As Goes Iceland, so Goes the EU?
By Staff News & Analysis - October 16, 2010

Iceland Pension Funds to Block $2 Billion Debt Relief Proposal … Iceland's pension funds, which hold the bonds behind most of the country's mortgage debt, will try to block proposals to forgive as much as $2 billion in bad loans that the government says it is considering. A group that represents households demanding debt relief says lenders should write off up to 220 billion kronur ($1.99 billion) in mortgage loans to help the 39 percent of homeowners who are technically insolvent. The government this week said it may back the proposal as it responds to protests that drew bigger crowds than in the weeks before former Prime Minister Geir H. Haarde's administration was ousted in January 2009. "We don't support the ideas of the Interest Group of the Homes on general write-offs on loans," said Hrafn Magnusson, managing director of the Icelandic Pension Funds Association, which has assets of about $16 billion, in an interview yesterday. "The measure would mean that members will see their pensions cut." – Bloomberg

Dominant Social Theme: There are problems of course, but in a crisis, the West pulls through and so does feisty, little Iceland.

Free-Market Analysis: It is important to keep track of Iceland because the EU and European mainstream media itself continually fashion an Icelandic narrative that is much different than what is really going on. And when events do not correspond to the narrative, the result is … silence. Sub dominant social theme: "Look, Iceland is just like every other troubled EU country. The people are really pulling together. They realize austerity is the only way out and they will simply have to buckle down for the next century or so, working 18 hours a day to pay their debts!"

In fact, as we can see from the above article excerpt, Iceland continues to be a riven society. Britain under Gordon Brown pretty much precipitated the crisis by freezing Icelandic banking assets (smashing Iceland's biggest banks) but Iceland's citizens are now supposed to clean up the mess – and bankrupt themselves while doing so. The point we want to make here is that while these trends are playing out all over Europe now (just as we long predicted) the mainstream media is only covering this exploding story grudgingly – and because it is so big it has no other choice.

Yes, until it was absolutely necessary, the social unrest was not reported. The problems were seen as inevitable and the solution was merely austerity and nothing else. Iceland was a template for this sort of approach. Despite the many blows to the Icelandic economy and the country's virtual bankruptcy, the Icelanders were to be portrayed as an indomitable people that would undergo hardship to deal with the economic crisis.

The EU media, in fact, let it be known in myriad articles that in their hour of need the stalwart Icelanders had realized that they must become full-fledged members of the EU and that it would be necessary to resolve the country's indebtedness in a way that made the larger banking community fairly whole. Even the deal with the International Monetary Fund was put in this perspective: All roads led to Brussels. Always. In every way.

And yet, we have disagreed, and offered a different narrative to those who stopped by to read the Bell. From our point of view, this "happy Icelandic" theme was an elite sub dominant promotion designed to reinforce the understanding that austerity was inevitable. One must suck it up. One must buckle down. And yet are the good people of Iceland really so resigned to this? Is this really what is going on there? Not exactly. Here is how Icelanders are actually handling the current situation as of the end of September, according to the UK Guardian (the only paper that seems to be covering Iceland with any honesty):

Iceland's politicians forced to flee from angry protesters … Thousands take to the streets of Reykjavik as anger erupts over the impact of the financial crisis … Riot police stand guard in front of the Icelandic parliament. Protesters took to the streets of Reykjavik today, forcing MPs to run away from the people they represent as renewed anger about the impact of the financial crisis erupted in Iceland. The violent protest came amid growing fury at austerity measures being imposed across Europe. Disruption in more than a dozen countries this week included a national strike in Spain and a cement truck driven into the Irish parliament's gates.

Witnesses said up to 2,000 people caused chaos at the state opening of the Icelandic parliament, with politicians forced to race to the back door of the building because of the large number of protesters at the front. Eggs were said to have hit the prime minister, Jóhanna Sigurðardóttir, other MPs and the wife of the Icelandic president, Ólafur Ragnar Grímsson. Árni Pall Árnason, the minister of economics affairs, who was caught up in the protests, said: "We have a difficult economic situation and this is something to be expected in a democratic country." Birgitta Jónsdóttir, one of three MPs to join the protesters, said: "There is a realisation that the IMF is going to wipe out our middle classes."

Of course that is what the IMF will do. That is what the IMF does – only not to Western countries until recently. But the financial crisis has given the IMF room to play in Europe. It is trying to do the same things to Greece, Ireland and Iceland that it did to Argentina. Only Argentinians had the sense to kick the IMF out. The PIGS have not shown the IMF the door and neither has Iceland. Of course in Iceland's case that is understandable as they are still trying to get rid of their own politicians. Perhaps the IMF is next in line.

This certainly doesn't get a whole lot of play, does it? When Iceland borrowed money from the IMF, the news was seemingly everywhere. When angry Icelandic citizens chase their own politicians out the back door, the news seems a good bit more … subdued. When the socialist government of Iceland attempted to sign off on a deal that would have put every Icelandic household into debt for about a century, there was a good deal of publicity. But then the media lapsed into silence. And the silence has continued, in large part because Iceland's 300,000 residents are simply refusing to allow their government to sign off on wage slavery.

We don't think the Icelandic standoff is going to be resolved any time soon. We would be surprised if tensions didn't grow between Iceland's citizens and the inept government and the IMF, too. We notice the happy talk about joining the EU seems to have died down for the moment, and we are not surprised about that either. We saw an Internet video interview recently with a top EU economist (a German who actually wanted the eurozone broken up) and his point was that so long as Germany was willing to fund the EU, the construct would retain its regional integrity. Our point has always been that the tribalism that simmers beneath the European surface is far stronger than people may realize.

Germany's elites may currently wish to keep the EU together (though average Germans do not) but the real test will come as protests grow in the PIGS and continue in Iceland. It is one thing not to report on these protests in fullness; it is another thing to willfully misunderstand them. They are driven out of a profound sense that the Europe's expanding union was built on the backs of the middle class that will now receive the full brunt of austerity measures that should be more appropriately aimed at the elites and the banks themselves.

This is a much larger issue than the length of a work week or the size of one's pension. What has begun in Europe (see recent protests in France and Greece) is likely, increasingly, a full-scale class war. The tribes are stirring just as we suggested they would in many previous articles over the past two years. Unless Europe finds economic expansion fairly soon, the unrest, we imagine, will build.

The resolution to continue with the EU experiment continues to be continent wide (restricted mainly to legislators) and an inch deep. Scratch the surface and the EU is increasingly unpopular. How could it be otherwise? Iceland is a bellwether country in this regard. But its problems are increasingly replicated throughout the EU, certainly through the PIGS. Germany's elites may have the wherewithal to continue with the EU experiment, but this is a delicate consensus indeed.

After Thoughts

Unless there is a significant economic turnaround, we wonder how happily all this will end. Debt eventually could be repudiated. Countries could fall out of the EU. The euro itself could be fractured. We have never predicted, fully, that all this will occur. But we have granted its possibility and we see no retract that perspective now. Here's a thought: "As goes Iceland so goes the EU … "

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