Apart from such structural factors as the restrictions posed by its membership of the eurozone, there are also some other factors that make it hard for Greece to copy the “Iceland model”.
For example, most debts on which Iceland defaulted were private bank loans, whereas the debts Greece wishes to default on right now are mostly public loans.
In other words, while it was the private banks that were heavily in debt in Iceland, it is the government itself in Greece which is unable to honor its debt liabilities.
The Iceland debt crisis in 2008 mainly had its roots in the overexpansion of its banking sector and rampant high-risk private loans. A year before the outbreak of the crisis, the book value of the total assets of Iceland’s banks was eight times greater than the country’s GDP.
The subprime mortgage crisis of the United States that finally led to the global financial tsunami in 2008 turned out to be the last straw that broke the camel’s back as Iceland’s banks were unable to get financing from the international market, leading to their bankruptcy.
However, the factors behind the current Greek debt crisis are far more complicated, and can be traced back to the long-standing financial “black hole” of the Greek government which had already existed even before it joined the eurozone.
While the Iceland government found its way out by restructuring its three largest banks and declaring them insolvent, there is almost nothing the Greek government can do.
Besides, cultural differences play an important part here too. Like its northern European counterparts, Iceland is a Protestant country, and they share the same cultural identity, which explains why Iceland was able to reach currency swap agreements with Scandinavian countries without much difficulty.
Moreover, as scholars like Brent F. Nielson have pointed out, Protestant countries tend to be more receptive to financial discipline and are more willing to enforce austerity measures in times of financial difficulties.
In contrast, as an Eastern Orthodox country, Greece seems to have more historical connection with Russia than with Western European countries, and is to some extent always wary of the EU, especially Germany, even though Greece itself was the first Eastern Orthodox state to join the EU.
Eastern Orthodox countries, including Greece, are often ambivalent about the expansion of the EU into Eastern Europe. On one hand, they are worried about the invasion of western Christian and Protestant culture, but on the other hand, they are eagerly taking advantage of their EU membership to gain economic benefits and bring back their European identity.
However, when it comes to making tangible contribution to the EU, these countries are often not quite willing to do so.
As academics like Daniel Philpott and Timothy Samuel Shah have pointed out, these countries are often “free riders” in the EU, and never regard themselves as responsible members wholeheartedly.
When the economic benefits suddenly vanished in the wake of the European debt crisis, and the International Monetary Fund and the EU were both turning up the heat on Greece by forcing it to adopt austerity measures, the Greek society was getting increasingly irritated about the EU and Germany, and was even becoming hostile to whatever the IMF and the EU proposed.
Therefore, even if the “Iceland model” is implemented in Greece, it is unlikely to work.
After all, Greece has a population of over 10 million, while Iceland has only 300,000, and the scale of their economies are hardly comparable.
Besides, Iceland is rich in natural resources and is among the leading countries in the world in the development of new energy sources, whereas there is nothing much to generate growth in Greece apart from tourism and speculative investments.
Therefore, I don’t see any light at the end of the tunnel for Greece at this stage.
The article appeared in the Hong Kong Economic Journal on Sept. 10.
Translation by Alan Lee
[Chinese version 中文版]
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