A Brexit paradise: How Iceland's 'Project Fear' backfired
Published 11/03/2016 | 09:27
Thordur Oskarsson is in the departure lounge of Heathrow airport heading for Aberdeen.
Iceland’s ambassador to the UK is off to formally open Scotland’s second and Britain’s sixth direct air route to Reykjavik. Aberdeen will become the 60th and perhaps most improbable global destination offering round-trip travel to and from the Icelandic capital when it launches this week.
The four-weekly flights from Icelandair are evidence of the country’s new boom.
Eight years on and one $4.6bn bail-out later, the Nordic isle with a population smaller than Croydon, has cast off the demons of its banking meltdown.
An explosion in tourism is a large part of Iceland’s nascent bust to boom tale. More than 1.5m foreign visitors landed at the sleek Keflavik airport outside the capital in 2015 - five times Iceland’s entire population.
Visitor numbers have tripled in just four years. It’s a sudden burst in popularity which has surprised the ostensibly “boring” fishing nation once famously described by an IMF official as more “like a hedge fund” than a nation state.
“Iceland is now cool," says Ásgeir Jónsson, an economist at the University of Iceland.
“We never thought people would want to come here in the winter because it’s dark and harsh, but every hotel in Reykjavík has been full in February.
“Even Beyonce and Jay-Z holiday in Iceland now."
Hotels in the capital are having to turn away bookings for the summer season. Airbnb, a popular home-sharing alternative, boasts more than 3,500 apartments in a city of just 120,000 residents.
The film crew of Hollywood blockbuster series Fast & Furious will descend on the island later this year, and have reportedly hired out Iceland's entire rental car fleet.
It's all given rise to a searing construction blitz as hotels and homes spring up to accommodate waves of new visitors arriving from countries ranging from the US to China.
When Project Fear lost
Iceland has reinvented itself from the days of casino capitalism.
Relative to the size of its banking sector, the country’s 2008 financial collapse was the worst any economy has suffered in modern history.
Its trio of "New Viking’ banks, who accounted for 90pc of its entire financial sector, crumbled in the space of days.
The economy was left saddled with debt of 850pc of GDP, or £224,000 owed by every Icelandic man, woman and child.
As pro-Brexit campaigners decry the “Project Fear” tactics deployed in the UK’s referendum debate, Iceland witnessed something more akin to “Project Apocalypse” in the aftermath of the crash.
Where Britons are warned of the potentially cataclysmic implications of a UK exit from the European Union, Icelanders were sold a tale of perma-doom that would plague the island until it became a member of the bloc.
It was in the wake of this turmoil that Iceland formally launched its bid to become a full member state of the European Union in July 2009.
Lumbered with a currency that lost 60pc of its value, draconian capital controls and mass austerity, the rationale for membership was simple: as part of the EU’s supranational institutions and monetary union, Iceland would finally have shelter from the market speculators that bought the country to its knees.
2009 also marked the euro’s first decade in existence. With financial calamity having descended on British and American shores, Brussels pronounced monetary union an unmitigated success.
In commemoration of its 10th anniversary, the European Commission released a 53-page report excoriating an entire body of mainly US economic literature which had prematurely “doomed the single currency to collapse”.
“The euro is one of the most exciting experiments in monetary history,” declared the authors.
Thousands gather in Frankfurt's banking district to mark the launch of the euro on January 1, 1999
It was amid this triumphalism that Iceland’s then left-leaning government began accession talks.
Sigmundur Gunnlaugsson, Iceland’s current prime minister, says the membership debate was dominated by fears over Iceland’s very survival.
“Without membership we were doomed," says Gunnlaugsson, who became Iceland’s youngest prime minister aged just 38 in 2013.
"There was never any discussion about the ideals and nature of the European Union or whether that was something Icelanders wanted to be part of," he says.
“The application was simply presented as an economic necessity with claims that as soon as we applied, we would improve our credibility internationally and the euro would be the solution to all our problems."
But Iceland’s Project Fear failed.
Free to operate an independent monetary policy and allow its currency to slide, Iceland was soon brought back from the precipice. Its export sector - dominated by fisheries and energy - quickly began to thrive.
With the currency acting a natural shock absorber for the economy, wages remained steady and unemployment bottomed out at around 9pc.
Growth has since averaged 2.6pc over the past six years, and will exceed 3pc in 2016, according to the IMF. The jobless rate is also a far cry from the 25pc seen in the worst parts of southern Europe, at just 2pc.
Not being a member of the euro “proved indispensable in our quick recovery”, says Gunnlaugsson.
“There is hardly any doubt that if we would have been members of the EU and the euro at the time, the country would have been bankrupted and put in an economic position more resembling that of Greece than what we see in Iceland today.”
This fantastic reversal of fortunes has all but eliminated any lingering case for EU membership. Gunnlaugsson’s centre-right coalition government formally withdrew from the accession process last year and public appetite for restarting talks has dwindled.
Polls carried out in the wake of the move - which was not put before a referendum - show an overwhelming 70pc of Icelanders are happy to remain out of the EU.
Instead, Iceland is one of the three countries who make up the European Economic Area (EEA).
Along with Norway and Lichtenstein, since 1994 Iceland has been granted full access to the EU’s internal market, in a model often dubbed as the “pay but no say” alternative facing the UK.
Also part of the Schengen passport-free area, Iceland does not pay directly into the EU’s budget but stumped up around €30m to the EEA’s joint grant scheme between 2009-14, a 3pc contribution, dwarfed by Norway’s near 96pc.
Meanwhile, Reykjavik transposes 18pc of all the EU’s directives, regulations, and decisions, into national law in return for securing the EU’s four freedoms - goods, movement, capital and people.
But unlike its larger, more problematic neighbour Norway - which periodically stalls on implementing Brussels' initiatives - or the Swiss, wracked by immigration fears, Iceland seems to have struck a happy medium with the EU.
“For Iceland, the EEA Agreement is the best of both worlds," says foreign minister Gunnar Sveinsson.
“We have chosen a way that fits Iceland as a small European export-driven economy,” he says.
Despite having one of the smallest civil services in Europe, Icelanders have proven to be reliably compliant partners.
Of the the 761 single market directives listed on the European Commission’s surveillance watchdog, Iceland shows a sea of green on everything from veterinary issues to the directive on “solvents used in the production of foodstuffs and food ingredients”.
The list itself is enough to make even a hardened europhile bristle.
Prime minister Gunnlaugsson says compliance has proven to be “quite a burden and even plain annoying at times, but all the stuff that really matters is still under our control”.
Chief among them is fisheries. Exempt from the EU’s common agricultural and fisheries policies, Iceland has managed to protect its sacrosanct fishing industry from the reach of Brussels quotas.
Accounting for 40pc of all export earnings and making up 6pc of the country’s entire economic output, fishing has been instrumental in helping the country get back on its feet in the aftermath of the crash.
As a result, even Iceland’s hardened eurosceptics show little agitation at the country’s current settlement.
“I am happy with the relationship,” says Guthlaugur Thor Thordarson, a eurosceptic MP and former Icelandic health minister.
“Compared to the alternative, which is being a full member, there is no doubt we are in a better and stronger position."
Iceland has also managed to achieve the holy grail for many pro-Brexit campaigners: a free trade deal with China.
In 2013, Reykjavik became the first European nation to conclude a trade agreement with the Asian giant.
“We have a free trade deal with China and a free trade deal with the Faroe Islands - some of the biggest and smallest economies in the world," says Thordarson, a vocal advocate for Brexit who has urged the UK to take part in an EEA-like arrangement.
“Come on in: the water’s lovely," he wrote in the pages of this newspaper last summer.
For a nation the same size as the US state of Kentucky, many Icelanders seem baffled at the suggestion Britain cannot go it alone.
One of the deterrents used by Remain campaigners is that the UK’s European partners would quickly turn vengeful in a post-Brexit world - making the prospect of striking up 27 potential bilateral trade agreements all but an impossibility.
But Thordarson dismisses the scaremongering.
“The EU has enormous problems and they would be piling plenty more on their public if they decided it was time to get even with Britain," he says.
“It would mean German or Dutch politicians turning to their workers and industry and telling them they have to suffer because we are getting even with Britain after they voted to leave. That would have serious economic consequences for the entire economy of the EU.”
Yet for all the apparent benign neglect towards the EU, Iceland hardly finds itself in constant harmony with Brussels.
Periodically, a rule or regulation comes along that threatens to derail the Nordic nation’s crash-prone economy.
Chief among them is a bank deposit directive that would require the state to guarantee up to €100,000 of customer deposits, up from its current level of €20,000.
The regulation strikes at the heart of Iceland’s past banking misdemeanours.
A woman gestures during a demonstration outside the central bank in Reykjavik October 10, 2008
A woman gestures during a demonstration outside the central bank in Reykjavik on October 10, 2008
In a country still dominated by three big banks, critics say the measure would plunge the economy back to the days of moral hazard, when Iceland’s banking system bloated to 10 times the size of the economy.
Crucially, any insurance law would have prevented the government from liquidating banks as it did back in 2008 to extricate itself from crisis. Back then, the state’s coffers were insufficient to cover the collapse, forcing it into an international bail-out. The government now argues that its rainy day deposit fund is all but dry.
But in reality, Iceland will have little choice but to submit. Campaigners have tried to kick the deposit scheme into the long grass but observers are not hopeful Reykjavik will win the fight.
Britain can tell similar tales of taking on the EU and losing in matters related to financial services - namely its fight to resist imposing Brussels’ banker bonus cap.
Yet the EEA arrangement, for all its obvious benefits for a small, open trading nation like Iceland, affords the minnow almost no clout in shaping the course of EU laws.
It is one of the reasons Prime Minister David Cameron has fought to win safeguards against the eurozone forging ahead with reforms it deems antithetical to Britain’s financial interests.
For Iceland however, a former vassal state of the Danes which only gained independence at the start of the 20th century, they seemed to have accepted their place in the continent’s patchwork of relationships.
And with the boom times back, prime minister Gunnlaugsson is staying sanguine about whatever may lie ahead.
“Iceland will be in a positions to weather its storm outside of the European Union,” he says.