sweden's churchill

Yesterday I had the pleasure of attending a lecture by Göran Persson, the Prime Minister of Sweden from 1996 to 2006, and before that the Swedish finance minister. In these positions, he played a key role in steering Sweden back from its banking crisis of 1992.

He came to Iceland to share his experiences, speaking at Háskóli Íslands, the University of Iceland. Even in non-native English, I found him a powerful and compelling speaker, one who held the packed auditorium in rapt silence. Many of his points were dead-on and many are not getting anywhere near the deserved attention from Icelandic politicians or the media in these stormy months of crisis.

He started off by saying he wasn't going to tell us what to do, but merely to share his own experiences with Icelanders. He said after being Prime Minister, he knew how it felt when foreigners came to his country and tried to tell him what to do. But then, of course, his whole lecture seemed to be built around telling us Icelanders exactly what to do. But it was all good stuff. Following is my summary of some of the main points he made. Some of my thoughts, in parentheses, are blended in.

Action: Don't wait for the IMF or others to tell you what to do. Take the lead now. "It's not difficult to see what to do, the difficult thing is to do it." Later he quoted Gorbachev, "He who waits will be punished by history."

Credibility: It is important to create credibility in Iceland. Both the government and Central Bank must realize that their words and actions reverberate far outside Iceland. With gains in credibility come gains in the local currency and easier debt financing. Loss of credibility will punish the currency.

(Incidentally, this is why I feel that Davíð Oddsson's resignation from Central Bank governor is necessary. Not because of anything specific he said or did, though there are many egregious examples. But because he has the habit of making off-the-cuff remarks that send the wrong message to markets outside of Iceland. This is not a good habit for a Central Bank governor to have. "Loose lips sink ships.")

Debt Burden: In taking on the debts of a banking sector that was 10 times the size of the national GDP, Iceland's government faces a giant debt burden in the coming years. Some of this may be made up by sales of bank assets, but these are difficult times in which to sell these assets and he doubts Iceland will recoup 100% of them, as Sweden did. The only solution to this debt burden is a radical restructuring of public finances, both through much higher taxes and cuts in every area of public expenditure including social services. Front-load these painful adjustments. "You have no time to lose." Restructuring the budget in 2009 will surprise everyone, sending a positive signal to the markets, which expect Iceland to wait until 2010.

Political Crisis: Try to avoid one. This sends a signal of weakness and hurts the nation's credibility. "Political parties are important but the country is more important."

Budget Package: (The cornerstone of his speech, which he returned to several times.) Start setting out a 2-3 year budget program. Describe it plainly for the electorate. Set expectations of higher taxes and lower services. Explain clearly the pain that will be coming, and the need for it. And be prepared for a backlash: he pushed hard on strict changes in the Swedish budget and ended up "the most hated politician" in Sweden. Be honest now, and the public will thank you later.

Conservative Assumptions: When you put together your budget package, use conservative estimates when budgeting economic growth rates, interest rates, and inflation rates. (In my opinion, this is something few Icelanders, being perpetual optimists, know how to do.) If you think the GDP growth rate will be 2%, use 1% in your model. If you think inflation will be 8%, use 10%. Also, don't use book-keeping tricks that hide reality.

Transparency: Open the books to all. Let the public see what models and assumptions are being used. This will aid debate and help see the necessity of the package.

Justice: Go after those few who created this crisis. The whole population will pay for their actions, so it is important for credibility that these participants be brought to justice. Try to get every penny you can from them. Give the authorities the necessary resources to pursue them. But always respect the rule of law. Stick to your legislation and prosecute only clear violations of it.

(The rule of law is also a concept that to me feels a little thin on the ground here in the Land. There is not a strong sense of one law that applies the same to all, nor a clear sense of "due process" where the law is always applied the same way, through the same procedural steps. I could be wrong, this feeling is based on conversations and anecdotal evidence. Further, it seems that Iceland's markets, which have grown up largely only in this decade, were not set up with an adequate legal framework. For example, there seem to be few protections for minority shareholders in a corporation. So there may not be adequate laws on the books to publish acts that would be clear crimes in more evolved legal systems.)

Goals: Set public goals. The core goal should be the level of debt, a secondary goal should be inflation. A goal could be: "In three years the level of debt of the government will have stabilized." In your goals, prepare for the next downturn. Prepare to build a surplus in public finance for that point in time.

The European Union: "We [Swedes] love to hate the European Union." They joined in 1994 in the midst of their banking crisis and this sent a positive signal to the capital markets. But the downside of EU membership is the bureaucracy. These days, the UN structures are falling apart: "World War II is finally over." The EU is one of a few newer international organizations that can push forward the interests of its members. We need new international organizations: "We don't have an international political body strong enough to balance the international capital markets."

Pensions: Iceland is in a much better position than most, with its strong pension system. This is a huge advantage.

The Currency: To maintain a small currency like the ISK is possible, but it demands much more attention to public finances than maintaining a large currency. Iceland has unfortunately not been paying much attention to public finances.

Mr. Persson concluded by saying that Iceland had many advantages, among them the well-educated population, and that he was optimistic for our future. The time to begin the painful rebuilding that lies ahead, however, is now.