I’m in Dublin these days. Before going I had been following news from Ireland rather carefully: it’s a small country and there is a natural affinity between Iceland and Ireland. The word ‘cronyism’ certainly has popped up once in a while in the international reporting on Ireland but it’s come as a surprise to me that the word on everyone’s lips here is ‘corruption’ – the Irish, those who have no interest in denying it, largely see the political life as fairly corrupt.
It’s not just rumours, the ex-Taoiseach (prime minister) Bertie Ahern was forced to resign two years ago because of persistent corruption charges. Most Irish know by heart what he said, when interviewed on corruption charges: “What I got personally in my life, to be frank with you is none of your business. If I got something from somebody as a present or something like that I can use it.” Brian Cowan who replaced Ahern abolished the tent at the Galway races: the tent where the political leaders of his party, Fianna Fáil, had traditionally met with the property developers, the core of the Irish business community, for fundraising.
There has been a deluge of Irish crisis books. Today, at the Hodges Figgis bookshop I counted nineteen titles. Snouts in the Trough; how we have all been betrayed by politicians, bureaucrats and bankers by David Craig tells you what many Irish think of these three social groups. I’m currently reading Fintan O’Toole’s bestseller since last year: Ship of Fools; How Stupidity and Corruption Killed the Celtic Tiger. Quite interesting to see that financial fraud is nothing new in Ireland. He writes on cases of blatant fraud going as far back as the ‘70s that went ignored, un-investigated and ultimately unpunished.
The point of interest, in a wider context, is the continuity. As to Iceland, I have emphasised that is wasn’t the privatisation of the banks, 1998-2003, that led to the collapsed of the Icelandic banks. The threads go much further back, to the unhealthy atmosphere where the political parties divided and reigned, meted out money and favours to the undeserving through the politically controlled state banks. Loans were given on a regular basis according to political allegiance not business acumen.
Iceland and Ireland are two countries badly hit by the present financial crisis – but so are Spain, Portugal and Italy. Belgium doesn’t seem to be doing too well and everyone knows what happened in Greece. Some classify these countries (minus Belgium which so far isn’t officially a country in crisis) as the peripheral countries. Belgium doesn’t really fit in there, being right at the heart of Europe.
There is, however, another criterion that fits them all: corruption. From observing Iceland and now Ireland I’ve come to the conclusion that corruption is an important factor as to why these two countries – and apparently other European countries badly hit by a financial crisis – are suddenly so badly off.
What characterises countries with rampant corruption and cronyism is that money isn’t distributed on merit but according to whom you can do favours and receive in kind. When these countries were suddenly awash with money there were no channels but the corrupt channels – and the money was to some/a large extent wasted on ill-conceived projects. All these countries are dealing with mountains of bad loans. What a corrupt country lacks is a mechanism to distribute money and projects according to merit, business sense and according to what’s best for society. There is nothing in place except the corrupt channels.
All these countries suffer from a fairly poor civic sense, if you compare them to countries like the four Scandinavian countries or Germany. Tax evasion is, if not a national sport, then something that people in general sympathise with or don’t condemn. Scandinavia, Germany and France have a fairly strong believe in the authority of the state and its right to tax and rule. In his book on the Mafia, Cose di Cosa Nostra, Giovanni Falcone wrote that the Mafia thrives where the state isn’t present. The same goes for corruption – it’s in those corners of society where the state isn’t present with its rule of incorruptible law. The weaker the state the more space there is for corruption.
Iceland – and probably the other countries as well – had been more or less able to handle its own affairs while its economy was self-contained and mostly fuelled by only its own exports. It was generally spending what it earned or when it went out of kilter it managed to regain its balance. An Icelandic bank went bust in the 70s but the country survived it. In all the crisis-stricken countries domestic banks have grown enormously by fetching money on the international markets and lending them to their local customers. When the ability to fetch money abroad arose money flowed into bad deals, lousy projects and private clients were allowed to borrow far beyond their means: Iceland wasn’t the only country where the banks rushed onto the mortgage market, offering 100% or even 110% mortgages thereby heating up the market to a boiling point.
These countries tend to have toothless, often complacent, regulators that certainly in Iceland neither had the expertise nor the proper understanding of complex modern banking. The state in these countries isn’t strong and consequently the state institutions are weak as well.
I don’t think it’s a coincidence that the European countries worst hit by the crisis are corrupt countries with weak state institutions. The crisis in each of these countries has some aspects unique to each country. The common factor, however, is corruption and money, plenty of money, coming from abroad.
The countries that have so far apparently been fairly resistant to the crisis are countries like Germany and France, Denmark, Sweden, Norway and Finland. Outside Europe it’s a country like Canada. All of these countries have a long history of strong institutions and a strong state with a strong sense of civic values.
UK and the US are somewhat in a group of its own – big economies where the banks definitely did overstretch but where the state has so far been able to prop them up with taxpayers’ money.
Although Germany and France have, in terms of their banking sector, been a model of restraint their banks have been unrestrained abroad. German and French banks, as well as UK and American banks, have gone on a lending spree abroad, lending to the countries that are now so crisis-stricken. There is a lot of anger here in Ireland towards the EU for forcing Ireland to save its banks so as not to wreck havoc for French, German and British banks. It’s always easier to be upset with others, in Iceland the anger has been vented against the IMF, but there is an element of truth in this that especially French and German banks did in some ways go abroad to do things they couldn’t do at home. – The German and French banks are like kids who at home behave impeccably but who take out their pen knifes and cut up the furniture when they are visiting their friends.
In terms of Iceland it’s inconceivable that a bank like Deutsche Bank, lending to all the Icelandic banks and thus with a certain insight into the standing of these banks, showed so little restraint. German banks are by far the largest creditors to the Icelandic banks. And it’s irritating beyond words that the banks show so little understanding of their own actions and upsetting that governments aren’t showing any move towards doing the only thing that will go some way to restrain the banks: to split them up.
In Ireland I keep hearing that the crisis here isn’t just an economic crisis but a crisis of moral and social understanding. The same can be said for the other European countries fighting with the consequences of crisis. It won’t be enough to get banks lending again. These countries will have to take a long and hard look at their institutions and their sense of civic duties. This crisis isn’t just about money but about moral.
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