A Modern Icelandic Narrative, as Told by One of its Protagonists — Ambassador Geir Haarde

While most European countries were badly bruised by the financial crash of 2008, the impact on Iceland's economy was nothing short of catastrophic. But Iceland has recovered quicker than most and its remarkable turnaround adds a modern narrative to the ancient Icelandic sagas that define the Nordic island's history and society. Iceland got there by letting its profligate banks fail – even as the U.S. government was buying stakes in its own ailing financial institutions. It did so by slashing household debt, letting its currency devalue by almost 60 percent, putting capital controls in place restricting what people could do with their money and imposing draconian austerity measures.

The fact that Iceland was not in the eurozone, and therefore could let the value of the krona collapse, proved an advantage in making the country competitive. It's perhaps one reason why Icelanders continue to blow hot and cold over the issue of becoming members of the European Union, starting negotiations one year and stopping them the next. Other factors include Iceland's miniscule population of around 320,000 and a relatively narrow economic base led by fisheries, power-intensive industry, and tourism.

Few Icelanders were more closely connected with the crisis than Geir H. Haarde, a leading politician who was successively finance minister, foreign minister and prime minister. He was indicted for his handling of the pre-crisis situation in what he calls a politically motivated trial that backfired when he was cleared of all substantive charges. Now out of active politics after more than three decades, he is Iceland's ambassador to the United States. It's a country he knows well from his student days at Brandeis, the University of Minnesota, Washington's School of Advanced International Studies (SAIS) at Johns Hopkins University and subsequent working visits. He talked to Diplomatic Connections in his embassy office overlooking the Potomac.

Diplomatic Connections: You are not only ambassador of Iceland in the United States, you're also Icelandic ambassador to eight other countries, including Brazil and Argentina. It's not unusual for a chief of mission in Washington to be accredited to one or two other countries, but eight is an unusually large number. How do you cope with such a broad assignment?

Ambassador Haarde: This is a situation we've had since Iceland first opened a mission in D.C. during the Second World War, when we were recognized as an independent republic. When we established our own foreign service, the ambassador in Washington would represent Iceland in all of South and Central America and, following the creation of the United Nations, took on representation there as well. Now we have an ambassador at the U.N. and another in Ottawa. The three of us divide the rest of the continent between us. So instead of having 27 countries, I have eight. We are a small country with a small foreign service and we have to make the best use of the limited human resources that we have. I expect to be able to present my credentials in all of them eventually, but I haven't done so yet. It's different from our bilateral relations with the United States where we have a lot of issues.

Diplomatic Connections: Does that mean you would expect to be on the road a lot?

Ambassador Haarde: I would expect to try to visit these countries regularly, but I also have to do a certain amount of travel in the U.S. Since I came here in January 2015, I've been to Alaska twice and on the West Coast and Minneapolis..

Diplomatic Connections: What about the diaspora? How many people of Icelandic origin are there in this country?

Ambassador Haarde: I cannot give you an exact figure, but I can tell you that between the U.S. and Canada there are more people of Icelandic descent than there are in Iceland. There was quite a movement of people in the late 19th century to Canada and the Midwest. Ever since, there has been a tendency for people to want to move to the U.S. We have quite a big population around Minneapolis and North Dakota, also New York and Boston. We have mixed marriages of Icelandic women who married American servicemen stationed in Iceland, and people who have come to study and stayed, medical doctors, for example. In several places in the U.S. there are Icelandic associations which are quite active and some of my time is attending Icelandic festivals. We have a large network of honorary consuls.

Diplomatic Connections: How are bilateral relations with the United States at the moment?

Ambassador Haarde: We have no issues that you would describe as serious problems, but we have a lot to talk about. We have a defense treaty that goes back to 1951. We had a continuous U.S. presence from 1951 to 2006 when the U.S. government decided to end their presence at Keflavik base. Things are a little different now, 10 years later. The decision in 2006 was based on hopes, expectations and developments in Europe that have not exactly turned out to be true. So we are talking to the Americans about the security situation in the North Atlantic, the new face of Russia – who we, on the other hand, also consider friends. In addition to this, the U.S. is a big trading partner, although no longer the single most important trading partner, which is the EU taken together, and the United Kingdom as a single nation. Maintaining the U.S. relationship, trying to be a facilitator for trade and business and investment is an important part of the job of this embassy, and also cultivating cultural exchanges, science and technology.

Diplomatic Connections: During the Cold War, Iceland had a key role as part of the line of defense. Has the emergence of a more aggressive Russia led the Americans to have second thoughts about having quit Keflavik and maybe want to return?

Ambassador Haarde: I don't think they would go back in the same way as before, but I've met people here in the administration who think the decision taken in 2006 was a mistake. The question now is to figure out what would be mutually beneficial in the current circumstances. Whether that requires a permanent presence of U.S. forces of some kind is not clear at this point. But the situation in the world, and particularly in our part of the world, is definitely different to what it was 10 years ago. Unfortunate, but it's a hard fact.

Diplomatic Connections: Would you agree with some people's description of the present situation as a new Cold War?

Ambassador Haarde: I think that's a little extreme. I hope that at the end of the day the leaders involved would find a way to avoid that. Our geography has not changed. We were strategically important in World War II. We were important in the Cold War. Some called Iceland an aircraft carrier – you had sealanes on both sides of the island where you had submarine traffic. If you wanted to be able to control the action and to know what was going on, it was better to have this piece of property in your camp. The British occupied our country in May 1940, and with our approval the Americans took over a year later.

Diplomatic Connections: When the Americans left Keflavik, there was the problem of cleaning out years of dumped waste, some of it toxic, the removal of which was not covered in the bilateral base agreement. What is the current status of that issue?

Ambassador Haarde: There was a problem with waste spillage and disposal, but it may not have been as big as people feared. Another issue was the fact that the voltage on the base buildings was American, 110 as opposed to the European 220, so there was quite a problem to convert all that to the Icelandic standards. But that issue has also been resolved, and the base itself has been re-developed.

Diplomatic Connections: What has happened to the former base now?

Ambassador Haarde: Part of it has been converted for other purposes. There is student housing, a school, a number of businesses have opened there – there's a lot of activity. Part of the base infrastructure is still used as a security area and it's the venue of the control center for the NATO Air Defense Radar System in Iceland.

Diplomatic Connections: Doesn't the NATO air policing system operate out of Keflavik?

Ambassador Haarde: Yes, but it's not 24/7 like in the Baltic States. Squadrons from a number of NATO countries come in rotation: France was one of the first; the U.S. has been there every year; the Czechs have been there twice recently.

Diplomatic Connections: Is it Icelandic airspace that the Russians sometimes trespass?

Ambassador Haarde: I cannot go into specifics on air defense issues and flight paths: the Russians have long distance bombers which don't always identify themselves when they fly near Iceland. In the old days Iceland-based American fighters would scramble.

Diplomatic Connections: But now presumably it’s the air policing that reacts?

Ambassador Haarde: Yes, when they are there. But they are not there all the time.

Diplomatic Connections: The Icelandic economic crisis made history because it was huge in proportion to the size of the island and its economy. But the story now is one of recovery. So how would you summarize the latest developments?

Ambassador Haarde: We were the first to be hit by the international financial crisis, but in many ways also first out. We have now repaid everything we borrowed from the IMF and others during the crisis. But we did impose capital controls in 2008 Ð not to control trade, but to prevent great, destabilizing movements of capital out of the country-- and they are now gradually being lifted.

Diplomatic Connections: Did Iceland nationalize the banks?

Ambassador Haarde:There were three big private banks that fell, constituting between 80 and 85 percent of the financial system. The authorities split them up into ÒoldÓ and Ònew.Ó The government refinanced the much smaller new banks who took over domestic services Ð domestic businesses, deposits, and so on Ð and the old banks were taken over by resolution committees controlled by the creditors. The external indebtedness of those private banks was not guaranteed by the government so their losses were not socialized. They had borrowed excessively and irresponsibly. The creditors, of course, got hurt in the process but maybe they should have been a little more careful in lending to those banks. The whole winding up of the old banks is hopefully coming to an end in the next few months through a transparent resolution process in accordance with Icelandic law.

Diplomatic Connections: You were in government at the time and were subsequently the target of an indictment.

Ambassador Haarde: There was a court case brought against me by a slender majority in parliament: basically my political opponents engineered it.

Diplomatic Connections: So it was a political maneuver?

Ambassador Haarde: Clearly, and it's very sad to see this happen in a Western democracy. I won the case, but it was, in my view, a horrible example of mixing together political and criminal responsibility. There were six counts in the indictment. Two of them were thrown out of court as they were deemed legally inadmissible. On the three that had anything to do with the financial crisis, I was acquitted and cleared of those serious accusations. That was the most important outcome, and in line with what I had expected all along. On one technical count claiming that I had not held enough cabinet meetings to discuss the banking situation, I was found guilty by a vote of 9 to 6. The court, however, regarded this ridiculous charge as a minor offence and did not impose any punishment. Instead, it ordered the government to pay my legal costs.

Diplomatic Connections: Presumably the fact that it was a global financial crisis, much of it out of Iceland's control, was an argument in your favor.

Ambassador Haarde: Definitely. Iceland was a member of the European Economic Area, with full freedom of capital movement when this happened; the banks took advantage of those rules in terms of cross-border banking. There were all kinds of things in the European framework that were flawed, and that have since been corrected. Singling out an individual political leader of the time always seemed to me to be something that happens in countries with which we prefer not to compare ourselves. And several of the people who took part in this later told me that voting in favor of the indictment had been a grave mistake. I don't want to dwell on this issue: I am doing different things now and I have to work with a lot of people in and out of government.

Diplomatic Connections: Iceland is a member of the European Economic Area, but Iceland also applied for full EU membership. What is the current status of that application?

Ambassador Haarde: After I left office in 2009 the new government decided to apply for EU membership but on the basis that entry would later be subject to a referendum. Talks started and were not finished when the next election came around in 2013. They announced to the EU that Iceland was not interested in joining and the discussions stopped. So we're not an applicant country. One of the potentially difficult issues in the accession talks, of course, was fishing. But we have a good relationship with the European Union, which is our most important market in terms of both exports and imports Ð and, of course, we are Europeans. I often say that you can be a good European without being a member of the European Union.

Diplomatic Connections: Has Iceland had any major security threats?

Ambassador Haarde: We are in many ways very lucky. Our location isolated us for centuries from outside influence and threats. The fact that we are located up there in the middle of the Atlantic has been a hindrance. In World War II people realized that we were a valuable piece of property. We are founding members of NATO, which has been a key factor in our thinking in terms of defense and security.

Diplomatic Connections: Having been successively economics minister, foreign minister and prime minister, how does it feel to be at the receiving end of instructions after many years of issuing them yourself?

Ambassador Haarde: It takes a little bit of getting used to. Before I went into politics I was a civil servant, so it's not such a difficult switch over for me. I know most of the people that I'm dealing with in the ministries from before. I have a lot of respect for my colleagues, and I have no problem working with anybody even though I'm not in the same position.

Diplomatic Connections: Once this incursion into diplomacy is over do you envision going back into politics?

Ambassador Haarde: I have no such plans.

Diplomatic Connections: Do you have any desire to do so?

Ambassador Haarde: No. I was in parliament for 22 years, 11 of them in the cabinet. Before parliament I was political assistant to the then minister of finance. Basically, that's enough political involvement for any normal person.

Diplomatic Connections: How well do you know the United States?

Ambassador Haarde: I spent six years in the United States as a young man going home every summer to work as a journalist. It had a great influence on me and I believe I know the country quite well. After school, in my various appointments, I have visited the U.S. many, many times, and the various government offices in Washington numerous times.

Diplomatic Connections: So do you see a change in the way Washington does business?

Ambassador Haarde: Yes. It seems to me that it's changed quite a bit, not necessarily for the better, in terms of the politics of the situation. But I don't think it's appropriate for me to say much more about that. It seems to me that there is less bipartisanship which used to be a hallmark of U.S. foreign policy. Unfortunately, we have had a little bit of the same phenomenon in my own country. Politics have become more divisive.

Diplomatic Connections: You must get asked this a lot. Why is Greenland called Greenland and Iceland called Iceland when Iceland is green and Greenland is ice-covered?