Will social safety net survive Iceland’s crisis?

Furious over the economy’s swift collapse, antigovernment protesters continue to surround the parliament building here.

The demonstrations have grown violent, with police this week using teargas – reportedly for the first time in a half century – to scatter the crowds.

Since its banking sector collapsed in October, this remote island nation of 300,000 has been gripped in the throws of its greatest economic, political, and social crisis since gaining independence in 1944.

Although the government has refused protestors’ demands to step down, on Thursday, a senior official in the ruling party said early elections could be held later this year.

Despite the deepening crisis, a recent walk in Reykjavik’s streets revealed little of the obvious poverty and human suffering on display in many US cities (even in good times).

No slums, little crime

Homelessness is as rare as ever here, slums nonexistent, and crime remains low. People are losing their jobs, their homes, and their savings, but Iceland’s well-developed social safety net is catching them long before they hit the ground. This won’t change anytime soon, says Vilborg Oddsdottir, of Icelandic Church Aid, a leading charity. “We will have no soup kitchens in Iceland. ... As you say: over my dead body.”

Ms. Oddsdottir doesn’t mean that people shouldn’t be helped, but that under no circumstances should anyone be allowed to fall so low that they would have to stand in line for food.

“We are a very small nation, but we have built up a very good society ... and we can get through this without people queuing up with their children for soup,” she says.

It’s no small claim, given the problems here.

Unemployment at 10 percent?

Unemployment – which stood at less than 1 percent in 2007 – has soared to nearly 5 percent. The rate is expected to double again in February, but the government intends to encourage those without jobs to enroll in Iceland’s essentially free universities during the downturn.

“We want people to increase their skills while they are looking for employment,” says Education Ministry official Steingrimur Sigurgeirsson, who estimates university enrollments have jumped by as much as 10 percent. “We believe this is one of the keys for the future.”

Despite the collapse, government officials do not expect to have to make major cuts in social benefits, which include generous unemployment insurance, nearly free health care, and subsidized housing for the jobless.

“We are fairly confident that we will have the resources so that people can maintain a reasonable standard of living while we are going through the worse,” says Kirstjan Kristjansson, spokesman for embattled Prime Minister Geir Haarde, chairman of the free-market Independence Party. Mr. Kristjansson added that thus far the country has seen a drop in gross domestic product and personal incomes that returns them to the levels of 2003 – just last year they had the fourth highest per capita income in the world – and that a third of this year’s national budget, which has long run in surplus, will be debt-financed.

Currency at half value

While most Icelanders may avoid hitting rock bottom, there’s plenty of pain going around. Inflation now exceeds 18 percent, even as companies are lowering salaries. With the Icelandic kronur trading at half its precrash value against most major currencies, businesses of all sorts are finding imports and debt payments unaffordable.

“If the krona stays at its current rate it will be extremely difficult to keep many businesses alive,” says Andres Magnusson, general manager of the Federation of Trade and Services. “I’m not worried about essentials like food, pharmaceuticals, and fuel, but more about electronic devices, furniture, and clothes.”

Iceland’s largest car dealer is already hard hit, with the number of new vehicle registrations nationwide predicted to plunge from 18,000 to less than 500 this year, says Jon Trausti Olafsson, marketing manager of Reykjavik’s Hekla dealership, which has already laid off 40 of 250 employees. “Nobody is asking for cars.”

Building projects have been halted, including the half-finished $250 million National Concert Hall and Conference Center on Reykjavik’s waterfront. In a recent poll, a quarter of respondents feared they would lose their job.

Oddsdottir, the social worker, has seen a huge increase in the middle class seeking aid as they try to meet mortgage payments, which have doubled because they were denominated in foreign currencies. Her charity has an annual Christmas drive to help poor people in Africa and India; this year, half of the proceeds went to Icelanders.

A better future?

Many say a better country will emerge from the wreckage. “When life starts being only about money, something terrible is going to happen,” says protest organizer Hordur Torfason. “So we’re in ruins now. Let’s stick together and rebuild the country on different terms.”

“We’ve survived earthquakes and volcanic activity, living in this darkness and with five different weathers in a day,” Halla Tomasdottir, cofounder of Audur Capital, which partnered with the singer Björk to invest in innovative Icelandic companies. “Icelanders are survivors, and I believe we will pass through the anger phase and start finding solutions.”