Why do we have price-indexation?

A question normally asked by foreigners is why do we have price-indexation in Iceland?

Price indexation of wages was abolished in the early 1980’s because businesses could not afford paying their employees anymore when the inflation rose. Price indexation of loans remained though.

Businesses have lobbyists and cozy up to politicians, homes don’t.  

It seems absolutely fair and just that if I lend you a krona I get a krona’s worth in the future. But the game is skewed when one side has a much lower incentive to keep inflation in check than the other. Abroad, both sides lose if inflation runs wild, in Iceland the lender gets his money and if he doesn’t he gets your home. 

It complicates matters that Icelanders’ pension is price-indexed. Older generations, especially the one that holds the reins of power benefits immensely from price indexation securing their pension. They did not borrow price indexed loans to educate themselves or to put a roof over their head. It is never published enough that Geir Haarde, prime minister owns his house outright. And his personal savings are probably price indexed as well. Add to this the fact that the pension funds in Iceland are extremely powerful as the golden gooses’ everyone wants a piece of and their management is not about to rock any boats.  

At the citizens’ meeting in Reykjavik last Monday, Agust Olafur Agustsson, vice-chair of Samfylkingin told the crowd that “when Iceland is part of the European Union, the price-indexation goes”. It is really scary to think that Samfylkingin might be using the price indexation as a noose around people’s necks to threaten the country into joining the EU. Not because it shouldn’t, but because it might be too late when it finally happens. 

In two years, I have paid between 3-4 million ISK onto my home loan. The loan has not gone down. It has risen by 2.5 million. On the other hand the incentive for my generation to keep staying in Iceland is dropping fast.


1 Response to “Why do we have price-indexation?”

  1. 1 Kjartan January 16, 2009 at 1:46 am

    Has there ever been a more one-dimensional party than Samfylkingin?
    They’re introductory leaflet for the next elections (whenever we are deemed fit to be granted those) can be one page long because their policy in everything is EU.
    “What should we do about the króna? -Join the EU
    How should we handle this crisis? -Join the EU
    How do we keep people and businesses from going bankrupt en masse?
    -Join the EU
    Does Santa really exist? -Join the EU
    Wait, that isn’t a valid answ… -Shut up, you aren’t the nation! And join the f***ing EU while you’re at it.”

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