficit was turned into a surplus, the public debt was reduced and almost disappeared, government enterprises were privatised, taxes were cut, the sustainable and profitable system of ITQs (individual transferable quotas) in fisheries was developed further and pension funds were greatly strengthened.

Red line shows loans to Johannesson and his cronies.

However, another and less fortunate turnabout took place in 2004 when a small group under the leadership of retail magnate Jon Asgeir Johannesson became very powerful in Iceland. Crony capitalism replaced the market capitalism of the 1991–2004 era. Professor Gissurarson presented a graph with data from the report of the SIC, Special Investigation Commission into the bank collapse, showing that it was Johannesson and his cronies who were responsible for most of the debt accumulation in the banks before the collapse, much more so than the two other main business groups identified by the SIC. Thus, because of company cross-ownership and overvalued debtor assets, a systemic risk specific to the Icelandic financial sector was created, in addition to another systemic risk caused by the asymmetry of the banks’ field of operations—the whole of the European Economic Area—and their area of institutional support—which turned out in the end to be Iceland alone. In the autumn of 2008, three decisions made in New York and London transformed this already fragile and vulnerable situation: The US Fed refused to make a dollar swap deal with the Central Bank of Iceland, similar to those which it had made with the Scandinavian central banks; the British government refused to allow British banks owned by Icelanders to participate in the financial rescue programme for British banks; and the British government invoked an anti-terrorism law against one of the Icelandic banks, Landsbanki, as well as the Central Bank of Iceland and the Icelandic Financial Supervisory Authority, with the result that a total collapse of the banking sector became inevitable.

The 2008 bank collapse caused a sharp leftward swing in Iceland, mostly however reversed in the 2013 parliamentary elections. But the bank collapse demonstrated, Professor Gissurarson submitted, that it was difficult for small nations to be without powerful allies. Despite little interest in Iceland both in the US and in the UK, these two powers remain, with Canada, Iceland’s most natural allies, Gissurarson argued. No shelter is to be had in the EU, as the example of Cyprus showed. However, small nations have first and foremost to rely on themselves; they have to utilise their natural resources efficiently, to keep taxation at a moderate level and to facilitate wealth creation. Professor Gissurarson’s lecture formed a part of the joint research project of RNH and AECR, the Alliance of European Conservatives and Reformists, on “Europe, Iceland and the Future of Capitalism”.

Professor Gissurarson gives his lecture at Humboldt University.

As the year 2008 went on, the Icelandic financial market became very vulnerable, heading towards a deep depression, similar to those which Icelanders frequently had to cope with in the 20th Century. However, three foreign factors suddenly brought all three Icelandic banks down and transformed a foreseeable, and manageable, depression into a total collapse. These factors were: that the American Fed refused the Icelandic central bank the same dollar swap lines that it extended to the Danish, Swedish and Norwegian central banks; that the UK government denied Icelandic-owned banks in England participation in the immense rescue programme it implemented during the financial crisis, at the same time as many other banks—some with extensive foreign ownership—were allowed to participate, including the RBS and Lloyds; and that the UK government quite unnecessarily invoked an anti-terrorism law against one of the Icelandic banks, Landsbanki, putting it on a list with Al-Qaida, the Talibans, Sudan and Iran, with dire consequences for other Icelandic companies. This was the main message by Dr. Hannes H. Gissurarson, Professor of Politics at the University of Iceland and RNH Academic Director, in his lecture at the well-attended conference of ESL, European Students for Liberty, at Humboldt University in Berlin 14–16 March 2014.

Professor Gissurarson rejected three common explanations of the Icelandic bank collapse by pointing out some relevant facts. 1) The Icelandic banks were not relatively bigger than the Swiss banks which were nevertheless bailed out, not least with money from the American Fed through dollar swaps lines. These Swiss banks had been engaged in all kinds of illegal or immoral activities, shredding documents about Jewish-owned assets and trading with governments on the British Treasury list of terrorist regimes, including Iran and Sudan—indeed the very same list where the Icelandic Landsbanki was to be seen for a while. 2) The Icelandic bankers were neither better nor worse than their foreign colleagues who accumulated enormous risk before the 2008 crisis, for example by subprime loans in the US and by reckless lending elsewhere, subsequently requiring the injection of massive amounts of government money both as liquidity and equity, for example RBS and Lloyds, both of which had also been engaged in rate rigging and money-laundering. 3) The Icelandic bank collapse was not the result of a failed “neo-liberal” experiment in Iceland, since the Icelandic financial market was regulated in precisely the same way as its counterparts in other EEA—European Economic Area—countries. Professor Gissurarson added that admittedly there were two risk factors special to Iceland: One of them was the extensive cross-ownership and extraordinary debt accumulation of one group of businessmen, The Baugur Group, led by Jon Asgeir Johannesson, well identified in a report by a Special Investigation Commission appointed by the Icelandic parliament, announcing its conclusions in 2010. The second risk factor was simply that the Icelandic banks’ field of operations—the EEA—was much bigger than its area of institutional support, which turned out in the bitter end to be Iceland alone, because of the foreign factors already mentioned.

ESL conference participants in the festivities Hall of Humboldt University with Johan Norberg holding the banner in centre. Professor Gissurarson sitting in 3rd row, furthest left. Dr. Palmer standing by the left entrance, to the left, next to Dan Grossman, chairman of Atlas Network.

Professor Gissurarson’s lecture formed a part of the joint research project by RNH and AECR, the Alliance of European Conservatives and Reformists, “Europe, Iceland and the Future of Capitalism”, while one of the sponsors of the Berlin conference was New Direction, the think tank cooperating with AECR. Chairing the meeting with Professor Gissurarson was Lukas Schweiger who has lived and studied in Iceland. Other lecturers at the conference included keynote speakers Dr. Tom Palmer, the American philosopher and activist, and the Swedish historian and writer Johan Norberg. Both spoke eloquently and to wide acclaim. Aleksandar Kokotovic from Belgrad University is chairman of ESL, while Yaël Ossowski from Vienna University was in charge of organising the very successful conference.

Gissurarson Slides in Berlin

Foreign businessmen took advantage of the sudden and temporary plight of the Icelanders during the 2008 bank collapse to grab Icelandic-owned assets at prices far below market prices, even prices in a depression. They could do this because authorities in some European countries refused the same assistance to Icelandic-owned companies that they extended to domestic countries. This was the main message in a lecture given by Dr. Hannes H. Gissurarson, Professor of Politics at the University of Iceland and the RNH Academic Director, at the spring conference of the Institute of Business Studies at the University of Iceland 14 March 2014. Professor Gissurarson reminded his audience of St. Thomas Aquinas’ view on business ethics: While merchants might, legally and morally, try to get the highest price possible for the goods they offered (Summa Theologiæ, II, II, 77, 3), they should not take advantage of the sudden, unforeseen and temporary plight of their neighbours to extract exorbitant prices from them (Summa Theologiæ, II, II, 66, 7). This view is shared by classical liberals or libertarians like F. A. Hayek and R. Nozick, but rejected by hard-core propertarians.

Photo: Ester Gustavsdottir.

Professor Gissurarson analysed three example, the sales of Glitnir Bank ASA and Glitnir Securities in Norway and of Glitnir Pankki Oy in Finland. After the Icelandic bank collapse, the Norwegian Central Bank had refused to provide liquidity to Glitnir Bank ASA, referring it instead to the Norwegian Guarantee Fund of Depositors. The leadership of the Guarantee Fund had provided a temporary credit line on the condition that the bank would be sold quickly, and then it had formed a consortium to buy the bank for 300 million Norwegian kroner, valuing it three months later at 2 billion kroner. Glitnir Securities had been sold to a group of employees for 50 million kroner; the group sold half the company to another company, RS Platou, conveniently located in the same building in Oslo as Glitnir Securities, for 50 million kroner, thus appropriating half the company for nothing at all. The Finnish Financial Supervisory Authority demanded, according to Professor Gissurarson’s sources, a quick sale of the Finnish bank. It was sold to a group of employees for a mere 3,000 euros, even if it was valued at more than 40 million euros. In 2013, the bank was sold for 200 million euros. Professor Gissurarson estimated that the difference in market prices and the prices extorted by foreigners from these three “fire sales” was between 40 and 160 billion Icelandic kronur.

Professor Gissurarson’s lecture formed a part of the joint research programme of RNH and AECR on “Europe, Iceland and the Future of Capitalism”. It was well-attended, and he published an article on the issue in Morgunbladid 14 March 2014. He was also interviewed by the government broadcasting service and by the net television of Vidskiptabladid, a weekly business review: