Iceland Shows Other Europeans How to Survive Bankruptcy

Greece’s Prime Minister Alexei Tsipras – June 5, 2015

Taxpayers in Europe (and the United States) who have been terrorized since 2008 by government officials warning about economic armageddon, catastrophe, and pestilence should look to tiny Iceland for a taste of how little there is to fear when the experts can’t save the people.

Christine Lagarde, managing director of the International Monetary Fund, recently branded Iceland’s economic performance “impressive.” In the last few years the small island in the north Atlantic has managed to shrink its deficit, reduce unemployment, and allow its economy to grow. [ Well, that means the IMF’s “austerity” reforms don’t work ]

Meanwhile, on mainland Europe, there is hardly any economic growth to be seen, and countries that pledged to make necessary austerity reforms have almost certainly failed to do so.

Government growth, fiscal activism, and national resentment are the norm. Officials from the eurozone have been trying to help heavily-indebted nations like Greece, Portugal, and Italy avoid banking-system collapse and exit from the single currency. Were they to examine Iceland’s example they might find that temporary financial collapse and monetary sovereignty provide a better roadmap to economic recovery than bailouts backed up by unpopular and unenforceable “austerity” conditions.

Iceland, like the rest of Europe, was faced with an almost unprecedented economic situation in 2008. Iceland’s central bank tried to rescue some of the country’s largest banks, bankrupting itself in the process. Iceland’s largest banks held almost 10 times Iceland’s GDP in assets (much of it foreign) in 2008. The central bank was forced to attempt the rescue after agreeing to guarantee future bailouts in 2001. With the central bank out of commission and a crippled financial sector, Iceland’s GDP took a nosedive.

Because so many of the assets held by Icelandic banks were foreign, the diplomatic fallout was almost as severe as the economic one. The British prime minister at the time, Gordon Brown, invoked anti-terrorism legislation in a bid to freeze assets of one Icelandic bank in the United Kingdom.

[But who are the real terrorists in this case: IMF, British Prime Minister, the European Central Bank, and the European Union? ]

 Iceland’s GDP per capita (in current U.S. dollars) was a little over $65,500 in 2007; in 2009 it was almost $38,000. It would be cruel to overlook the effect a sudden loss in wealth like this had on the average Icelander’s economic well-being. Having investments you thought were safe vanish is unfortunate at best and tragic at worst. However, the economic future of young Icelanders will almost certainly be substantially better than that of their peers in Greece.

Icelanders will do better than Greeks precisely because financial institutions collapsed in Iceland, ironically in part because of mechanisms in place requiring bailouts from the Icelandic Central Bank. Economic collapse allowed for proper refinancing. Greece has suffered from too much attention, and because of all of that attention, the actual size of the Greek economy has been forgotten.

Greece’s GDP is roughly the size of Maryland’s, about $300 billion. The eurozone as a whole has a GDP of almost $12 trillion. Figures like these only highlight the strictly political motiviations behind the attempted rescue of Greece by the rest of the eurozone. Certainly, a Greek exit from the eurozone would be a major event. However, Iceland’s example shows that letting financial institutions fail allows for strong and comparatively quick recoveries following a period of economic hardship.

Unsurprisingly, government attempts to fix the European financial crisis have made the situation worse and humiliated the most affected countries the most severely. Had Greece been left to default on its debt and leave the eurozone early, the effects, economic and political, would have been much less dire in comparison to the effect of a Greek exit now. What is forgotten about the example of Iceland is that although the initial international reaction to Iceland’s collapse was anger, the country’s reputation recovered. The animosity brewing between the Greeks and other Europeans (especially Germans) will not diminish within a matter of months. Too often the cultural changes that are happening in Europe are overshadowed by the economic fiasco.

The comparison between Greece and Iceland is not perfect. If Greek GDP, at $300 billion, puts it on par with the Old Line State, Iceland’s, at just $15 billion, puts the island nation below even Vermont, the U.S. state with the lowest GDP. But so what? The economic stagnation caused by Too Big To Fail, of which the Euro “crisis” is only the most monstrous example, resulted from policymakers believing that the same math you know to be true at the local level does not apply at the macro level. The central bankers are wrong about that, and the example of Iceland provides Greece and the rest of mainland Europe with a valuable example.

Unfortunately, it looks like it will be a lesson learned in hindsight. How severe the effects of fiscal and monetary activism will be on the eurozone will depend in part on how quickly continental policymakers can abandon their political agenda and focus on the economics.  

The War in Ukraine: Editorial in The New York Times Suggests US Is Looking for a Face-Saving Way Out

The New York Times recommends a diplomatic settlement of the Ukrainian conflict based on the Russian proposal of a year ago for Ukraine’s federalisation.

In-depth Report:

putin-nato-russia-ukraine_si-400x224The editorial in the New York Times we attach below is the first belated acknowledgement that the only way of saving Ukraine and ending the war is by conceding federalisation to Ukraine’s eastern regions.

We do not know for sure  whether this editorial reflects official US thinking. However, the probability is that it does.

Firstly, it is not unheard of for the US government to float ideas in this way through editorials in the New York Times. The New York Times is regularly chosen to do this because of its reputation and because it is widely read abroad.  The British government used to use the Times of London in the same way.

We have previously reported the concerns of some officials within the US government at the way in which the Ukrainian crisis is leading US relations with Russia into an impasse.

It is at least possible that with the war going disastrously wrong for Kiev and with the US administration looking increasingly short of options, the US administration is now trying to find a face-saving way out by finally embracing the federalisation solution that the Russians proposed last spring.  If so then this editorial, which will surely be read in Moscow, is intended as as an olive-branch.

The following words give the clear impression that a concrete offer has been made to Moscow through diplomatic back-channels. The carefully chosen words clearly convey the sense that the authority of the US government lies behind them:

“Russian officials have suggested that Moscow has no interest in annexing eastern Ukraine, the way it grabbed Crimea, but rather seeks a Ukrainian federation in which the pro-Russian provinces would have relative autonomy, along with assurances that Ukraine will not move to join NATO.

There is definitely potential for negotiations there……..

Tempting as it is to focus on punishing Mr. Putin, the greater objective must be to end the fighting so that Ukraine can finally undertake the arduous task of reforming and reviving its economy. Toward that end, the West must make clear to Mr. Putin that if a federation is his goal, the United States and its allies will actively use their good offices with Kiev to seek a workable arrangement.”

Poroshenko has just issued another statement ruling out federalisation.  This also suggests we are looking at an actual behind-the-scenes offer.  We have already explained why for Maidan talk of federalisation is anathema.  Poroshenko’s words suggest he knows of the US initiative and is trying to scotch it and to make his opposition to the idea clear before Secretary Kerry flies to Kiev as he is due shortly to do.

Moscow and the rebels are however unlikely to take up the offer.

The Russians pushed strongly for federalisation of Ukraine’s eastern regions following the February coup.  On 17th April 2014 a Statement was agreed by the US and Russian foreign ministers, John Kerry and Sergei Lavrov, in Geneva, and was signed by the EU and the Ukrainian government, that called for constitutional negotiations between the various Ukrainian parties. These were obviously intended to lead to a constitutional settlement that would have led to federalisation. Many people in the Donbass at the time of the independence referendum of 11th May 2014 appeared to support the idea.

What was offered (and declined) in Spring 2014 may however no longer be on the table in Winter 2015.

Since the federalisation idea was floated last Spring there has been a murderous war in the Donbass causing massive devastation and loss of life. Russia has been subjected to two rounds of sectoral sanctions. There has been a relentless propaganda campaign against Russia, the rebels and Putin himself. It is difficult to believe that all of this has not caused views to harden since the spring.

Promises of constitutional negotiations like the ones made in Geneva on 17th April 2014 and in Minsk on 5th September 2014 have come and gone. No negotiations have however taken place. Given that Kiev is dead against them, after all that has happened it is very doubrtful the rebels or the Russians now believe they ever will. Nor are the Russians likely to be in any sort of mood to believe in US assurances that “if federation is the goal, the United States and its allies will actively use their good offices with Kiev to seek a workable arrangement”.

What made sense in the Spring, when it was proposed to prevent a war, may anyway no longer make sense in the Winter, after the war has already happened. After so much violence it is barely conceivable that the rebels or the people of the Donbass who support them would now agree to be part of a federation that left them within Ukraine, especially now when they are on the brink of victory.

If this is correct, then it looks like the US and its allies have missed the bus.


The text of the editorial that appeared in The New York Times on February 2nd, 2015:

The fighting in eastern Ukraine has flared up again, putting an end to any myth about the cease-fire that was supposed to be in force since September.

Though the Russian economy is staggering under the twinned onslaught of low oil prices and sanctions — or, conceivably, as a result of that onslaught — President Vladimir Putin has sharply cranked up his direct support for the rebels in the provinces of Donetsk and Luhansk, while continuing to baldly deny it and to blame all the violence on the United States.

Meanwhile, Ukraine is broke, and without the military means to move against the Russian-backed rebels. Most of the victims are civilians who struggle with hunger and dislocation in the rubble of the combat zones and die in the constant exchanges of shells and rockets.

The eruption of fighting in recent weeks, which was not supposed to happen until spring, has given new force to pleas to the Obama administration to give Ukraine the means to resist Mr. Putin — in money and in arms.

Certainly the United States and Europe should increase their aid to Ukraine and explore ways to expand existing sanctions against Russia. NATO’s commander, Gen. Philip Breedlove, is said to support providing weapons and equipment to Kiev. And Secretary of State John Kerry is said to be open to discussing the idea. But lethal assistance could open a dangerous new chapter in the struggle — a chapter Mr. Putin would quite possibly welcome, as it would “confirm” his propaganda claims of Western aggression.

So far, President Obama has cautiously pledged to help Ukraine in every way “short of military confrontation.” Yet with sanctions and diplomacy making no headway against Russian aggression, it is imperative that the United States and its allies take a new look at what would bring Russia to a serious negotiation.

The first question is, to negotiate what? Along with denying the direct involvement of his troops in eastern Ukraine, Mr. Putin has not made clear what he is trying to achieve. Russian officials have suggested that Moscow has no interest in annexing eastern Ukraine, the way it grabbed Crimea, but rather seeks a Ukrainian federation in which the pro-Russian provinces would have relative autonomy, along with assurances that Ukraine will not move to join NATO.

There is definitely potential for negotiations there. Yet the latest rebel attacks have focused on Mariupol, an important port on the Black Sea, and on expanding the rebels’ control to areas that would give their self-proclaimed “republics” greater military and economic cohesion. And that speaks to long-term rebel occupation.

Tempting as it is to focus on punishing Mr. Putin, the greater objective must be to end the fighting so that Ukraine can finally undertake the arduous task of reforming and reviving its economy. Toward that end, the West must make clear to Mr. Putin that if a federation is his goal, the United States and its allies will actively use their good offices with Kiev to seek a workable arrangement.

But if the evidence continues to accumulate that Mr. Putin and the rebels are carving out a permanent rebel-held enclave in eastern Ukraine, à la Transdniestria, Abkhazia or South Ossetia, he must know that the United States and Europe will be compelled to increase the cost.

Crowd of Several Hundred Tries to Storm Ukrainian Presidential Administration Office

 

In-depth Report:

Ukraine-anniversary-Maidan-coup-4-400x270A crowd of several hundred people has begun storming the Ukrainian presidential administration’s office, a TASS correspondent reports from the scene.

Protest demonstrators have penetrated the first cordon of the National Guards and are trying to make their way to the conference hall. Police forces are being moved in. National guards in full riot gear entered a brawl with the demonstrators, who are demanding access to TV cameras for a statement.

Earlier, demonstrators demanded the introduction of martial law and resignation of all top law enforcement officials, including the defense minister and prosecutor-general.

Also, one of their demands is the removal of the 25th Kievan Rus battalion of the Ukrainian armed forces from the area of Debaltsevo. Women from the Mothers’ Union have told TASS their sons could not have been contacted for the past several days.