13 August 2015

VoxEU: Iceland, Greece and political hectoring

In Iceland and in Greece the heavy pressure from foreign countries and the hectoring from their public officials was counterproductive during the crisis, hardening the opposition to any settlement.

Leaving the economics aside, here I want to focus on the political and international relations aspects, and in particular how the Icelandic Icesave dispute has many echoes in how the Greek crisis is playing out and the impact of subjecting debt agreements to referenda.

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Greece has been under continuous and very public pressure to reform its economy. Leaving aside the question of whether these reforms are needed, all the public hectoring seems to be quite counterproductive at least in terms of voter perceptions.

In their dealings with Greece, the foreign authorities have repeatedly and loudly told the Greek people they have to reform, that their way of doing things is wrong and that the way of the foreigners is right. I don't think this will work, and the recent referendum clearly suggests that voters would like to take an even harder line than their current leaders. This has ominous implications for the next election.

After all, the Greek economy was collapsing when the troika was being obeyed. Leaving aside the question of whether there is causality, the voters certainly did see one.

Referenda

Iceland has another factor in common with Greece – they are the only two countries that have subjected sovereign debt settlements to a referendum, as analysed by Curtis et al. (2014).

They argue that while the vote was supposedly about economics and Europe, it really was about domestic politics and attitude of the voters to the government. The outcomes therefore signal the political direction of the countries.

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One long-term consequence of the Icesave dispute has been the hardening of its anti-European and isolationist views. And in the subsequent national elections, the Icelanders voted in parties that had campaigned against both the Icesave deal and EU membership (Danielsson 2013), including a prime minister who built his career on the “no” vote.

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Conclusion

The lesson from Iceland is that the population will instinctively reject foreign pressure. It doesn't matter whether it is sensible or not, so long as it is imposed, it will be resisted.

If the Greeks don’t want to reform their economy, the foreign authorities wanting that for them will be disabused. The hectoring by foreign officials, who are addressing their own voters as much as the Greeks, is likely to be counterproductive.

At the end of the day, the will to reform needs to come from within, and the sooner the Troika realises this, the easier it will be to deal with the Greek situation.

Full article on VoxEU

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