Democracy 2.0: Iceland crowdsources new constitution

by Jérôme E. Roos on June 11, 2011

Just two or three years after its economy and government collapsed, Iceland is bouncing back with remarkable strength. This week, the small island nation earned praise
from foreign investors despite allowing its banks to collapse and
refusing to pay back some of its debt — belying the dominant idea among
Europe’s ruling class that bank failures and defaults necessarily engender disastrous economic consequences.

Now,
in an historically unprecedented move, the government has decided to
draft a new constitution with the online input of its citizens —
essentially crowdsourcing
the creation of Iceland’s real democracy. Rather than just involving
voters at the end of the process through a referendum, the Icelanders
have an opportunity, through social media, to be directly involved in
the writing process. It’s the ultimate affirmation of participatory
democracy. It’s Democracy 2.0.

How did Iceland get from there to here? And what are the lessons for Europe’s troubled periphery?

Back in 2009, months after the greatest banking collapse in economic history, the people of Iceland took to the streets en masse to
denounce the reckless bankers who had caused the crisis and the
clueless politicians who had allowed it to develop. Quietly, as the
world was busy watching the inauguration of President Obama, the people
of Iceland overthrew their government and demanded a referendum on the country’s debt.

In
the referendum, the Icelanders decided not to repay foreign creditors —
Great Britain and the Netherlands — who had so foolishly deposited
their savings in one of the world’s most over-leveraged banks, Icesave.
In fact, the President had already vetoed
the deal, so the referendum was largely symbolic, but still, the
outcome of the vote (93 percent against repayment) was a watershed in
the epic battle between people power and foreign financial interests.

Yet
what’s really interesting about the Icelandic case is not just the
referendum, but the fact that the consequences of the outcome were far
from being as disastrous
as Europe’s self-proclaimed economic ‘experts’ had predicted. In fact,
within just two years of the collapse of its government, Iceland is
bouncing back rapidly, and is actually being rewarded for it by foreign
investors. As the Wall Street Journal reported yesterday:

Iceland’s
first international bond offering since its spectacular economic and
banking collapse late in 2008 has been snapped up by investors. The
five-year $1 billion deal, yielding just under 5%, is a milestone in
rebuilding confidence internationally and follows a turnaround in the
economy, forecast to grow 2.25% this year.

So it’s no surprise that Iceland became a rallying point for the ‘indignados‘
in Spain during the mass protests that broke out there last month.
Spanish demonstrators could be seen carrying placards reading “Iceland
is my goal” and “I think of Iceland.” The Icelandic model has also come
to inspire the indignant protest movement in Greece, which is rapidly picking up steam. So what are Iceland’s main lessons for Europe’s troubled periphery?

First of all, make sure to read this excellent piece
by Robert Wade, my former Professor at the London School of Economics,
to understand how Iceland’s mistakes in the lead-up to the crisis were
just an extreme version of what we did on the continent: capital account
liberalization combined with financial deregulation and unprecedented
political disinterest in the face of an epic bubble blowing up right in
front of our eyes.

Wade helps us understand what not to do. But perhaps at this stage, it’s more interesting to find out what we should do. In
this respect, one overwhelming lesson jumps out: while letting banks
collapse and refusing to pay back foreign lenders certainly has negative
consequences in the short run, those consequences are born largely by
the reckless bankers who instigated the crisis in the first place.

Instead
of socializing the losses of the banks, making ordinary people pay for a
crisis they never caused, the Icelandic model forced the bankers to pay
for their own stupidity. During the Icelandic crisis, all three of the
country’s largest banks collapsed. The government didn’t save them.

Secondly, Iceland actually went after
those responsible — both to enact justice and to set a precedent that
this type of reckless speculation on the livelihoods of real people will
simply not be tolerated in the future. Key figures in the banking
sector have been arrested and a former prime minister has been formally charged. Treating reckless speculation as a crime is a crucial first step towards real democracy.

Thirdly, Iceland did what no one is supposed to be doing according to neoliberal dogma: just like Malaysia did — to the dismay of the IMF — during the East-Asian crisis of 1997-’98, the Icelandic government instituted capital controls
to stem the outflow of hot money from the country in the wake of its
banking collapse. The EU should have done the same (and can still do the
same) to stem the outflow of capital from the periphery.

Fourthly, and this is obviously the most crucial lesson of all, the people of Iceland managed to sever the neoliberal straitjacket
that had kept their politicians enthralled to the interests of the
financial sector for so long. Through mass mobilization, the people
toppled the government and instituted a radically new form of political
participation. The crowdsourcing of the constitution is the most
powerful symbol this new, real democracy.

As a result, the Icelandic people are now slowly but surely beginning to recover
from the worst ever economic collapse of any country during
peacetime. By contrast, countries like Greece, Spain, Ireland and
Portugal are still struggling — and likely to remain mired in deep
recession, if not outright depression, for years to come.

Untold suffering and hardship
will fall on millions of people as the ECB, IMF and Germany continue to
expect full repayment while imposing draconian (and ultimately
counterproductive) austerity measures. A lost generation
will flee these countries in a desperate search for opportunity.
Countless lives, businesses, families and dreams will be destroyed. And
for what? A handful of bankers who refuse to take a haircut?

What Iceland teaches us is that it need not be that way. The Atlantic currents and Arab winds have already reached
the European periphery. It’s just a matter of time before the first
government on the continent will be toppled by its people. Democracy 2.0
is on its way. No one can stop it now.

As one European country after another fails or risks failing, imperiling the
Euro, with repercussions for the entire world, the last thing the powers that be
want is for Iceland to become an example. Here’s why:

Five years of a pure neo-liberal regime had made Iceland, (population 320
thousand, no army), one of the richest countries in the world. In 2003 all the
country’s banks were privatized, and in an effort to attract foreign investors,
they offered on-line banking whose minimal costs allowed them to offer
relatively high rates of return. The accounts, called IceSave, attracted many
English and Dutch small investors.  But as investments grew, so did the banks’
foreign debt.  In 2003 Iceland’s debt was equal to 200 times its GNP, but in
2007, it was 900 percent.  The 2008 world financial crisis was the coup de
grace. The three main Icelandic banks, Landbanki, Kapthing and Glitnir, went
belly up and were nationalized, while the Kroner lost 85% of its value with
respect to the Euro.  At the end of the year Iceland declared bankruptcy.

Contrary to what could be expected, the crisis resulted in Icelanders
recovering their sovereign rights, through a process of direct participatory
democracy that eventually led to a new Constitution.  But only after much
pain.

Geir Haarde, the Prime Minister of a Social Democratic coalition government,
negotiated a two million one hundred thousand dollar loan, to which the Nordic
countries added another two and a half million. But the foreign financial
community pressured Iceland to impose drastic measures.  The FMI and the
European Union wanted to take over its debt, claiming this was the only way for
the country to pay back Holland and Great Britain, who had promised to reimburse
their citizens.

Protests and riots continued, eventually forcing the government to resign.
Elections were brought forward to April 2009, resulting in a left-wing coalition
which condemned the neoliberal economic system, but immediately gave in to its
demands that Iceland pay off a total of three and a half million Euros.  This
required each Icelandic citizen to pay 100 Euros a month (or about $130) for
fifteen years, at 5.5% interest, to pay off a debt incurred by private parties
vis a vis other private parties. It was the straw that broke the reindeer’s
back.

What happened next was extraordinary. The belief that citizens had to pay for
the mistakes of a financial monopoly, that an entire nation must be taxed to pay
off private debts was shattered, transforming the relationship between citizens
and their political institutions and eventually driving Iceland’s leaders to the
side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused
to ratify the law that would have made Iceland’s citizens responsible for its
bankers’ debts, and accepted calls for a referendum.

Of course the international community only increased the pressure on Iceland.
Great Britain and Holland threatened dire reprisals that would isolate the
country.  As Icelanders went to vote, foreign bankers threatened to block any
aid from the IMF.  The British government threatened to freeze Icelander savings
and checking accounts. As Grimsson said: “We were told that if we refused the
international community’s conditions, we would become the Cuba of the North.
But if we had accepted, we would have become the Haiti of the North.” (How many
times have I written that when Cubans see the dire state of their neighbor,
Haiti, they count themselves lucky.)

In the March 2010 referendum, 93% voted against repayment of the debt.  The
IMF immediately froze its loan.  But the revolution (though not televised in the
United States), would not be intimidated. With the support of a furious
citizenry, the government launched civil and penal investigations into those
responsible for the financial crisis.  Interpol put out an international arrest
warrant for the ex-president of Kaupthing, Sigurdur Einarsson, as the other
bankers implicated in the crash fled the country.

But Icelanders didn’t stop there: they decided to draft a new constitution
that would free the country from the exaggerated power of international finance
and virtual money.  (The one in use had been written when Iceland gained its
independence from Denmark, in 1918, the only difference with the Danish
constitution being that the word ‘president’ replaced the word ‘king’.)

To write the new constitution, the people of Iceland elected twenty-five
citizens from among 522 adults not belonging to any political party but
recommended by at least thirty citizens. This document was not the work of a
handful of politicians, but was written on the internet. The constituent’s
meetings are streamed on-line, and citizens can send their comments and
suggestions, witnessing the document as it takes shape. The constitution that
eventually emerges from this participatory democratic process will be submitted
to parliament for approval after the next elections.

Some readers will remember that Iceland’s ninth century agrarian collapse was
featured in Jared Diamond’s book by the same name. Today, that country is
recovering from its financial collapse in ways just the opposite of those
generally considered unavoidable, as confirmed yesterday by the new head of the
IMF, Christine Lagarde to Fareed Zakaria. The people of Greece have been told
that the privatization of their public sector is the only solution.  And those
of Italy, Spain and Portugal are facing the same threat.

They should look to Iceland. Refusing to bow to foreign interests, that small
country stated loud and clear that the people are sovereign.

That’s why it is not in the news anymore.