"Europe can learn from Iceland"

It might not seem very realistic for an Icelander to recommend that someone ask a Spanish lawyer about the problems that led the country's near financial ruin in 2008, after its residents had lived on the high end for many years. But that is exactly what happened one day when an Icelandic lawmaker, Birgitta J¨®nsd¨®ttir, suggested this during a conversation she held with another person at a local caf¨¦ in Reykjav¨ªk.

"If I were you I would go ask the Spaniard, Elvira M¨¦ndez. Everyone knows her and she knows a lot about this subject," J¨®nsd¨®ttir said.

M¨¦ndez single-handedly - or almost single handedly - took a case before the island's Supreme Court, winning a ruling in which the justices agreed over the unconstitutionality of granting loans to citizens which are backed by foreign money. This financial practice that had been in place for years was one of the reasons for the country's economic meltdown.

M¨¦ndez is a professor of European Law at the University of Iceland. After living in the Nordic Atlantic nation for 11 years, she began to try to unravel the causes of the country's crisis using her experiences as an Icelandic resident as well as the problems facing her own compatriots back home.

Creditors and investors have to suffer in the losses from the crisis"

"At first, I wasn't sure about writing a book," she says in a telephone interview. "But then I found out that the media was very interested, not only because of the title, but because they wanted to learn more."

The result was La revoluci¨®n de los vikingos, (or, The Vikings' revolution) which was published by Planeta last summer.

M¨¦ndez graduated with a law degree from Madrid's Complutense University. She holds a master's in European Community law from Panth¨¦on-Assas University in Paris and a doctorate in European Law from the University of Alcal¨¢ de Henares.

Question. Can Spain look for answers in the Icelandic crisis?

You really need to determine what debts can be paid and which can't"

Answer. Yes and no. The truth is that it is complex. Spain can learn a lot from our mistakes and decisions. Iceland's economic and political systems - even though we are a small country - are similar to those of Spain. But the differences come from Spain's memberships of the European Union, the euro zone and the Economic and Monetary Union. As you can see, austerity policies alone don't work. In Iceland, there were cutbacks but they were reasonable and were helped by the times. We were lucky that that the crisis hit in October 2008 because, with all the revenue that had been collected during the entire year, the budget for the following year wasn't so austere. At the same time, the center-left government tried to keep the Nordic welfare state intact. This gave us some breathing room. There was a two-year moratorium that was put in place on home evictions; it was more of a liberal policy than that being followed in Spain. It wasn't a moratorium for everyone, but for those who were able to show in good faith that they could not pay the mortgage. There were practically no evictions for two years. In 2010, when the moratorium was about to end, there were huge demonstrations and it was extended. But now it has ended; the evictions have begun and we have returned to the problem.

Q. What are the remedies that are working?

A. The government declared bankruptcy at three main banks, formed three new ones, and created new balance sheets. At the same time strict controls on monetary transactions were put in place, and they still exist today. You can't take money out of the country that isn't generated from the real economy. But then, if you operate a company abroad or have to send money to a sick family member, then you can get special permission.

Q. Do you think this could work for Spain?

The right to have a home should obligate society to help out families"

A. The EU is already studying this; creditors and investors have to suffer in the losses. What they can't do is place all the burden on taxpayers and the middle classes. Belonging to the euro zone has been very detrimental to Spain because the country has no freedom in its fiscal and monetary policies.

Q. In other words, the key lies in allowing creditors to absorb the first jolts of the crisis?

A. The first thing is to get to the root of the problem, which is the unreal debt that is not connected with actual economic activities. In Iceland, according to a parliamentary investigation, it wasn't ordinary people who caused the country to go bankrupt. It wasn't someone who went out and bought a flat-screen TV, a car or a home. Some 80 percent of the country's debt was held by other banks, including friends of the same owners of the financial institutions so that they could purchase companies abroad that cost some four times more than their actual worth. In Spain there is private debt held by companies and families, but I believe that much of that debt comes from the breakdown of the construction industry. You really need to determine what debts can be paid - what debt should be considered fair so that the society as a whole must chip in and pay, and what debt that should not be paid. The right for everyone to have a home should obligate society to help out families which cannot afford, in good faith, to pay for a home. Society should be able to pay for their homes. And similarly to Iceland, controls need to be introduced to prevent capital flight. If not, there will be a massive flight of capital. What was done in Iceland can be done [in Spain], but on a European scale.