President of Iceland Ólafur Grímsson: The Will of the People Must Rule the Day | Big Think

Well, Iceland was, in the years that led up to the financial crisis, like every country in Europe and the United States, part of this policy transformation where the financial sector was deregulated, where the freedom of financial capital was increased, and where there was a different form of regulations and structures that had prevailed before.

So when the financial crisis hit, we suffered in a traumatic way. We were, for a while, perhaps exhibit number one of a failed financial system. It was a profound shock to our country and our people, not just because of the economic difficulties and the hardship that followed, but also because Iceland is one of the most democratic and secure societies in the world. We've always conducted everything through peaceful dialogue and discussions, but suddenly we had riots and demonstrations.

There were fires burning in the center of Reykjavik; the police had to defend the Parliament and even the central bank. So, it demonstrated that a collapse of the financial system can also threaten the democratic institutions as well as the social cohesion of one of the most harmonious, open, and free democratic societies in the world.

So if a collapse in the financial system can do such damage and provide such a threat to a country like Iceland, imagine what a failure in the financial market can do to countries where the democratic institutions are not as strong and solidly based as in my country.

But then when we had to formulate policies on how to deal with the financial crisis, we decided, in one way or another, to follow a different formula than from the traditional consensus in the previous 30 years of how you deal with a financial crisis. We did not save the banks; we let them go bankrupt. We introduced currency controls. We devalued the currency.

We did not introduce austerity measures of the scale that had been deemed to be absolutely necessary in the decades before. And when the failure of one Icelandic bank in Britain and the Netherlands led to extraordinary pressure from all the European governments that the Icelandic taxpayers should take responsibility for the debts of this one bank in these two countries, I put it to a referendum, and I allowed the Icelandic nation to vote on it, not just once but twice.

It is, I believe, the only location where the democratic will of the people was deemed to be more important than the perceived financial interests of the markets. We could discuss, as was done five years ago or so, whether this was wise, and there were lots of people—not just so-called experts and financial authorities but also governments all over Europe—who were telling us we were absolutely wrong; that this was a crazy path to follow because it went against the established orthodoxy.

But now we know the outcome six years later that Iceland, having been exhibit number one of a failed financial state, is now exhibit number one in Europe of a recovery from a financial crisis. We have three to four percent economic growth, four to five percent unemployment, and many of our sectors—the tourism sector, the energy sector, the IT sector, the high-tech sector—are in fact doing much better in the last five years than they did in the five years leading up to the financial crisis.

So the end result has been that this democratic way of dealing with the financial crisis, this unorthodox way in terms of economic policy, has in fact turned out better and more solid results than the so-called expert or official community predicted.

So, in that sense, I think Iceland can serve as an interesting reference when other nations discuss and debate what policies they should follow. But after all, what is the relationship between democracy on one hand and financial markets on the other? There was the prevailing assumption in the previous decades that somehow the financial markets should be supreme, but we faced a tough challenge to decide if the democratic will of the people is more important than the forces in the financial markets.

And that is, in fact, a question which many other nations have not yet addressed.