We may remember that, at the start of the 2008 financial crisis, Iceland literally went bankrupt. The reasons were mentioned only in passing, and since then, this little-known member of the European Union seemed to drop out of the news.

As one European country after another faces near bankruptcy, imperiling the Euro, Iceland becomes a beacon of hope for choosing people over profit. Here’s why:

Five years of a neo-liberal regime led to a privatization of all banks in Iceland, (population 320 thousand, no army). In order to attract foreign investors, these banks offered on-line banking whose minimal costs allowed them to provide relatively high rates of return.

The accounts, called IceSave, attracted many English and Dutch small investors. As investments grew, so did the banks’ foreign debt. In 2003 Iceland’s debt was equal to 200 times its GNP, and in 2007, it was 900 percent.

The 2008 world financial crisis became the coup de grace. The three main Icelandic bankswent belly up and were nationalized, while the Kroner (Iceland’s currency) lost much of its value with respect to the Euro. At the end of that year, the country declared bankruptcy.

Citizens reclaim their rights
Contrary to world expectations, the crisis led to the people taking over their country, through a process of direct participatory democracy. This eventually led to a new Constitution, but only after fierce perseverance.

Geir Haarde, the Prime Minister of a Social Democratic coalition government, negotiated an over two million dollar loan, to which the Nordic countries added another two and a half million. But the foreign financial community pressured Iceland to impose drastic measures.

Protests and riots followed, eventually forcing the government to be replaced by a newly formed left-wing coalition.

The coalition eventually gave in to the outside demands that Iceland pay off a total of three and a half million Euros. This would require each Icelander to pay $130 per month for fifteen years, at 5.5% interest, to pay off a debt incurred by private parties vis-à-vis other private parties. It was the straw that broke the reindeer’s back.

What happened next was extraordinary. The belief that citizens had to pay for the mistakes of a financial monopoly, that an entire nation must be taxed to pay off private debts was shattered. Enlivened relationships between citizens and their politicians empowered Iceland’s leaders to act on the side of their constituents. The Head of State, Olafur Ragnar Grimsson, refused to ratify the law that would make Icelanders responsible for bankers’ debts, and supported calls for a referendum.

International community furious
The world only increased the pressure. Great Britain and Holland warned of dire reprisals that would isolate the country including cutting off aid from the IMF and freezing Icelandic foreign bank accounts.

In the March 2010 referendum, 93% voted against repayment of the debt. The IMF immediately froze its loan. But Iceland would not be intimidated. As Grimsson said: “We were told that if we refused the international community’s conditions, we would become the Cuba of the North. But if we had accepted, we would have become the Haiti of the North.”

With the support of a furious citizenry, the government launched civil and penal investigations into those responsible for the financial crisis. As a result, the former finance minister served a two-year prison sentence while Interpol put out international arrest warrants for bankers implicated in the crash.

Icelanders did also agree on certain budget cut measures such as disbanding their military infrastructure - the Icelandic Defense Agency (IDA), ceased to exist in January ‘11.

Iceland’s New Constitution
In order to free the country from the exaggerated power of international finance and virtual money, the people of Iceland decided to draft a new constitution.

They elected twenty-five citizens from among 522 adults not belonging to any political party but recommended by at least thirty people. The constituent’s meetings were streamed on-line, and citizens could send their comments and suggestions, witnessing the document as it took shape. The constitution that emerged from this participatory democratic process was submitted to parliament for approval this fall.

The people of Greece have been told that the privatization of their public sector is the only way to keep the nation afloat. The people of Italy, Spain and Portugal are facing similar pressures. They, and the rest of us could learn a lot from Iceland, refusing to bow to foreign interests and stating loud and clear that the people can and will take their power back.