Iceland: For worse and for better

The plan was that Iceland would have a general election tomorrow, on May 9. We all know by now that the then Icelandic Prime Minister's plan, announced on January 23, did not quite work out. Within four days, his government had to resign.

It would be a mistake, though, to see in Iceland simply an object lesson in what not to do. Iceland managed to get a lot right over the last several years. It can also serve as a positive model of what to do, especially for a country of similar population size, like Malta.

First, however, let us recall the mistakes. Iceland's implosion, due to the financial crisis, was dramatic. A country that, only a year ago, had its economy held up as a model of ambition and success to others, went bankrupt in the most spectacular fashion. Some signs of high inflation and interest rates were already being noticed a year ago. By October, however, Iceland's currency was rated only above those of Zimbabwe and Turkmenistan.

The causes of Iceland's crisis were several. They cannot be blamed just on the currency. Two simple figures tell a bigger story.

The first is that by the end of last year, Iceland's banks owed six times the money earned by the whole country in 2008. The second is that a country of 300,000 people had to be rescued with a $10 billion package.

The country was living way beyond its means. People felt it. Before the crisis broke out, Icelanders described the previous eight years as one big party. In five years, ordinary families saw their income increase by 45 percent. Top-range cars were bought at 100 per cent credit, arranged in around 10 minutes according to one Reykjavik dealer.

The credit was based on foreign currency, whose value shot up exponentially in relation to krona when the crisis hit.

Interest rates were so high that people who wanted to change houses for something bigger or smaller ended up swapping. Meanwhile, Icelandic students abroad at US universities found their generous grants shrink to worthlessness.

Nor was the problem, as we know, just a consumer boom. The latter rested on a very aggressive drive by Icelandic firms to expand abroad. In 2004, £894 million in stock were bought up in the UK alone. Food and communications companies, in particular, were being bought up elsewhere, especially in eastern Europe.

It sounds like a classic story of pride coming before the fall. After all, this is the country whose people openly described it as the best place to live in. In 2007, it topped the UN's Human Development Index. It had the sixth highest GDP per capita in the world.

People described themselves as happy and confident. Even with the highest divorce rate in Europe, Iceland had the highest birth rate, women choosing to have children in their early twenties, as well as the highest rate of women working outside the home.

Some of this confidence was built on illusion. But hardly all of it. The confidence could also be seen in the highest ratio of active book readers... and authors. It was based on an excellent, highly innovative public education system, beginning with pre-school, so that almost all of the rich sent their children to state schools. It was also based on a generous welfare system, that gives nine months parental leave to each couple.

Culture was actively cultivated as well. The evidence is there not just in the abundance of bookshops. Some 100 artists earn a full time living from their art. The country's symphony orchestra plays to the highest standards.

Ironically the general impression that one gets of Reykjavik and beyond is a sense of modesty. The ministries, departments, courts of justice and up-market residential areas can only be described as modest. The banks were an exception.

Iceland went wrong in allowing its banking sector to expand at a crazy rate, in deregulated fashion. But its strategic planning was excellent in many ways. It invested heavily in biotechnologies. Its use of renewable energy is so high that practically all its electricity needs are provided by hydroelectric and geothermic power.

Volcanically heated water supplies half the electricity at two thirds the price of the average in Europe (using the prices before the latest drop, but also before the huge rise last year). Iceland was selling its expertise in this technology in Africa, Latin America and Asia, including China.

It also invested a great deal in its university, with its staff coming from 23 countries. Its ambition is to compete for the best students around the world.

Since last week, Iceland has had a left-of-centre coalition in government. Its Social Democrat prime minister has announced that she will aim for a fast track to EU membership. In embarking on that road, however, the country will be building on its generous investments in education, including teaching staff, environment and social welfare.

Iceland has had to learn some things the very hard way. In others, however, it has preceded us by several lengths. Instead of smirking when it is mentioned, we ought to pay attention to how a small country managed, in some areas, to reach world standards.

Dr Attard Montalto is a Labour member of the European Parliament.