April 11th, 2011
12:01 PM GMT
The Icelandic people are known for their independent nature, isolated at the northern tip of Europe, but their second “no” vote on bailing out investors from Britain and The Netherlands will keep them entangled in European courts for a long while.
There are only 320,000 citizens of Iceland, but they continue to punch well above their weight in their desire to reject a bailout of nearly $6 billion “foreigners” who invested in the on-line division Icesave of Landsbanki.
During the go-go days of the Icelandic real estate boom, the country’s banks were offering well above the going rate for savers, 6% at the time. This lured in not only the so-called average investors of the U.K. and The Netherlands, but local city council investment managers as well.
After the crash, and facing political heat from a Northern European deep freeze in relations, the British and Dutch governments stepped in and bailed out their citizens and went to Iceland to collect their funds. What was an original plan agreed to behind closed doors was put to a referendum twice in Iceland. Both times the terms were rejected by voters.
Not surprisingly, local politics have a role to play as well. Iceland’s President Olafur Ragnar Grimsson used one tool of his largely ceremonial position to intervene and block the center-left government from paying out these sums – even though repayments terms were stretched out over many years.
While President Grimsson and the nearly two-thirds of people who voted "no" may be pleased, it could eventually scupper or at least complicate plans to join the European Union. Iceland now belongs to a limited membership club, the European Free Trade Association or EFTA. Lichtenstein, Norway and Switzerland are Iceland’s three other partners of EFTA.
One may read between the lines here – they all share a similar trait of being ardently independent minded. Some have benefited from that trait, such as Switzerland, with a flood of funds coming into the banking sector while the EU sinks in a sea of debt. Iceland, after its banking and real estate boom and bust, probably has not.
There remains a deep divide on the path ahead after the "no" vote. British and Dutch officials have pledged legal action. This case will likely be heard in Luxembourg in the EFTA court – a venue most did not think existed.
But this vote reveals something bigger about the shortcomings of Europe – whether it is the EU or EFTA. The banking sector has long been protected by national governments and the single market directive within the EU has left a lot to be desired. As a result, instead of treating investors as Europeans, the laws may have kept national boundaries in tact and the British and Dutch governments in this case out in the cold.
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