affaires civiles - nato-pa.int - 23… · web viewfrom 26-28 september 2012, 11 national...
TRANSCRIPT
ECONOMICS AND SECURITY
236 ESCTER 12 EOriginal: English
NATO Parliamentary Assembly
SUB-COMMITTEE ON TRANSATLANTIC ECONOMIC RELATIONS
(ESCTER)
MISSION REPORT
ICELAND
26-28 September 2012
International Secretariat November 2012
This Mission Report is presented for information only and does not necessarily represent the official view of the Assembly. This mission report was written by Paul Cook, Director of the Economics and Security Committee (ESC).
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I. INTRODUCTION
1. From 26-28 September 2012, 11 national parliamentarians from 9 NATO member countries visited Iceland. The primary goal of the visit of these members of the NATO Parliamentary Assembly’s Sub-Committee on Transatlantic Economic Relations was to explore Iceland’s perspective on the rapidly changing environmental, economic, and security situation in the Arctic and to gather a better understanding of how Iceland is rebuilding its economy after a serious financial crisis pushed it to the brink of default. Over the course of the visit, the delegation met with political leaders, academics, top civil servants and representatives of the country’s business and scientific communities.
II. STRATEGIC, COMMERCIAL AND ENVIRONMENTAL CHALLENGES IN THE ARCTIC
2. Iceland cannot but be effected by the growing global interest in the High North. Some thinkers see the North as becoming an ever more strategically consequential region as a result of global warming and changing population movements. The ever rising demand for energy, driven in part by the development of China and India, will invariably lead to more energy exploration in the region both on and off shore - a trend rife with strategic, economic and environmental implications. 3. When commercial activity in the region increases, Iceland could offer a range of port services and play a more central role in global distribution networks. If Greenland becomes a center for mineral and energy extraction, Iceland would very likely play a very important role as a transportation and storage hub for firms operating there. This is an opportunity that most Icelanders seem to welcome. On the security front, Iceland recognizes that growing international interest in the region could raise the security stakes there as well. But it also seeks to advance the idea that the region ought to be one of international cooperation rather than tension. The government wants to avoid a kind of great game in the High North and reduce any risks of conflict and accident. Still there are outstanding concerns about Russia’s military build-up in the region among several littoral countries, and Iceland has expressed concern about Russian military aircraft patrols in the region which it sees as a nuisance and potential danger to civilian air traffic. That said Canada and Norway have also bolstered their Arctic military presence and capabilities in recent years. Iceland would like to see a more active NATO presence in the region, but understands that some Allies are opposed to this.
4. Arctic ice cover has never been as reduced as it was on 16 September 2012. The ice sheet is rapidly shrinking and this not only raises serious concerns about global warming and its potential impacts, it is opening up the High North to unprecedented commercial activity. It is also triggering important disputes over control of the seabed. Russia and Denmark, for example have conflicting sovereignty claims over the Lomonosov Ridge.
5. The UN Convention on the Law of the Sea (UNCLOS) provides a vehicle for managing this and the Icelandic government considers this Convention absolutely vital across a range of sectors. In the view of Iceland, the UNCLOS has helped instill the region with a spirit of cooperation, in part, by regulating natural competition. Although it has not ratified that Convention, the United States has said that it will nevertheless work to comply with its provisions. Under these provisions, Iceland claims roughly 1 million square kilometers of the continental shelf although there are potential disputes to these claims.
6. Warming waters have also altered the migratory patterns of fish, sometimes with international consequences. Mackerel, which once swam in British waters, have now moved into Icelandic waters and this has obviously posed problems for the Scottish and Irish fishing industries. A warming climate is also bringing more tourists into the waters of the High North. This poses a range or problems as the region is not properly mapped and patrolled. The influx of
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people into the region could eventually pose security challenges as well. Iceland is concerned about large ships starting to move between the country’s West coast and Greenland and its preference would be for shipping to keep to the South.
7. It is also interesting to look how various Arctic countries are prepared to cope with rising opportunities in the region. Canada is in a very strong position. It has a strong demographic outlook, abundant natural resources and incentives to operate in the region. The Northern United States has strong demographics but it has fewer resources than Canada and Russia. Russia has the best resource outlook but has poor demographic trends and poor incentive systems. Iceland has strong demographics, decent natural resources but its incentive outlook is not strong although it is likely to improve. Norway has very good natural resource endowments, fairly strong incentives, but its demographic outlook is not particularly rosy. Sweden and Finland have poor demographic prospects, relatively strong incentive systems but only limited natural resources. Denmark has a demographic profile similar to Norway but has strong incentive systems and enormous potential resources in Greenland.
8. China is seeking to bolster its role in the region and some have seen the attempt by a Chinese entrepreneur with strong connections to the Chinese state to purchase 300 square kilometers of land in the country’s North as part of this strategy. This deal has collapsed although that entrepreneur is now trying to lease this land, and, in the eyes of some, he is also working to manipulate local communities.
9. Iceland has sought to develop a holistic approach to the Arctic which encompasses commercial, environmental, cultural and strategic considerations. It recognizes that if anything, the scientific community has been conservative in estimates of the pace and degree of change in the region. More study is needed because these are inordinately complex environmental systems and the stakes are very high. Iceland has signed bilateral agreements with Norway, Denmark, Canada and the UK on regional cooperation across a range of areas and it has also signed a declaration on Arctic cooperation with Russia.
10. Icelandic authorities believe that Russia has been a responsible player in the Arctic and is very open to forging cooperative partnerships. Russia’s strategic concerns are perfectly understandable given that a large swathe of its territory lies in the High North and that it has extraordinarily valuable and commercially exploitable resources in the region. Iceland’s bilateral defence agreement with the United States remains valid and there is now a joint declaration on search and rescue as well. NATO itself is increasingly engaged in disaster relief cooperation and its assets provide broad situational awareness that can help cope with these kinds of challenges.
11. Iceland has reinforced its coast guard to ensure that the country is an active and reliable contributor in the very harsh seas off of its coast. The Coast Guard is engaged in search and rescue, maritime surveillance, environmental response, maritime traffic management, and ice, volcano and pollution research support. It also administers an air defense system and four radar stations supporting aerial search and NATO air surveillance. It has also worked with Frontex and recently participated in the Sarex Arctic Search and Rescue Exercise off the coast of Greenland.
12. Global warming is clearly transforming the region’s commercial landscape. Russia is now opening up to foreign investment in the High North and seems very intent on developing its capacity to exploit its resources there for commercial gain. China is the world’s most important trading country and it has a very clear stake in shorter shipping lanes. These could become a reality if summer melting accelerates, although there are myriad concerns about opening these routes to commercial shipping. A northern route would shorten the distance for ships travelling between Europe and China by 40%. China is also keen on gaining access to a broad range of raw materials and energy. Other Asian countries are also showing interest in the region. Iceland has noticed a very perceptible increase in Asian interest and this could present commercial
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opportunities as well pose a range of risks. At the same time, however, much of the Arctic lies in firmly established exclusive economic zones, and this limits competition to a certain degree. Iceland itself promotes regional cooperation while defending its interests as a coastal state on the edge of the Arctic. It wants to avoid militarization while safeguarding its marine industries which are the backbone of the national economy. Sustaining fish stocks is vital. It therefore seeks sustainable Arctic development as well as political stability across the region. Iceland sees the Arctic Council as the key forum for cooperation and it wants this cooperation formalized as it was in the recent search and rescue agreement.
III. MEETING WITH THE PRESIDENT
13. The delegation had an opportunity to meet with President Ólafur Ragnar Grímsson. He opened the discussion by talking about Iceland’s long struggle for independence from Denmark. At the time of its independence, he noted, few would have imagined that Iceland would one day assume a position on the global stage. But the country has become an important international actor because of its focus and its talented people. Iceland has had to cope with a very difficult economic crisis and its people have suffered as a result. But this experience has strengthened the country and it has managed to come through the crisis more quickly than originally imagined. He stressed that Iceland is now well on the road to recovery. 14. President Grímsson discussed how climate change was opening up the region to increased commercial activity and the potential implications for Iceland. He noted that the Arctic is entering a new era and that the Arctic Council has become a vital forum for international cooperation in the region. Interest in its work is hardly limited to the littoral countries and countries like China and Singapore are keenly following deliberations in the Arctic Council because of the potential impact on their own interests. He noted that even climatic change in the Arctic has potentially important implications for Asia weather patterns. This is why Chinese and Indian scientists are studying change in the High North. Rising seas linked to warming pose another set of challenges for Asia as well as for the rest of the world. He suggested that Iceland might be prepared to extend China permanent observer status in the Arctic Council, but there is currently no consensus among the Arctic states to do so. He noted that the Arctic had been a highly militarized region during the Cold War but it now is seen as a region of international cooperation. This is not a coincidence. It is the product of a great international effort to develop common approaches to Arctic stewardship, boundary making, commercial activity, search and rescue and security broadly defined. The President mentioned how a group of Germans on a boat passing through Arctic waters stopped in Alaska without any passport controls. This event raised broad concern in the United States about how borders in the region will be managed in an era of melting ice and increasing traffic.
15. On the prospect of EU Accession, President Grímsson said he was not yet convinced that his country should move too quickly in this direction. He described EU fisheries policy as a failure and noted that Iceland would want nothing to do with that system as it currently stands. He noted that fisheries policies should be tailored to particular regions and that having the same approach in the North Sea and the Mediterranean made no sense.
IV. THE FISHING INDUSTRY
16. Iceland has long had a powerful fishing industry and it remains one of the pillars of the national economy. Efforts are underway to build up so-called Ocean Clusters representing the whole value chain of the industry including research and development, ocean tourism, biotechnology, aquaculture, ocean transportation, shipping technology, marketing, distribution and ocean surveillance. These are sectors in which Iceland has or is positioned to develop natural comparative advantages. There are an estimated 60 small export oriented firms working in these sectors. The idea is to make the national economy less dependent on fishing and thus more broadly based in these other related industries. While the fishing sector generates roughly
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10.2% of GNP, the Ocean Cluster contributes roughly 26% with additional indirect effects. This is therefore a very important sector for Iceland and one with growth potential. There are also a number of efforts to increase the productivity of the fishing sector itself including an effort to improve utilization rates and increase value added.
17. Iceland is also very skeptical of EU fisheries policies and frankly sees these as highly ineffective. The fishing companies worry that accession would result in a decline in their fishing quotas. This chapter in the accession talks has yet to be opened up. Iceland runs its own quota system, which includes divisible and individual quotas, transferability, surveillance and other enforcement systems, and fishing fees. Currently fishing licenses are not auctioned although this idea has been discussed. A catch rule has been in place since 1995 and regulators seek to base quota policy on good science to prevent overfishing and best practices in fishing stock management. The system operates without subsidies.
V. THE GEOTHERMAL INDUSTRY
18. The delegation had an opportunity to visit at Reykjanes Geothermal Plant for a discussion about Iceland’s energy strategy and the role of geothermal power in the national energy mix. The speakers discussed the features of the plant and explained how electricity can be generated in this unique volcanic setting where it is relatively easy to convert water to steam which, in turn, drives the turbine engines of the power plant. Geothermal electricity is very clean, it is highly secure and it is cheap in Iceland which has abundant water and hot rock. This is an important asset for the country, and cheap electricity is one of the primary reasons that Iceland is able to sustain a relatively large aluminum industry which produces one million tons of aluminum a year. Iceland is the world leader in exploiting geothermal energy and it hosts hundreds of visitors each from other so called “red zones” to share this knowledge.
VI. THE ICELANDIC FINANCIAL CRISIS
19. There has been much written on Iceland’s financial crisis and much of this has been misleading. Journalists from around the world have “parachuted” into the country, made very cursory judgments about the situation and produced inaccurate articles. That said, the crisis had a devastating impact on the national economy and has had a range of social and political implications which are still being sorted out. The events that led to the 2008 winter of discontent were dramatic and included the collapse of the banking system, the near bankruptcy of the state, sharp falls in household income and very serious political turmoil. It is important to note from the outset that in the run up to the crisis, the banking sector in Iceland had grown to nine times the size of the national economy and this left the country extraordinarily vulnerable to a down turn in that sector.
20. The crisis was discussed in some details with an economist and an historian, both of whom chronicled the crisis as it unfolded. Below is a summary of the points these two speakers made in their presentation.
21. One would need to go back twenty years to begin to understand the origins of this crisis. Joining the European Economic Area (EEA) suddenly opened the country up to capital mobility, which ultimately proved very difficult for Iceland to handle. When large volumes of capital flowed into such a small country, bankers were hard pressed to look for lending opportunities. Capital inflows also trigger currency appreciation and this leads to import booms. In the case of Iceland there was also a boom in housing prices, which only set off further funds of international capital inflows, speculative property purchases and rising individual debt. Asset prices soared and few were willing to contemplate that this was invariably a short-term phenomenon.
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22. In 2000, there had been a strategic decision to make Iceland a banking center in order to create another pillar to an economy that had long relied on the fishing and aluminum sectors. Banking regulations were relaxed, banks were privatized sometimes in an opaque and dubious fashion and the government sought to promote Iceland as a great place for the financial sector to ply its trade. The problem again was that this sector was far too large for such a small country, which, moreover, had no history of overseeing a dynamic banking industry. It was a classic example of how the powerful forces of international capital can overwhelm the institutional capacity of small countries. Exacerbating the problem was that when the banking system finally collapsed, Iceland was virtually alone in managing the fall-out. It had not joined the European Union, and, the United States, which had withdrawn its military forces from Iceland as part of its post-Cold War restructuring, had no interest in “back stopping” the country as it would like have done in a Cold War setting.
23. According to one speaker, there has been much discussion in Iceland about who was to blame for allowing an unsustainable economic structure to emerge. This has been ascribed to capitalism, greed, general arrogance, the nature of the business community, flawed regulation, the ratings agencies, attitudinal changes linked to generational change, the thin national currency, and poor political oversight. All were certainly factors. But most clearly, there was a general failure of banking sector oversight and very little scrutiny over what was transpiring. The problems were structural but there was also a problem of hubris and the assumption that the country could manage these capital inflows. Indeed, Iceland’s explosive growth came to be seen as something that was almost inevitable and as the economy took off, led by an unleashed banking sector, few seemed interested in asking whether this was sustainable. This is why the government’s announcement in 2008 of an emergency law to cope with the crisis proved such a shock. For a certain period thereafter many continued to see the country as a victim rather than as responsible for what transpired. This shock was evident in the so-called Pots and Pans revolution which was largely peaceful although there was a potential for real violence given the anger and sense of desperation that became apparent once it was clear how serious the problems had become.
24. Political change was one consequence of the crisis. The center right government fell and was replaced by a center left coalition. This government has had to clean up a financial system which had essentially collapsed. It has worked with the International Monetary Fund (IMF) to develop a stabilization plan and applied for EU membership in 2009. IMF assistance was unofficially linked to solving the problem of the debt of the internet savings bank, Icesave. This was a case where the Icelandic state refused to compensate British and Dutch citizens who had lost their savings in what proved to be a very dubious internet bank. A public referendum in Iceland has confirmed this decision. The case is currently before the European Free Trade Association Court and has been a source of tension between Iceland, on the one hand, and the United Kingdom and the Netherlands on the other.
25. Three years after the explosion of the crisis, the situation in Iceland has improved in a surprising fashion. Bankruptcies helped reduce the burdens of an over-leveraged economy. German banks and other foreign institutions lost a great deal of money in this process. According to the speaker, these institutions bankrolled the onslaught of speculative investing in Iceland so it was proper that they pay part of the price associated with the collapse. Moreover, because Iceland never formally defaulted, its credit rating did not suffer as much as it might have. Indeed, the government had paid down the public debt in the boom years and this left it in a much stronger position than it otherwise would have been in had it continued to borrow. The stabilization program has been successful insofar as public finances are now on a sustainable track and the banking system has been appropriately downsized.
26. Today Iceland’s economy is growing at roughly 2.5% and investment, exports and consumption are all rising. An IMF program has supported monetary, fiscal and debt
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restructuring. Fiscal deficits are now falling while capital controls continue to prevent capital flight. It is important to recall that prior to the crisis, businesses in Iceland took on enormous levels of debt denominated in foreign currency in order to purchase domestic assets. Right now capital controls are keeping some of this capital artificially in Iceland. The fear is these controls lifting them prematurely would trigger massive capital flight and result in another recession. The challenge now is to find a way to end these controls gradually.
27. The opposition points to the ongoing problem of debt, the lack of agreements on investment, plans to control the fishing industry, the failure to resolve the Icesave dispute and EU accession as problems that the current government has not properly addressed. These issues are all fodder for coming elections. Emigration is another challenge as there are concerns that failure to return to healthy growth is triggering an outflow of talented young people from this small country.
28. Not surprisingly, the financial crisis has colored Iceland’s perspective on a range of domestic and international issues and it has compelled the country’s political leaders to rethink how Iceland ought to position itself in the world. The crisis revealed the country’s vulnerability to external shock and efforts are now underway to reflect on ways to reduce that vulnerability.
29. Perhaps the most important issue on Iceland’s political agenda is the question of whether or not it should accede to European Union membership. This is a divisive issue in Iceland and different constituencies have very different outlooks on this matter. Again, the sharp impact of the financial crisis has left Icelanders with an acute sense of financial vulnerability. The country has had to confront the collapse of the national currency without external support. The purchasing power of Iceland’s consumers fell by 50%. At the same time, 70% of corporate loans were denominated in foreign currency, inflation jumped by 30% and since household debt was linked to inflation, the impact on the public was immediate and severe.
30. The government responded to this by slashing expenditure while seeking to defend a minimum level of benefits including basic pensions. Iceland’s response did not conform to a typical IMF designed program which would have demanded more draconian cuts. The feeling in Iceland is that this would have caused unemployment to soar. At the same time though, a Keynesian response was not possible because Iceland had essentially lost access to the sovereign bond market and had no reserves to underwrite an expansionary policy. Those European countries in crisis, at least, have had access to other resources to help mitigate some of the effects of the crisis.
31. Iceland’s government wrote down corporate debt instead of demanding that unrealistic levels of debt continue to be honored. The picture in Europe has been much more variegated. In the UK household assets have fallen significantly while in other countries, levels of municipal debt have soared. The UK today seems only to be feeding its creditors and investment is falling. Iceland has sought not to socialize losses and it did not issue guarantees to creditors. The government has also resisted demands from the middle class to have the state finance its debt. The state has also sought to exercise strong control over the banks.
32. Iceland is now applying for membership in the EU and the Eurozone, although a final decision has yet to be taken. The government feels that it no longer makes sense for it to administer the smallest floating currency in the world. The view is that while the Euro has certain flaws, they are less compelling than the problems associated with administering the Icelandic Krona. Iceland is having difficulty attracting foreign direct investment due, in part, to the exchange risks investors might have to assume. The aluminum sector has been exempted from these risks as this is a dollar denominated sector. In other sectors, rapid currency fluctuations are very difficult for investors to manage.
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33. Iceland has a deep and ongoing relationship with the EU. It is already participating in the EU’s four freedoms but is not participating in agricultural, fisheries, monetary and justice programs. These are the primary issues that have to be dealt with in the accession process. There is a feeling among some that Iceland could benefit from joining the Euro and being part of a deeper banking union which would give Iceland a credible lender of last resort.
34. Accession, however, remains a divisive issue in Icelandic politics. The country applied for EU membership in 2009 with conservative and far left groups opposed to accession. The issue cuts across some traditional political lines and there also appears to be a rural/urban split. Many on the conservative side would like to see a conclusion of negotiations followed by a national referendum to determine if accession should be consummated. If the vote were held today, it is likely that the opponents would prevail, partly because of the Euro crisis and also because it is felt that European fisheries policies would work against the interests of this important sector in Iceland itself. Public opinion in support of accession has been sliding in recent months, but this may not be indicative of a long-term trend.
35. Still there is a sense that meeting various criteria for membership, including the Maastricht criteria, ought to be a goal for Iceland whether or not it decides to accede. Those advocating membership also worry that Iceland will not be able to ease up on strong capital controls without joining a larger currency area. If capital controls were to be lifted now, a massive capital outflow would occur and throw the national economy into crisis. On the other hand, Iceland has benefitted from devaluation—an option which neither Greece nor Spain has enjoyed.
36. The departure of the American military in 2006 has had an important psychological impact on the people of Iceland. It left the country more isolated as the ties with the Americans had been very deep and were embodied in the American presence on the island. Trade between Iceland and the United States is very low (the US purchases only 4.5% of Iceland’s exports and US exports constitute roughly 8.1% of Iceland’s imports). That said, the bilateral defence pact between the two countries remains in place as well as the general Alliance security commitments. Many Icelanders have subsequently come to the conclusion that their destiny ultimately lies in Europe. This view though is not entirely shared in Iceland. Still, EU membership remains a priority for most of those supporting the government and for some in the opposition.
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