Iceland’s Gudbjartur Hannesson puts people’s welfare first during the crisis

Next year Iceland’s revenues will cover the state expenses. The country will begin repaying its debt with interest during 2013/14. 2011’s expected 2.5 percent growth rate is better than the expected growth in other European countries, but restitution takes time.   

“I don’t think things are moving fast enough,” the Minister for Welfare Gudbjartur Hannesson tells the Nordic Labour Journal. 

Private sector investments are slow to gather speed. The government’s promised debt relief is well underway but many families and businesses are still waiting for help. Unemployment is slowly falling but the number of long term unemployed is rising. Young people with low education are most at risk. This is worrying and the minister has taken action.

The social partners say they could have helped the country reach four percent growth if the government had followed their advice on how to increase economic activity. 

Managing Director at the Confederation of Icelandic Employers Vilhjálmur Egilsson still had a satisfied smile when I admired the view from his office - the nicest office in the whole of Reykjavik he said. Two out of four walls are glass. Blue skies, sea views and boats gliding along the horizon left a grand impression. 
  

But the views from the Minister for Welfare’s office can compete. He is not only close to the sea and harbour, but he can also see his home turf in the distance. “See the houses over there? That is Akranes. That’s where I come from,” says Gudbjartur Hannesson while pointing.

It’s hard to say whether this closeness to his roots, his home village and the sea - which always has been crucial to the Icelanders’ welfare - has also coloured his approach to politics. But securing the welfare system during the crisis has remained a main objective while the belt has been tightened considerably elsewhere. It’s been not only his objective but that of the red/green government coalition and a cross-political majority in the Allting (parliament).

Gudbjartur Hannesson has been following booms and busts from his position as a politician. He won a seat in parliament for the Social Democratic Alliance in 2007. In September 2010 he was appointed Minister for Social Affairs and Health and was charged with merging his department with the Ministry of Labour and create a new Ministry for Welfare from January 2011. He has nearly half of the state budget at his disposal to look after the Icelandic people’s work, health and welfare. It’s a clear mandate.

“We will keep and strengthen the welfare system. We will reduce the differences that emerged during the boom. The instability and rioting we see in many countries now is to a large extent rooted in an unfair division of common public goods. We will work against that,” he says.     

He has seen that Icelanders too will be heard when they loose their trust in the authorities. They took to the streets and forced the then Prime Minister Geir Haarde to step down only days after his historic 6 October 2008 TV address in which he told the Icelandic people that their banks were bust and the country in crisis. Iceland’s debts would turn out to be some 14 - 15,000 billion Icelandic Kronur (€85-90bn) or ten times the state budget. 

As Geir Haarde ended his address to the nation with ‘God save Iceland‘, panic broke out. In two days shops had sold out of freezers and people were queuing up to stockpile food. It was the start of a downturn which would also see many individuals and companies go bust, and many are still trapped by debts.   

Icesave

Since then Icelanders have twice voted no in referendums on the government’s proposals for the Icesave agreement with Great Britain and the Netherlands. It is now up to the court of justice of the European Free Trade Association (EFTA) to determine whether Iceland can refuse to pay parts of the online bank’s debts according to the wishes of the two countries. Gudbjartur Hannesson led negotiations on Icesave and presented as many as three separate proposals, he says.

“We reached broad agreement on the changes which formed the basis for the first deal, and it was passed in the Allting and by the President, yet turned down by Great Britain and the Netherlands - so negotiations continued. The second and third proposals were put to referendums and both were turned down by a large majority.”

How does the word Icesave make you feel now?

“Nothing in particular,” he says, while maintaining there is no prestige in this for him. But Icesave has become a symbol of freedom for many, he thinks. 

“I felt we should settle our bills and that it was important for the international trust in Iceland. All along it’s not been clear whether we were legally bound to do this or not. The EFTA court will answer that.”

Did he consider his position? How could the government stay after the people had said no?

“We didn’t stake our posts on this. We cannot have referendums if it means the government must fall when public opinion turns against it.”

The captivating view through his office windows gives a cinematic effect. Things are happening all the time and the changing visual impressions provide drama even when the seas and harbour are not stormy. It’s like a metaphor for greater things. Sunshine and calm seas, but undercurrents of disquiet.

“Of course it’s hard, the crisis has dealt a blow to everyone in Iceland. My family, my neighbours, people I meet in the street and I know that many have been hit hard. That’s why it has been so important to protect the welfare state first before we started cutting budgets.”

Not everyone is pleased with the progress so far. Iceland’s Home Coalition, which fights for those who are hardest hit by the debt crisis, has gathered 18,000 signatures to get rid of the inflation index-linked loans which caused many homes to face severe problems when inflation skyrocketed, says Andrea Jóhanna Ólafsdóttir. When inflation reached nearly 18 percent the inflation-linked loans also increased by 18 percent. 

The government has approached this problem by saying no-one should have loans which are larger than 110 percent of the value their home had before the crisis. The government offers remortgaging deals via the new banks and via the housing financing fund ‘Íbúðarlánasjóður’, but the process is slower than desired.

“But the Home Coalition wants to get rid of the entire system,” says Andrea Jóhanna Ólafsdóttir.

“The government is working on changing the inflation-linked loan system, but we are yet to find a good solution,” says Gudbjarthur Hannesson.

Tempting Euro

A weakened Icelandic Krona has helped the country through the crisis, import is limited and export revenues have increased, but individuals and companies have become debt victims.  

“We need a stronger currency. The Icelandic Krona is far too weak and exposes a small country to speculations.

“The banks were playing with the Icelandic currency before the crash. Now we’ve created a much stricter set of regulations,” says Gudbjartur Hannesson, who also speaks warmly about the Euro. 

“A stronger currency, like the Euro, is the most important argument for joining the EU. That would mean we would avoid the large inflation fluctuations.”

Challenging parties

The Managing Director at the Confederation of Icelandic Employers Vilhjálmur Egilsson challenges the Minister for Welfare Gudbjartur Hannesson and the government on more than the views from his office. 

The alliance between the social partners can challenge any position of power. Employees, employers and the state all contribute to independent occupational pension funds. Over the years they have come to be worth some 2,000 billion Icelandic Kronur (€12bn) out of which 400 billion Kronur are invested abroad. This can play a powerful role. 

When the social partners grow impatient the pension funds are one of the things they want to make use of. The crisis has put Iceland back five years. Today the Icelandic economy is on the same level as it was in 2004/2005.

If the social partners had it their way growth could reach four percent as early as this year, and not 2.5 percent as forecast. They want to speed up hydro-electric and geothermal projects - Iceland is rich in both energy sources - which would offer the aluminium industry cheap energy needed to invest in a new aluminium plant in Reykjanes. They also want to use pension fund money to build roads in joint venture with the state, using toll roads to pay back into the funds. There is also conflict surrounding the government’s planned changes to fishery quotas. 

The misgivings over the speed of change and the chosen solutions are such that I wonder whether the head of ASI (Iceland’s Confederation of Labour), Gylfi Arnbjörnsson, who organises 63 percent of Iceland’s workers, actually wanted to be in the prime minister’s shoes when I met him. But no. This is the Nordic three-party cooperation. Which means the trade unions have influence, he said. Yet the question remained when I later met Minster for Welfare Gudbjartur Hannesson.

They are strong and want to exercise power? Is the Minister for Welfare being challenged?

“I don’t see it that way. It’s not a question of competing for power, but to discuss solutions, and we don’t always agree there. But we have cooperated in a very good and useful way throughout this period,” the Minister for Welfare says. 

He is also impatient to help small and medium businesses with a chance of survival to get out of their debts so they can start producing and hiring people again. According to the Central Bank of Iceland’s first quarterly report for 2011, 37 percent of small and medium Icelandic businesses defaulted during the crisis. They do not have money to repay their debts. 

“Many of these businesses have only ever existed on paper, created to avoid paying taxes. But there are also many good businesses that need to have their debts cleared, and for these the banks need to speed up things,” says Gudbjartur Hannesson, while underlining the need to create jobs. 

Unemployment is a big problem. Iceland’s unemployment rate is seven percent lower than the European average, but long term unemployment is rising and covers 60 percent of the unemployed, hitting young people worst.

“We risk a lost generation,” warns the Managing Director at the Confederation of Icelandic Employers Vilhjálmur Egilsson. He fears the future labour force will have less access to working life, but also that businesses will not have access to people with the skills they need. 

Now the social partners want to take on the role of the state job centres themselves in cooperation with local trade unions and match jobs to workers. In addition to the pension funds the social partners have build up a vocational rehabilitation fund over the past few years to help people with disabilities stay in the labour market, and an education fund for training and skills creation aimed at securing skills and preventing people from falling outside of the system. Such measures also help keep employers’ costs down and contribute to make the workers’ pension funds last for future pensioners.  

This could also be interpreted as the social partners taking over part of the public welfare system. The latest collective agreement, concluded in June and due for renewal in 2014, saw the partners agree with the government to take over 25 percent of the work of finding people jobs during a trial period. The project has yet to be realised.

“As head of the Directorate of Labour I must say that anything which gets more people into jobs is good. How this is thought to happen I don’t know,” says the head of the Directorate of Labour Gissur Petursson somewhat sceptically. 

Professor of Sociology and welfare researcher Stefán Ólafsson sits on the Directorate of the Public Social security Institution. He is also sceptical. He is against a privatisation of the welfare system, he says.

Does the Minister For Welfare want privatisation?

“No, that is a misunderstanding. This is a trial project which will be established during the autumn and it will happen with the cooperation of the Directorate of Labour.”

According to the parties there is a mismatch in the labour market. Businesses need labour but can’t find the skills they need, while unemployment remains high and long-term unemployment digs in. 

“That’s why we believe we can do the job better than the state job centre,” says Vilhjálmur Egilsson, CEO at the Confederation of Icelandic Employers. 

The Minister For Welfare thinks this is worth trying. 

What is the most important lesson the crisis has taught you?

“The most important lesson is that the belief that the free market will find the best solutions has been proven wrong. The market does not work like that. We need good regulation and strong laws to stop criminals and others from exploiting the system. We had far too few rules, and that makes it extra difficult when we try to solve the problems.

“We have also learned that a state welfare system is incredibly important and a prerequisite for a healthy working life,” Iceland’s Minister For Welfare Gudbjartur Hannesson tells the Nordic Labour Journal.