The Political and Economic Situation of Greece and Iceland – A Comparative Analysis of Schuberth/Önnudóttir/Nezi

Aug 16, 2017 by

by Marek Siek

On the fifth day of the AEMS Summer School, we got the lecture with Eva H. Onnudottir, researcher at the Faculty of Political Science at the University of Iceland, and Spryidoula Nezi, a member of the non-governmental organization Brain-Gain, entitled “From theory to practice: Greece and Iceland.” Afterwards, we attended a discussion panel at the University College of Teacher Education in Vienna about “The Political and Economic Situation of Greece and Iceland” featuring Helene Schuberth, who is the head of the Foreign Research Division at the central bank of the Republic of Austria.

The current situation in Greece and Iceland has been strongly affected by the financial crisis of 2007-2008, considered by many economist as the worst financial crisis since the Great Depression in 1930.  Iceland was the first global victim of that crisis, which started in 2008 with the default of all three of the country’s major privately owned commercial banks, following their difficulties in refinancing their short-term debt and a run on deposits in the Netherlands and the United Kingdom. By comparison, the crisis in Greece was mainly caused by the weakness of the global financial system due for example to the centralization of the decision making process especially in the hands of the established Eurozone countries, for which the Greek economy was not prepared. The crisis in the country has its roots in more than just fiscal and international trade imbalances. The Greek economy suffered from low GDP, productivity and growth rates and high unemployment and inflation rates prior to joining the Eurozone. That coupled with the Greek government’s poor credit worthiness and lack of transparency created a “perfect” base of negative conditions. All of these factors combined together became the roots of the final collapse that has devastated the country’s economy until today.

One of the main differences between the crises that our specialists agreed on was the autonomy of the Icelandic monetary system. Though it is strongly influenced by the Dutch and British banking systems, it was independent in its decision-making process. Decisions taken by the authorities in Iceland reduced the length of the crisis. The government could implement its own independent monetary policy and relatively quickly implemented its measures. (The IMF was the only institution that was officially involved in the decision making process of Reykjavik with its assistance reaching more than $6 billion.) To compare, the situation in Greece, which after joining the Eurozone lost its monetary authorities to the European Central Bank (ECB), was much more complicated. (Three rounds of financial assistance was given to Greece, each after accepting the conditions written by the European Troika). Unfortunately, the ECB was not set up to handle that type of financial crisis. A critical analysis of Greece’s economic data reveals that the pre- and post-entry deficit of Greece, its public debts, and rate of inflation data disqualified Greece from being a member of Eurozone, because it never fulfilled the mandatory economic criteria. However, along these criteria also other Eurozone countries would need to leave.

In both Greece and Iceland, one of the biggest indirect causes of the crisis was political populism. In Iceland, the economic crisis triggered the biggest political collapse in the modern history of the country. Before 2008, local public opinion believed in the good intentions of their government. Unfortunately, the crisis changed that forever and caused protests that escalated into riots. Former politicians were charged with negligence concerning their failure to prevent or mitigate the collapse of the banks. In the long-term perspective, it affected a fragmentation of the Icelandic political scene. Unfortunately, protests in Greece only extended the position of populism in society. As a country with an authoritarian background and being embedded in European governance mechanisms, Greece had a hard time coming up with the kind of political solutions that would have addressed popular dissatisfaction about its current economic situation.

Years after the world economic crisis, the current political and economic situation of Greece and Iceland seems to be stable. The Icelandic economy has become fully independent. One of the most important conclusions was that we definitely need more mutual assistance between the members of the EU. Also, the mechanisms of ECB should be more efficient, because in terms of debt, the EU keeps very inflexible standards which definitely don’t help in the long-term perspective (While Greece tried to reduce its debt, Iceland continuously stimulated its own economy). Finally, all the panelists agreed that the economic crisis should have been defused by all European nations because we are all responsible for the common good.