Over the past few months Blawgconomics has on more than one occasion expressed its opinion on topics it has little to no first-hand experience with. The continuing financial troubles and yesterday's referendum in Iceland are no exception.
The Cliff Notes version of the story is that a bank in Iceland offered high interest rates on savings accounts to attract deposits from the Dutch and Britons. When the financial system in Iceland unfortunately collapsed, the government took over much of the industry and made deals with foreign governments to pay back certain obligations, almost serving as a deposit insurer. Though the scheme passed through the legislative branch, Iceland's populist president lead the charge to Iceland's first referendum vote in protest of the deal. The result of yesterday's vote was a resounding no to the repayment plans, as citizens expressed their discontent with paying for the sins of bankers.
Unfortunately, there are a few problems with this. First, Iceland is awaiting IMF loan payments that are a critical piece in the country's rebuilding puzzle. The IMF has put the payment schedule on hold until a deal is reached. Additionally, Iceland is hoping to become a member of the EU. Adding deal-breaking to a list of negatives which include a crumbling economy and a failed currency is not likely to endear the state to longer-standing members who are already reeling from the debt crisis in Greece among other issues. Finally, the affront to close trading partners England and The Netherlands as well as international obligations is just plain bad business. Despite all of this, it is understandable that the proud people of a very independent island nation are angry and have embraced this situation as an opportunity to express displeasure with the general state of things. Luckily, their no vote may be more bark than bite.
This is because the government has already been in negotiations for a new deal at more favorable terms. The other governments involved, particularly the British, appear keen to avoid the label of bullies. This has lead to hope that a new deal, and thus a resolution to the situation that is favorable to all parties involved, can be reached soon. Clearly the politicians involved are willing to make difficult decisions, and perhaps a new deal will bring a majority of citizens on board. Nonetheless, the situation is a powerful example of the influence citizens can have over government. Unfortunately it is also an example of when this influence can lead to damaging outcomes.