Below is my slideshow from the talk:

With acknowledgements to the Economist: front cover 26 November, 2011

Dear readers…posted this last night, but  failed to add links…so have updated this morning….And now at 12.54 on 28 Nov, following revelations from Bloomberg, am adding in a reference to the extent that Morgan Stanley was bailed out in 2008.

A petard, I am reliably informed by the Web,

“was a bell-shaped metal grenade typically filled with five or six pounds of gunpowder and set off by a fuse. Unfortunately, the devices were unreliable and often went off unexpectedly. Hence the expression, where hoist meant to be lifted up, an understated description of the result of being blown up by your own bomb.”

Correct or not, this is a helpful analogy for the crisis of the Euro. The grenade that is the Euro has a fizzing fuse that threatens to explode imminently, causing visible panic in markets, in parliaments and treasuries across the world. Mainstream economists are either dodging the bullets and like the cowards they are, pretending that ‘it’s nothing to do with me guv’.  Or else they’re panicking in ways that are crass and unhelpful, banging their heads against the brick wall that is the Bundesbank and ECB, and demanding that someone, somewhere defuses the bomb.

The Economist has a dramatic leader this week (“Is this really the end?”) warning of grave threats and offering Chancellor Merkel and other EU leaders ways of avoiding a comet-like crash. Like many others, leader writers on the Economist, somewhat belatedly, want the ECB to act as a central bank, and to  provide liquidity to sovereign members of the Eurozone.

“Vast monetary loosening should cushion the recession and buy time” argues its leader.

Too late. By calling for ‘monetary loosening’ the Economist is indulging in a form of mindless head-banging.  Like so many others desperate to preserve the Euro, leader writers at the Economist cannot fully face up to the contradictions inherent in their own orthodoxy, and in the Eurozone currency and monetary system created and cheered on by mainstream economists – including those on the Economist. Contradictions that are so strongly held by the ideologues that drafted the Maastricht and other texts, that they are carved in legal stone into the Eurozone’s various treaties – and will not easily be erased.

The fact is that the ECB is designed to be the very antithesis of a central bank. Its purpose is to ensure that sovereign governments do not ever draw on the kind of ‘liquidity’ provided by publicly-backed, nationalised central banks such as the Bank of England. The latter is now providing £75 billion of ‘liquidity’ support to the British government, albeit indirectly, and plans to print more of the stuff in February.  Similarly, the Federal Reserve has provided vast sums in support of the US public and private sectors (see this story on Bloomberg (29 Nov, 2011) about the secret Fed loans to private banks in 2008 and the $13 billion of income reaped by same banks taking advantage of the Fed’s below-market rates. Also see this chart’s revelations of how Morgan Stanley was rescued by the Fed – at a time it pretended to be whole: Felix Salmon, Reuters, 27 Nov 2011.)  The Bank of Japan provides generous support to the Japanese Treasury and Japanese industry.

And good that they do so too. At times of crisis, when private bankers fail – society needs a lender of last resort – a public central bank that stabilises the financial system, allows the real economy to carry on working, and acts as a backstop to a private financial system that regularly fails society.

But this is not the purpose of the Euro, the ECB and the monetary system created first, by the Maastricht Treaty, and then by subsequent Treaties.  Instead its purpose is to deny governments a sound monetary system that acts in this way, and that works for society as a whole. All these Treaties force Eurozone governments to turn to, and depend on the private banking sector for financial resources.

That is why the Euro is the wet-dream of private wealth. (For more on this, see “Open Letter to the people of Greece: restore the drachma.” 21 June, 2011.)

As a result of its construction by conservative and orthodox economists and policy-makers – heavily influenced by private bankers –  sovereign governments (like Greece, Spain, Italy) upon joining the Eurozone have to borrow from private banks. They can no longer rely on a publicly-backed central bank  for borrowing; to help compensate for a slump, mitigate a private financial crisis or manage public finances.

Furthermore, the rules of the Eurozone oblige these governments to borrow in what is effectively a foreign currency – or at least a currency over whose value they have very little influence (unlike the influence that governments have over the Dollar, Sterling and the Yen).  And to do so on the basis of rates of interest set by a group of technocrats – with no real commitment to the health and success of individual sovereign economies. Instead these technocrats – on the board and staff of the European Central Bank – have an overwhelming commitment to an economic ideology that demonises the wider public interest, and upholds, almost as sacred, the interests of the private banking system.

That interest is most clearly expressed as an abhorrence for ‘inflation’ – the phenomenon that lowers the value of a creditor or banker’s chief asset: an outstanding loan. Inflation erodes the value of that loan, and is the thing most loathed by creditors. By its fixation on inflation and private creditor interests, the ECB is inured to, and intransigent when it comes to the wider, public interest: the interests of Europe’s democracies. More frighteningly, the ECB is inured to the much graver threat of debt-deflation. (See Irving Fisher’s Debt-Deflation Theory of Great Depressions.)

That much most of us know. What few will publicly acknowledge is that in persuading policy-makers and orthodox economists to construct the Eurozone monetary system, private bankers had reached a form of nirvana. Not only had they eliminated competition in the sovereign lending markets from publicly-backed central banks; but they had also been given effective guarantees that they could lend vast sums (far more than e.g.they lend to corporates) to sovereigns such as Greece, without fear of loss. Greece would not be allowed to default, the treaties ensured that. And if sovereign governments were slow in paying, the stronger members of the Eurozone (most particularly Germany) could be expected to cover and guarantee no private losses.

Of course it takes two to tango.  Greece also got to borrow at levels she could not do before; and at rates of interest more appropriate to the German economy. So Greece’s reckless politicians turned up at the bankers’ party – and gorged themselves on debt.

The bankers never lost a night’s sleep. They had all those treaty guarantees – drafted by clever economists.

Now imagine if you were a farmer, wanting to sell tomatoes to sovereign governments across Europe. Would such treaties as the Maastricht treaty and the one that governs the ECB not have been of enormous help to a) guarantee sales of tomatoes b) remove competition from other tomato sellers and c) ensure compensation, should buyers go bust and fail to pay up?

Given that conditions were set up in this way for the private banking system – the bleating of the Economist and others for the ECB ‘to print money’ – is a) many years too late; b) hypocritical, but most importantly c): an open admission of the catastrophic failure of economic orthodoxy and its construction of the Euro. Above all, of its complete subordination to the interests of private finance.

The tragedy is this: when the Euro blows up, as it must, harm will not be restricted to its architects, or the private finance sector.

I appeared on Newsnight last night, to discuss the Eurozone crisis – and Greece in particular. (You can watch it with the BBC’s iPlayer..our slot is about 7 minutes into the show.)

By Ann Pettifor. An edited version of this piece was published on Left Foot Forward, 14 September, 2011. This original, longer version posted 19 September, 2011. 

The game is up. The 2007-9 private banking crisis that started with the unpayable debts of the US sub-prime sector, was never over. The crisis has now moved on to include the unpayable debts of sovereigns owed to private European bankers. It is increasingly clear that there is declining political and institutional support for further private bank bailouts. The dramatic resignation on Friday 9th September of Jürgen Stark, architect of Europe’s equivalent of the Gold Standard – the Growth and Stability Pact – marks an important step in the resistance to bailouts by the ECB; in the inevitable collapse of the Maastricht Pact, and with it, the utopian vision of the neoliberal Euro.

And so the age of liberalised, de-regulated finance appears to be over – at least in Europe. That is the conclusion of investors in both Wall St and the City of London and explains the collapse of confidence in banks and the volatility of stock markets as investors rush for the exits, transferring speculative gains into the safety of government bonds.

The Growth and Stability Pact was, and is repeatedly flouted by Greece and other eurozone countries – even by Germany under Gerhard Schröder. The ECB, led by Jean Claude Trichet is also obliged to flout its terms, by effectively adopting a fiscal role – buying up the bonds of deficit countries – and thereby causing the resignation of not just Mr Stark, but also Germany’s Axel Weber.

This resistance represents a Polanyian counter-movement – however weak – which defies orthodox economists, central bankers and Haute Finance. Across the Eurozone, Europeans resist further private sector bailouts; and refuse to march like lemmings to their own destruction across cliffs of unemployment, deflation and social unrest.

The Eurozone and its economic framework was designed as a financial ‘straitjacket’; to undermine the sovereignty of Europe’s elected governments; to transfer power over financial and therefore economic policy to unaccountable central bankers; powers then enforced by ‘the invisible hand’ – ‘the markets’ – international speculators on foreign exchange and financial markets. It was also, its protagonists argued, designed to ensure peace across Europe.

But so utopian is the vision of liberalised, unaccountable finance, that it has achieved the very reverse: the divergence, not convergence of European economies; sovereign insolvency, bank failures, rising unemployment, the degradation of public services, and with it the intensification of tensions and conflict across Europe.

Regrettably we have been here before. The very same policies – and liberal finance model – were tried in the 1930s, under the Gold Standard. By 1933 their failure was complete, challenged effectively by both Karl Polanyi and John Maynard Keynes. The latter took on the responsibility of outlining and implementing a ‘Plan B’ – one which endured until overturned by neoliberals in the late 1960s and early 1970s.

So as we witness the death throes of this second experiment in liberal finance, what is today’s progressive alternative? What is the left’s Plan B?

The failure of the left to pose an alternative to liberal finance was striking both before, during and after the 2007-9 financial crisis. In the wake of the greatest financial catastrophe of our lifetimes, the loudest complaints were aimed at bankers’ bonuses, and at the failure of rich elites to pay taxes. Recently, the pro-austerity Institute for Fiscal Studies has tried to turn this into a debate about the mal-distribution of wealth.

But while these are important issues, they do not touch on the structural injustice of a liberalised financial system that is capable of wrecking the global economy; denies economic sovereignty to democratic states, and that stratifies the polarisation of wealth between rich and poor. Nor does the debate on bonuses or the addition of taxes structurally alter the role of Haute Finance as ‘stupid master’ (to quote Labour’s Employment manifesto of 1944) as opposed to ‘servant’ of the real economy.

So what should the left’s macro-economic Plan B look like? Clearly it will have to embrace both monetary and fiscal policy, with monetary policy more important in the long-run; but fiscal expansion needed immediately to deal with the collapse of employment and private sector activity.

The first element of any plan must be the careful and coordinated sequencing of both quantitative easing and fiscal expansion. This will involve the financing of a programme of public works expenditures designed not just for socially and ecologically essential projects, but also to stimulate private economic activity. Central banks are eager to supply liquidity to private bankers when they wreck both their own institutions and threaten the global economy; they should now act to supply liquidity to governments that need to stimulate economic recovery, and finance the transformation of the economy away from fossil fuels. (For more on this see ‘The Green New Deal’ co-authored by this blogger.)

Next, it will be essential to manage in an orderly fashion the massive write-off or ‘re-structuring’ of unpayable debts – to replace the current disorder of random de-leveraging by sovereigns, corporations, households and individuals. Many of these debts are phantom debts, and cannot ever be repaid. That reality must be faced. It is time for another debt Jubilee.

The third element should be the introduction by sovereign states of capital controls over the mobility of finance across borders, to strengthen democratic, accountable policy-making. In the words of Brazil’s President Rousseff, governments must protect their “internal markets.” The form these controls take will depend on local conditions and circumstances, and should be agreed by elected representatives of democratic states, with central bankers acting in the interests of domestic economies, not the proverbial ‘gnomes of Zurich’. Fourteen countries already impose capital controls, including China and Iceland; but each week new reports appear. The most recent is Indonesia which will require companies to repatriate about $33bn of foreign currency earned each year on exports (FT 9 September, 2011).

Fourth, central bankers, while regulating the creation of credit by private bankers to ensure loans are repayable, should also seek to bring down interest rates across the spectrum of lending: for safe and risky loans, short and long-term loans. Adam Posen’s recent proposal for a public bank that would make cheap loans available to SMEs should be given serious consideration. In other words, the rule should be ‘tight but cheap’ money.

Fifth, governments and central banks should be mandated to promote a) full employment and b) sustainable, localised economic activity, supporting the domestic economy – not a globalised financial elite. For just as employment makes things affordable for individuals and households so full employment will make things – including the transformation of the economy away from fossil fuels – affordable for government.

“Look after employment” as Keynes argued, “and the budget will look after itself.”

Add to the above, terms and conditions for banks bailed out by taxpayers; and a reformed taxation system and you have a coherent and plausible Plan B. Correct me if I am wrong, but so far it seems the most comprehensive one on the table.

End

So, five of the world’s biggest central banks have decided on co-ordinated action to bail out – once again – the European private banking sector. In other words, central bankers are hoping to shore up private bankers, help their defer their losses, and prevent them being disciplined by market forces for their reckless lending to EU sovereigns.

Shareholders and investors in these banks must be delighted. Once again, reckless speculation and lending has paid off. Once again the world’s taxpayers have ridden to the rescue.

Where does that leave the people of Greece? Sad to say, but they are and will be being disciplined – by the coercive insistence that their politicians adopt ‘austerity’ policies.  Such is the profound injustice of the liberal private finance system – subsidised and backed up by publicly-owned, but unaccountable, central bankers, while the people of Greece, not responsible in any way for the reckless lending of private bankers and the irresponsible borrowing of their politicians and policy-makers –  are denied a public ‘bail-out’. On the contrary: they will be expected to shoulder the full burden of losses for this lending….and will be made to swallow the austerity medicine.

The question now is this: at what point will austerity policies so shrink economic activity in Greece, that her government and taxpayers are unable to generate  the revenues needed to repay foreign loans to private European bankers, and official loans to e.g. the IMF and EU?  The chart below gives some indication of how this drama might play out…by comparing Greece’s GDP declines with those of Argentina – prior to Argentina’s default on part of her debt in 2002.

31st August, 2011. G’day from sunny Adelaide. I am here on a short lecture tour organised by the Search Foundation, and supported by the Don Dunstan Foundation,  Catalyst , the think-tank in Sydney, as well as trades unions in Melbourne, Brisbane, Canberra and Sidney.

It’s an interesting time in Australian politics, not only at national level with the controversy around the new carbon tax, and yet another political sex scandal….but also  here in Adelaide, the home state of Don Dunstan, progressive Labour Premier from 1967-79. Dissatisfaction with the current Labour leadership has forced the resignation of Mike Rann, the premier. And today, the Australian Supreme Court has ruled illegal the government policy of deporting refugees to Malaysia…..So interesting times…

But arriving at Adelaide airport, and standing in the slow and long passort queue, more than a little dazed after the long flight from London, I was confronted directly with the crisis back in Europe. There was only one customs official clearing our long queue, and so it moved very slowly….Next to me were a couple with two restless kids, so I handed over my phone and offered to teach them how to play my favourite game: “Angry Birds”. (Although to be honest the reason I really love it is for the sound effects and those had to be turned down in the queue….)  We soon got chatting, and it turned out that they were a family from Ireland. Mum and Dad, they told me with shock written all over their faces, had both lost their jobs in the past few months. Four years ago, they raised a mortgage and built their own home. Now they have abandoned both their home and their families to start a new life in this strange city. The father had found a job, and they had rented a home somewhere in Adelaide – they had no idea where and hoped that the Satnav on the hired car would get them there. They know no-one in this city, and the pain of leaving behind her family was etched in the face of the mother…The teenage daughter looked sulky, and the younger boy grumpy….There was clear anxiety in the father’s face. And incredulity as they discussed the way that private Irish bankers are being bailed out, while they are obliged to pay the cost of the crisis….I wished them well, and hoped that Australians would welcome them….

It’s a bad old world….but great to be among Australians determined to do something about transforming it.

Irish Finance Minister Noonan and Luxembourg Treasury Minister Frieden attend an EU finance ministers meeting in Brussels. Image source: www.reuters.com

I find it hard to write about the crisis in Greece….because the tragedy unfolding there is so reminiscent of the tragedies that unfolded in Africa, Latin America and South East Asia in the 80s and 90s – and I was very close to those. Seeing the same economic mismanagement replicated in well-armed Europe is scary. Watching as tensions rise between the peoples of Europe…given our bloody history….is frightening.  So I have been silenced by rage.

But my outrage boiled over today, because of what the FT wrongly calls a ‘subtle’ change unveiled by EU finance ministers to the terms of the massive Eurozone bailout fund – a fund backed by European taxpayers. This is how the FT explains it:

Any bonds issued in future by the eurozone’s new €500bn rescue fund on behalf of Ireland, Greece or Portugal will not enjoy “preferred creditor status” – an alteration to the fund intended to help those nations return more swiftly to private capital markets.

For those who do not dabble much in sovereign debt, let me explain. Common to the whole of the international financial architecture/system for sovereign lending, there is one principle that overrides all others. That the IMF/World Bank are ‘preferred creditors’. Just as when a company goes bankrupt, the supplier that sold it widgets, is ranked lower than the bank that provided the overdraft – so in international ‘law’ – taxpayer-backed lending from the IMF and World Bank is ‘preferred’ when it comes to repayment – over all private commercial lending. And it is preferred because it is public money.

In other words, when the public cough up – via an international institution such as the IMF or the ECB  - then the sovereign (e.g. Greece/Argentina/Rwanda) has to pay taxpayers back first.

Yesterday, on behalf of EU taxpayers, EU finance ministers obliged private bankers by overturning that ‘principle’.

Instead they agreed effectively, that private bankers will get preference and will be repaid before taxpayers.

Michael Noonan, the Irish finance minister, described it as

“very good news for Ireland that this scheme has been amended” so that anybody who borrows will have the same ranking whether there’s an ESM programme or not.”. He was told by investors in the US that Ireland and other countries subject to bail-outs “would find it virtually impossible to get back into the market and access private funds as long as this provision remained”.

Now, my understanding is that Michael Noonan is a democratically elected finance minister. What he is agreeing to here -enthusiastically – is that taxpayer funded loans will have a lower repayment status than private commercial loans – debts owed to private banks/hedge funds etc. These private banks lent recklessly to e.g Irish private banks and colluded with e.g. the previous Greek government in concealing the true status of its foreign debts.

They are private bankers that expect the rules of the market to be replaced by a form of Soviet economics  - that removes all risks associated with the private business of lending and borrowing  - and instead provides taxpayer guarantees against all losses. And with those guarantees – and this new ‘preferred status’ – these financial institutions continue to recklessly speculate and gamble in EU debt.

There will be very little outrage about this apparently ‘subtle’ change to the international financial architecture by our elected politicians. But, be sure, it is another nail in the coffin of EU democracy. An example of bankers usurping power (and money) from the people of Europe – with the collusion of democratically elected EU politicians.

It will all end, I fear, very badly – and not just for the politicians.

Dear readers….this is my latest Huffington Post.

“The humiliating surrender of Greece’s economic autonomy came just last Friday, 23 April, 2010. The democratically elected Prime Minister, George Papandreou transferred to unelected officials in Brussels and Washington the power to determine Greece’s fiscal policy. In other words, decisions about taxation, and how tax revenues should be spent.

Back in 1765 Bostonians such as James Otis and Samuel Adams regarded “taxation without representation as a form of tyranny”.

Today, a nation that served as the cradle of western democracy will effectively be governed by remote, invisible and unaccountable officials.

When Greece’s leaders agreed back in 1992 to sign the Maastricht Treaty, and set up a currency union, they gave away powerful levers for the democratic management of their economy – to EU bankers.

First, they surrendered the power to determine the value of the Greek currency; the exchange rate. Since 1st January, 1999 the value of the Greek currency has been fixed by bankers and policy-makers based at the European Central Bank (ECB) in Frankfurt, Germany.

There were advantages to the introduction of a European-wide currency. It cut the cost of cross-border transactions, made financial markets more liquid, and allowed larger banking firms to provide a wider array of banking services to the people of Greece, as well as the rest of Europe.

But on balance, the people of Greece have gained less from the arrangement than have financial institutions. The EU and ECB turned a blind eye to the way banks, like Dusseldorf’s IKB, gambled in foreign markets, including in CDOs sold by Goldman Sachs.

Under the watch of the ECB, European bankers became lax about lending, including to Greeks. Their banks grew too big to fail.

None of this appeared to matter much, until the financial crisis erupted. The ECB had to step in to rescue private banks, with ‘quantitative easing’ or hundreds of billions of Euros of ‘enhanced credit support’.

Back in Greece, the surrender of control over the value of the currency made it impossible for her finance minister to respond by devaluation.

Not so Britain, which remained a member of the European Union, but whose government wisely declined to surrender control over sterling, and refused to join the Euro in 1999.

So Britain like the US enjoys relative autonomy. Both have responded to the global financial crisis by refusing to intervene as the value of currencies fell. This made exports more competitive, and raised a barrier to imports.

As a result both the US and the UK are re-balancing their economies.

Not so the Greeks. They have had to adopt and adapt to an exchange rate better suited to the needs and expectations of the German economy.

But it’s worse than that. By joining the Euro, Greece gave away the central bank’s power to set an appropriate rate of interest for Greek economic conditions. Again, this is in contrast to the UK and the US, where central bankers retain the power to set the base rate of interest, and influence other rates.

For Greece the ‘price’ of lending was set by the ECB in Frankfurt at a rate more appropriate to Germany than Greece, as Germany is regarded as the ‘engine’ of the European economy.

As a result, Greek households and companies have, for a decade, had a rate of interest a little too low for Greece’s good.

Low rates in turn encouraged reckless borrowing on the part of Greek banks, companies, households and the Greek government.

Reckless borrowing was aided by the lifting of barriers over movements of capital across the Eurozone, so that Greeks could borrow from e.g. German and French banks, as well as their own.

At the same time, the EU turned a blind eye as the Greek government worked with Goldman Sachs to securitise the public sector’s debts, and disguise the full extent of Greece’s expanding deficit.

As long as the private banking sector thrived on these arrangements the ECB and EU governments like Germany and France ignored their activities.

But then the private financial system crashed, and hit Greece hard. The government’s economic management had been weak, and even deceptive, and partly as a result of the constraints of the Euro, her private services and manufacturing sectors uncompetitive.

The government’s debt ballooned, and soon Greece needed loans to finance the deficit. This vulnerability, combined with the open nature of the Greek economy, made the country a sitting duck for the speculative attacks of players in the global bond markets.

Last Friday, rather than default on debts, the Greek Prime Minister capitulated to their demands and surrendered control over Greece’s fiscal policy to the EU and the IMF.

Today Greece lives under a regime that Bostonians back in 1765 would have regarded as tyranny. While there have been protests and riots, it is not clear that Greece has the equivalent of a Boston Tea Party. Or, like Bostonians that Greeks will join with the Irish, the Portuguese and Spanish – whose autonomy is similarly threatened – to fight for independence.

So we must wait and see. For as history shows, gaining independence is a struggle not easily won.

Together with the Prime Minister of Greece, Mr. George Papandreou, I am going to give evidence to the EU’s Special Committee on the Financial Crisis in Brussels this Thursday, March 18th.

So today’s leaked report from the EU, arguing that Labour’s plans for cuts to public spending are not “ambitious enough”, has got me really het up.

Labour, it appears, is just not ambitious enough about its goals for cutting investment and exacerbating unemployment. It does not have punitive enough targets for cutting benefits to the poor and services for the mentally ill and frail.

In the “imbecile idiom” (to quote Keynes) of today’s financial fashion, the EU, it seems, would prefer for unemployment to rise, for people to live in hovels, and for government “to shut out the sun and the stars” – so that we conform to an arbitrary number set in Frankfurt by a group of bankers, under a pact unwisely signed by an earlier British government.

Continue reading the article…

4th March 2010

With Saturday’s Iceland referendum due in just a couple of days (6th March), Advocacy International’s directors have an op-ed article critical of the UK and Netherlands governments in today’s Morgunbladid, Iceland’s main daily newspaper.

English version> Icelandic version> Press release>

Full text of the article:

So the negotiations have broken down, British and Dutch “bullying” (FT 27 February, 2010) continues and the referendum goes ahead. What next?

We emphasize that this is not a sovereign debt crisis, even if the British and Dutch want us to think it is.

It is a crisis of EU regulatory failure, and of the Anglo-American economic model.

The people of Iceland have a deep democratic tradition, and through the referendum have the opportunity to assert their sovereignty and autonomy.

Their leadership and example will encourage people in other democracies to reject harsh cuts in public services and living standards made at the behest of the very people and institutions responsible for the crisis. For through the wholesale nationalisation of private losses, we are all – not only in Iceland – asked to pay the price of private, reckless risk-taking.

Co-responsibility

A key principle in resolving the dispute is co-responsibility. President Grímmson has made a similar point, referring to “a shared international responsibility”.

The previous Icelandic government allowed a deregulated financial sector to run wild.

The subsequent collapse of Iceland’s banking sector was not a sudden bolt from the blue. The risks were visible and widely reported, including by one of the authors of this article.¹

And the deposit guarantee scheme was totally under-resourced to deal with a systemic meltdown.

So Iceland cannot escape some share of political responsibility for the Icesave fiasco.

But Iceland was far from alone in this negligence. The political establishments of Britain and the Netherlands – indeed those of the European Union and EEA as a whole – encouraged financial deregulation and a more extensive Single Market in financial services, without almost any regard for the wholly predictable risks of large-scale economic failure.

The EU and Deposit Guarantee Schemes

The UK and Dutch authorities also failed in their duty of supervision under EU law.

Icesave in Britain was a branch not a subsidiary of Landsbanki. The European Union Directive 94/19/EC, whose inadequacy is now obvious to all, requires that EU states:

• “… shall check that branches established by a credit institution which has its head office out with the Community have cover equivalent to that prescribed in this Directive.”
  (Article 6.1)

Iceland may be a member of the EEA, but it is still “outwith” the European Community, and neither Britain nor the Netherlands fulfilled this supervisory duty.

So whether one sees the obligations as moral, political or legal, there is a heavy responsibility on the part of the British and Dutch governments.

Proportionality

Proportionality is a key principle of EU law – but one ignored by the British and Dutch governments.

In our letter to the Financial Times (7th January) we pointed out that the combined population of the UK and Netherlands is 76 million, compared to Iceland’s 317 000, and that:

• “repayment of the nationalised losses of a private bank amounts to €12 000 per Icelandic citizen…By contrast, the cost to Dutch and British tax-payers of the bail-out will be about €50 per capita.”

Not a sovereign debt crisis

The British and Dutch governments have, by political sleight of hand, given the world the impression that this is an issue of sovereign debt default.

This is quite false.

These governments chose for understandable reasons, to compensate domestic Icesavers whose deposits were at risk. They did this without consulting the government of Iceland. But from the start, they used economic and political force majeure to try to place the whole burden of compensation on to the state and people of Iceland. Only retrospectively, and through duress, was an agreement made with Iceland’s Depositors and Investors Guarantee Fund to compensate the British and Dutch governments for the cost of bailing out their own citizens.

This retroactive arm-twisting is now defined as a loan contract – even though the “loan” was not contracted at the outset by the borrower, but forced on it by the “lenders”. And the UK and Dutch governments’ fiercely desired, but missing, link of an onerous sovereign guarantee is still…. missing!

The terms

The proposed interest rate of 5.5% is particularly unfair, given that the UK’s Financial Services Compensation Service has, according to the UK Treasury, “financed its payout [to UK depositors] through a loan from the Bank of England.” ² The Treasury does not disclose the rate of interest on this loan – a rate over which it had absolute discretion. The Bank of England’s base rate is today 0.5% (1.5% in January, 2009). The ECB’s base rate was 2.0% in January 2009, yet the Netherlands government had even greater audacity in seeking, initially, interest at 6.7%!

What are the strategic options for Iceland and its people?

One option in the referendum is to accept the proposal based on force majeure, to pay the full price demanded (cuts in public services, unemployment, widespread emigration…) and hope to slowly rebuild the fabric of the economy. However this strategy will make recovery and reconstruction in the short run well nigh impossible. And in the long run, as JM Keynes argued, we are all dead!

All other options would be enhanced by a strong rejection of the UK/Dutch proposal, since the bigger the turnout for a ‘no’ vote, the stronger Iceland’s negotiating position will be, whichever option is adopted.

The dispute could be referred to the courts, to arbitration or (preferably) mediation. It is a striking feature of the story so far that the UK and Dutch governments have gone to great lengths to avoid legal resolution of the dispute, despite the Icelandic government’s constant denial of legal liability.

This may be sensible, since the 1994 Directive is badly drafted, and the outcome unpredictable for all.

Winning hearts and minds

After the referendum it will be vital that the government and people of Iceland inform and win over public and official opinion in Britain and the Netherlands, and the EU.

To date, the issues have not been clearly explained to the British and Dutch publics.

As a result, the two governments are under little public pressure to change their strong-arm tactics.

The voices of the Icelandic government and of Icelandic civil society need to be heard more loudly in more targeted campaigns in the UK, the Netherlands and EU. Coming general elections in both countries will make this difficult in the short-term, but in the long-term the Icelandic position is bound to prevail – if put across coherently.

Now is the time to spread more understanding of the issues – the shared responsibility, the flawed and excessive nature of UK and Dutch government demands, their impact on ordinary Icelandic citizens, and the positive ideas and proposals that emerge as a result of democratic debate in Iceland.

In this way we can lay the foundation for a just resolution of the dispute.

Advocacy International is working with InDefence, a civil society group of Icelandic citizens.

(1) “The coming first world debt crisis” by Ann Pettifor, Palgrave, 2006
(2)   HM Treasury Press Release, 9 October, 2009