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Iceland Social Democratic Alliance shipwrecked


is_government_1999_2003Five years after Iceland’s economy imploded, austerity-weary voters looked set Saturday to return the parties widely blamed for the disaster to power.” This is the opening of an article by Jenna Gottlieb and Jill Lawless. How, we may ask ourselves, can this be? Icelanders are generally considered to be intelligent and boast of a good educational system; still, they want the parties back that sent the country to the brink of bankruptcy and caused hundreds of highly educated individuals to leave the country. How can this be?

One reason is the lack of long-term vision/strategy and short-term tactics to deliver it. Elections follow rules of warfare (in this case market warfare) and there are two ways to lose a war:

  • Deploying worse strategies than the opponent.
  • Failing to have a strategy in the first place.

Not only did the Social Democratic Alliance (SDA) show lack of adequate strategic planning; tactical mistakes were made that directly contributed to the political massacre witnessed today. These mistakes include, but are not limited to:

  • Changing the party leader too close to elections. Any change in leadership is disruptive and it takes more than a couple of months for a new party leader – or corporate CEO – to settle in. Both the SDA and the Left-Green Movement (LGM) changed their party leader far too close to elections. If the new leaders had pushed for that change individually they would have been better prepared to take the reins, but as the situation was forced upon them, they were not ready.
  • Party leaders traveling to China when they should be here driving the campaign. One of the reasons the SDA won by a landslide in 2009 was its strong leadership that had incubated and evolved for years. Current leaders have not had the time to build the type of following necessary, which put them in a very unfavorable position at the start of the election campaigns (that were not really campaigns at all). The LGM, however, fared better, and the reason is:
  • Focus on a specific issue. While the SDA attempted to push too many messages across, the LGM’s newly elected party leader turned the attention to education. This internal focus countered the SDA’s external – EU – focus which happened to be more relevant in the minds of voters, resulting in minimized loss whereas the winner of the 2009 election – the SDA – was slaughtered. And that despite the fact that tax raises on households and businesses can be traced directly to the LGM.

is_government_2005The SDA appeared to wake up only days before the elections and by then it was too late. Without a strategy, the party had no way to reach voters – the target audience – with effective messages. The SDA has since 2009 become more and more isolated from the Icelandic people as it fails to keep track of what voters really want and need. The party leader of the Progressive Party (PP) exploited that weakness very skillfully; the team behind it have earned the respect of both marketing and PR communities.

This is not to say that the teams behind other parties – notably the SDA – were at fault; the party leaders are to blame for what happened as they created these problems by mistiming events and not doing their homework properly. We see similar sloppy marketing work throughout government agencies, many of which are responsible for external marketing and are making blunders that may end up costing the economy billions and result in permanent loss of market territories. Many of the so-called marketers in Iceland have only superficial understanding of how marketing really works in the big world and have little insight into the economic and market-driven layers necessary to prepare and execute international long-term strategies.

WHAT MAY HAPPEN NEXT?

The PP and the Independence Party (IP) directly caused the crash of October 2008 by irresponsible and short-sighted activities that led to a wave of bankruptcies, foreign exchange restrictions, and general economic turmoil. That they will fix it is perhaps doubtful but possible. IceStat was part of the Special Investigative Commission responsible for tracing the actual causes of the collapse (it was actually established because of it), and these two parties were instrumental players. Therefore, what we expect will happen following these elections is that:

  • Major companies that bankrupted almost immediately following the banking system collapse (and the sharp weakening of the currency – ISK) will be listed on the stock exchange again. Domestic banks are already lending 70% toward purchase of shares in these companies, which is exactly what happened in 2001 – 2008 and fueled the bubble.
  • One of these banks, Landsbanki (currently state-owned), will participate and  fund 70% shares in registered companies which leads to the formation of holding firms. This artificially inflates bank balance sheets which in turn inflates Central Bank balance sheets (fractional reserve banking is quite the monster when let lose as 2008 demonstrated).
  • Landsbanki will be privatized by the same parties that privatized it and Kaupthing (by merger with Bunadarbanki) in 2002 (Landsbanki and Bunadarbanki) and possibly merge with MP Bank. This will eventually lead to the exact same situation Icelanders faced in October 2008 when the bubble burst. This second crash, however, will be so much worse as it will compound Iceland’s already fragile financial position and that is a scenario voters may not have considered when they went to the ballots.

If these elections told us anything, it is that Icelanders learn nothing from past mistakes. The blame is not with the voters; it is with the SDA and LGM that completely failed to take decisive lead and walled themselves in illusory ivory towers that have now come crashing down. The new regime comprised of the PP and IP will undoubtedly start with a bang by lowering taxes and getting the investment market back on track, but the methods used have to be closely monitored or Iceland may well be facing the end of its era of independence. That is what may happen; it is our responsibility to make sure it doesn’t.

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5 Comments

  1. Addition April 28: Turns out the Left-Green Movement didn’t fare so well after all. On the upside to this election is that businesses may now get support through the tax system and that is well overdue.

  2. Gregor McGee says:

    I’m American so I don’t understand– why does the social democratic party favor austerity? I thought that was more of a centrist or center-right policy, you know– laissez-faire. So why are the liberal parties in favor of reducing austerity? Wouldn’t they be the ones who’d want to reduce spending, and the social democrats to increase spending?

  3. Hi Gregor and thanks for the comment,

    There was really no other way to go about it. Iceland was almost sunk by debt and the only way to secure IMF loans was to reduce government spending. It was either that or go broke. Iceland still has a major debt problem – Glacier bonds – hanging over its head, but reducing austerity may be viable nonetheless and actually necessary.

    Less government spending means less work for all; the government is basically the largest buyer of goods and services. In a small economy like Iceland with a consumer market of 320 thousand, a large player like the government can send hundreds of businesses straight into Chapter 11 by reducing expenditure. The ripple effect is increased unemployment, less taxable revenue (household and corporate) and slower economic growth.

    That said, the promise to reduce austerity – whether it will actually be done or not – helped win the election. Unfortunately, Icelanders are exceptionally gullible at times. Did this answer your question?

  4. Gregor McGee says:

    Yes, it did answer my question; thank you very much!

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