California's Lessons for Iceland

Icelandic President Ólafur Ragnar Grímsson's refusal to sign legislation settling Iceland's dispute with the United Kingdom and the Netherland regarding losses suffered by owners of IceSave accounts when Landsbanki collapsed in 2008 threw resolution of this sensitive international dispute to the Icelandic people.

2010-01-31-XXOLIICESAVEJAN2010131201022824AM.jpg Political cartoonist Halldór Baldursson captures the national mood in Iceland regarding Icesave: Asleep, or like Minister of Finance saying to the Prime Minister, "Jesus, what ham! Long-winded and boring!"

According to Ólafur Ragnar, the expenditure of €3.8 billion (40% of Iceland's GDP) was too important to entrust to the elected officials who had spent months studying and debating the issue. Rather, he said, "the people must be convinced that they themselves determine the future course. The involvement of the whole nation in the final decision is therefore the prerequisite for a successful solution, reconciliation and recovery."

In a subsequent interview with the BBC, he made allusions to Iceland's commitment to the democratic process, the will of the people, and the desirability of the referendum process, making it seem as though referendum was a common feature of Icelandic politics. In fact, this will be Iceland's first national referendum since the country declared independence from Denmark in 1944.

It is a popular misconception to refer to most Western countries as "democracies." In fact, they all are some sort of representative democracy. There have been no direct democracies in the West of any importance since Alexander the Great took Athens. Like the United States, Iceland is a republic; article I of the Icelandic Constitution states: "Iceland is a Republic with a parliamentary government."

The rationale for a representative democracy is that the issues facing a government are too varied and detailed to expect the electorate to adequately study each issue. The fear is that modern propaganda can be used to bamboozle the masses into agreeing to laws that are not in their best interest or to permit a small dedicated group to bind the entire population when there is low voter turnout, which is how Hitler and Mussolini, for example, seized and maintained power. The creation of a professional political class is (in an ideal world) supposed to ensure that dedicated individuals are able to devote their full efforts to determining the nation's optimal goals and how to achieve them.

Much can be said for direct democracy in Iceland, which has a very small population (~315,000), a highly educated and engaged electorate and a somewhat vigorous media. In addition, Iceland's form of parliamentary democracy has saddled us with a long line of corrupt, self-dealing politicians who have not hesitated to place government resources--such as fishing quotas and banks--into the hands of their families and political allies.

Ólafur Ragnar's decision, while a stab in the back of the ruling coalition (mostly due to that fact that he never uttered a word about the matter while the government wasted several months reaching this agreement) is not necessarily the wrong outcome. However, I fear that the use of national referenda to resolve Iceland's woes would be a misguided strategy.

Just look at California.

Since the passage of Proposition 13 in 1978, the use of referanda has placed an ever-tightening noose around the state's finances, with the result that California now faces insolvency. In a nutshell, while the people of California have been generous in approving government services, they have been stingy about raising taxes. This has placed ever less discretion in the hands of the legislature and the governor, resulting in a steady paring of state services and "creative" accounting measures. Ronald George, the Chief Justice of the California Supreme Court, stated that the state's reliance on the referendum process has "rendered our state government dysfunctional." Governor Arnold told the Wall Street Journal that "This is no way, of course, to run a state."

I certainly don't think the Icelandic people should pay for Icesave; it should be the people who exploited the depositors, but I fear we have selectively been hearing only the voices who favor the position that we are not to assume responsibility for foreign depositors' loss in the IceSave accounts. Discussing Icesave on Iceland's premier political talk show -- Silfur Egils --following the president's decision, every one of the several commentators from around the world expressed the view that Iceland had no duty to insure foreign deposits, that the British and the Dutch should have discovered the Icelanders' fraud themselves, and that the IMF is not necessary for Iceland's recovery.

I suspect matters are not quite that simple. If they were, as the commentators would have us believe, why didn't we hear of this much sooner? Is all of Europe seriously conspiring against Iceland and did the government simply give in out of spinelessness?

Ólafur Ragnar may indeed be right that a referendum on the IceSave agreement is necessary to avoid any second-guessing that politicians would certainly engage in if it passed without popular approval. But to ensure that this happens, the government and the president -- who now has made us, the hoi polloi, the sovereign in this matter -- better begin handing over to us the documents relating to this miserable boondoggle. And I mean all documents. The Brits slammed us with terrorist laws because Icelandic banks allegedly were illegally transferring funds out of the country -- hand over the papers showing who, what, where, when and how. We are entitled to all the information that the Icelandic government and their negotiators have used to reach their conclusions.

It is incumbent upon the Icelandic media and political establishment to educate the public on the reasons for and against the agreement. So far there has been no organized effort or clamor from the Icelandic public demanding that the government release all relevant information before we decide in just over a month whether the consequences of rejection outweigh those of approval. I know the average Icelander is sick and tired of Icesave, but if we are serious about fighting for the political reform and transparency that our country so desperately needs, here is a good place to start.