Posted 10 months ago on Jan. 27, 2013, 3:30 p.m. EST by LeoYo
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With New Constitution, Post-Collapse Iceland Inches Toward Direct Democracy
Sunday, 27 January 2013 07:10 By Sam Knight, Truthout | News Analysis
When the global financial system crumbled over four years ago, Iceland played host to one of the most dramatic economic collapses in modern history. Its three largest banks were unable to refinance debt roughly ten times the size of the country's gross domestic product (GDP), causing one of the world's wealthiest nations to limp with hat in hand to the International Monetary Fund (IMF). The island became a symbol for capitalism's systemic failure.
Now, Iceland is making headlines for more positive reasons: activists there are in the process of advancing some of the strongest freedom of information laws and journalist protections in the world, and the Icelandic economy, while still beset by problems, is significantly outperforming other crisis-stricken countries.
Most recently, on October 20, a remarkable constitution - written by an elected council with help from the public - took a step closer toward ratification after it was approved in a referendum by a 2-1 margin.
Before the changes are signed into law, the draft must be approved by the Althingi, Iceland's Parliament, approved again by referendum and finalized once more by the legislature after a fresh parliamentary election in April.
Uncertainty is swirling around the status of the constitution, however. Those opposed to it - primarily right-wingers - claim that the 48.9 percent turnout for October's vote doesn't lend the document legitimacy. There is also fear among the constitution's supporters in Parliament that some of their colleagues are trying to abrogate the public's influence by altering the document's content instead of offering the technical revisions they were given the mandate to make. "I truly believe that our democracies have been hijacked by bureaucrats," said Parliamentarian Birgitta Jónsdóttir, a self-described "realist-anarchist" elected after the Kitchenware Revolution protests which ensued following the 2008 financial crisis forced the long-ruling conservative government to resign in 2009. "I don't want the new constitution to be plagued with their language, but the language of the people," she insisted in a Skype conversation with Truthout. "Their time is over. They just can't get over it." It's unsurprising that inertia is casting a pall over the constitution's future. In January 2011, the constitutional council's election was controversially nullified by Iceland's Supreme Court. Parliament effectively overruled this decision by appointing the 25 candidates who received the most votes to take seats on the council to rewrite the constitution.
Regardless of the document's final status, the drafting process - inspired by crowdsourcing techniques - has produced a remarkably progressive legal code and generated significant interest from around the world.
"A PBS TV crew of seven or eight followed a group of us around the north of the country before the [October] vote," Thorvaldur Gylfason, an economics professor and member of the constitutional council, told Truthout. (The footage will be part of a four-hour series on the US Constitution set to air in May.)
At home, supporters are hoping that the constitution can create more momentum for innovative reform. Information technology specialists who opened the drafting process to the public through social media are expecting to set up open data projects in partnership with the government. There has also been another web-based open government reform in the city of Reykjavik: the city council passed a law forcing it to consider 16 citizen-initiated proposals made each month through a web site called "Betri Reykjavík" (Better Reykjavik). There has been talk among its boosters that the constitution could mark the beginning of a gradual movement toward direct democracy. But to better understand the significance and global appeal of the new constitution, it is worth discussing the state of Iceland's economy, which has defined both the constitutional movement and international scrutiny of the diminutive subarctic nation since 2008.
A Shining Beacon of Post-Collapse Economics?
According to bloggers, Facebook memes and some prominent commentators, Iceland is the shining beacon of post-collapse economics.
Their narrative paints a picture of the government, emboldened by protest movements, refusing to be held to the fire for the mistakes of rapacious financiers and corrupt politicians, even sanctioning them for crash-related misdeeds. At least seven bankers have been charged with criminal offenses so far - two were recently sentenced to nine months in prison. Those indicted include the once powerful investor Jón Ásgeir Jóhannesson, who was charged in December with illegally securing loans worth around $50 million. And former Prime Minister Geir Haarde was found guilty of not holding cabinet meetings on important issues - one of four charges brought against him - although the verdict didn't warrant any jail time. This justice has supposedly left the country less burdened by debt and a domineering financial sector that crowded out sustainable industries.
But like most political memes bandied about on the Internet, this overly optimistic commentary must be critically examined. Iceland is faring better than most countries hit hard by the global meltdown. Write-downs and debtor revolts have undeniably mitigated the consequences of collapse.
Citizens, through referenda brought on by presidential vetoes, rejected Parliament's plan to pay billions of dollars claimed by the British and Dutch governments after one of Iceland's three major banks, Landsbanki, saw its cross-border savings scheme, known as Icesave, fail.
The establishment - perhaps influenced by widespread protests that followed the crisis - has also been somewhat attentive to the plight of debtors. The Supreme Court ruled that loans indexed to foreign currencies - commonly issued during the boom, but rendered absurdly expensive after the krona collapsed - were, in fact, illegal, significantly reducing mortgage principals overnight. The government also announced a plan in December 2010 to cap distressed homeowners' mortgage principals at 110 percent of estimated home values. According to a financial industry-backed report published last February, Icelandic banks, since the end of 2008, have forgiven debt equivalent to 13 percent of GDP.
The government also didn't directly bail out the three major banks - Kaupthing and Glitnir being the other two - but nationalized them (albeit momentarily - more on that later). And crucially, it eschewed sweeping austerity that the IMF typically favors - a strategy that seemingly paid off, as Iceland exited the IMF program in the summer of 2011.
It appears these developments have given Iceland's economy room to grow. The unemployment rate in October was at 4.5 percent, and the country's GDP grew by 3.1 percent in 2011, according to Statistics Iceland. Fairly impressive when considering eurozone misery.
There are also explanations for Iceland's performance that are less dramatic than frenzied demonstrations and white-collar prosecutions. Emergency capital controls have prevented a total collapse of the krona. Some post-crisis years saw net emigration, relieving the labor market of excess supply. The defunct banks invested in assets, like British retail chains, that largely retained value after the global bust - a significant amount of their debts could be covered by liquidating these assets. Finally, the post-collapse devaluation of the krona has made Icelandic commodities more competitive on global markets, giving the country the trade surplus it desperately needs to amass foreign currency.
But the lionization of Iceland glosses over persistent systemic problems.
"Look at what's happening in Europe. The crisis is much deeper and harder in Greece and other countries. It's just horrifying," Jónsdóttir said.
"But," she warned, "we could end up exactly like that."