Five years ago, Iceland was a failed financial state. Today it’s Exhibit A for revitalization after a financial crisis. The reason why? President Ólafur Ragnar Grímsson explains that the will of the people was prioritized over the perceived financial interests of the markets. Iceland didn’t bail out its banks and didn’t commit to austerity. And it’s thrived since.

Ólafur Grímsson:  Well Iceland was, in the years that led up to the financial crisis, like every country in Europe and the United States, part of this policy transformation where the financial sector was deregulated, where the freedom of financial capital was increased, where there was a different form of regulations and structures that had prevailed before.  So when the financial crisis hit we suffered in a traumatic away.  We were for a while, perhaps exhibit number one of a failed financial system.  It was a profound shock to our country and our people, not just because of the economic difficulties and the hardship that followed, but also because Iceland is one of the most democratic and secure societies in the world and we've always conducted everything through peaceful dialogue and discussions, but suddenly we had riots, we had demonstrations.  There were a fire burning in the center of Reykjavik, the police had to defend the Parliament and even the central bank.

So, it demonstrated that a collapse of the financial system can also threaten the democratic institutions as well as the social cohesion of one of the most harmonious and open and free democratic societies in the world.  So if a collapse in the financial system can do such damage and provide such a threat to a country like Iceland, imagine what a failure in the financial market can do to countries where the democratic institutions are not as strong and solidly based as in my country.  But then when we had to formulate policies how to deal with the financial crisis we decided, in one way or another, to follow a different formula than from the traditional consensus in the previous 30 years of how you deal with a financial crisis.  We did not save the banks; we let we let them go bankrupt.  We introduced currency controls.  We devalued the currency.  We did not introduce austerity measures of the scale that had been deemed to be absolutely necessary in the decades before.

And when the failure of one Icelandic bank in Britain and the Netherlands led to extraordinary pressure from all the European governments that the Icelandic taxpayers should take responsibility for the debts of this one bank in these two countries, I put it to a referendum and I allowed the Icelandic nations to vote on it, not just once but twice.  It is, I believe, the only location where the democratic will of the people was deemed to be more important than the perceived financial interests of the markets.  We could discuss, as was done five years ago or so, whether this was wise and there were lots of people, not just so-called experts and financial authorities but also governments all over Europe who were telling us we were absolutely wrong; that this was a crazy path to follow because it went against the established orthodoxy.  But now we know the outcome six years later that Iceland, having been the exhibit number one of a failed financial state is now exhibit number one in Europe of a recovery from a financial crisis with three to four percent economic growth, with four to five percent unemployment, with many of our sectors, the tourism sector, the energy sector, the IT sector, the high tech sector in fact doing much better in the last five years than it did in the five years leading up to the financial crisis.

So the end result has been that this democratic way of dealing with the financial crisis, this unorthodox way in terms of economic policy, has in fact turned out better and more solid results than the so-called expert or official community predicted.  So, in that sense I think Iceland can serve as an interesting reference when other nations discuss and debate what policies they should follow, but after all what is the relationship between democracy on one hand and financial markets on the other?  There was the prevailing assumption in the previous decades that somehow the financial markets should be supreme, but we faced a tough challenge to decide is the democratic will of the people more important than the forces in the financial markets?  And that is in fact a question, which many other nations have not yet answered, but in our case it turned out that allowing the democratic will to rule the day was a better course.