The Cold Shoulder: Iceland and the UK Spar over Debt

By Villa, Emily | Harvard International Review, Winter 2010 | Go to article overview

The Cold Shoulder: Iceland and the UK Spar over Debt


Villa, Emily, Harvard International Review


For decades, Iceland and the United Kingdom have enjoyed a relationship of admiration and mutual respect. Icelanders have long frequented Great Britain for its shopping and culture, while young UK citizens often vacation among their Nordic neighbors. Until recently, no significant conflict between the two countries had occurred since disputes over fishing rights in the 1970s, after which relations between the two countries improved significantly. But when the Icelandic economy collapsed in 2008, however, the United Kingdom responded acrimoniously, and tensions reemerged. Since then, relations have worsened to such an extent that the countries' deep relationship built over three decades of friendship could be reduced to nothing.

The global economic downturn hit Iceland perhaps the hardest of all European nations. The country's financial collapse resulted primarily from the failure of its three largest banks, which the government nationalized in the fall of 2008. The failure of the Icelandic banking system stemmed from poor decisions that led to significant exposure to volatility. Iceland fell into international debt, totaling roughly US$100 million. Meanwhile, the value of the Icelandic krona plummeted, falling from 131 kronur to the euro down to 340 kronur to the euro overnight and retaining an extremely low value for months. The government was left unable to pay back its loans, so the debt burden has fallen primarily upon local citizens and investors.

The effects of the crash on Iceland's small population of about 300,000 have been severe. Gone are the heady days of years past; while per capita GDP tripled from 2003 to 2006, signs of strain, from wage decreases to job losses, are now everywhere. No visitor can ignore the unfinished buildings lining streets or the omnipresent talk of the nation's failed economy. With such a small population, the increase in unemployment from 1.6 percent to 9.4 percent within a year has had conspicuous effects. The economic downturn has converted what was previously a wealthy, stable society into one struggling to make ends meet.

The United Kingdom's response to its neighbor's troubles infuriated Icelanders. UK Prime Minister Gordon Brown labeled the actions of Icelandic officials as "completely unacceptable." Attempting to recoup some of their losses, the UK government seized Icelandic assets under the Anti-Terrorism, Crime and Security Act of 2001. The antithesis of diplomatic subtlety, this measure dealt a serious blow to Icelandic pride. The reality of the situation settled in as Icelanders watched the UK Treasury list their country alongside organizations such as the Taliban and Al Qaeda.

Predictably, Icelanders did not respond well to being labeled as terrorists. Practically overnight, the relations between the two countries soured. Responses to UK actions have ranged from personal boycotts on travel to vandalism of the houses and cars of UK nationals in Iceland. The newly bankrupted nation's diplomats have addressed British actions as needlessly hostile. …

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