Icelandic anti-EU parties begin talks to form government

Sigmundur Gunnlaugsson Bjarni Benediktsson.jpg

Iceland's anti-EU centre-right parties began talks yesterday (28 April) to form a new administration, promising to end years of austerity and provide debt relief to households, but haggling over which one of them will lead the government continues.

Fed up with years of belt tightening and soaring debt, Icelanders on Saturday [27 April] handed the ruling Social Democrats the biggest defeat any ruling national party has suffered since independence from Denmark in 1944. They also offered the very parties that presided over Reyjkavic's economic rise and collapse another chance.

"The best solution would be a two-party coalition; that would be the strongest type of government capable to handling the tough decisions ahead," said Independence Party leader Bjarni Benediktsson, 43, on Sunday, calling a coalition of the two centre-right parties a "natural first choice".

With all ballots counted, the Independence Party, which has participated in every government between 1980 and 2009, won 26.7% of the vote and 19 seats in the Althing, the world's oldest parliamentary institution.

The Progressive Party, its main rival and partner in previous coalitions, scored 24.4%, also worth 19 seats, while the Social Democrats were a distant third with 12.9%.

Both parties are against Iceland joining the EU or the euro.

"[The] Independence Party and Progressive Party teaming up in a coalition is by far the most likely outcome. Other outcomes are of course possible but very unlikely," commented Olafur Hardarson, a political science professor at the University of Iceland, as the final votes came in.

In a country where Nordic civility prevails, the prime minister walks without security guards and members of parliament are listed in the phone book. Coalitions are usually formed in just days, and experts said it would be a quick deal once again.

President Olafur Ragnar Grimsson said he would decide by Monday evening who he would ask to form the government.

Progressive Party leader Sigmundur Gunnlaugsson, 38, argued that he should lead the government because his party had made the biggest gains, more than doubling its seats in parliament.

"I would think we are in a position to be offered to lead the government. We have gained most support," he said.

Collapse

Once a European financial centre, the windswept north Atlantic island of glaciers, geysers and volcanoes has struggled along for years after a crash that brought it to its knees.

"A lot of people are struggling and they are expecting a lot from this next government, maybe even magic," Reykjavik voter Haraldur Johannsson, 57, said. "All the parties make promises but they often don't keep them so perhaps we should be careful in what we wish for."

The two parties campaigned on offering households debt relief as falling property prices and inflation-indexed mortgages keep pushing debt higher, despite several rounds of write-offs.

They also argued that foreign investors, primarily hedge funds, who hold claims to the collapsed banks, must take a huge write-off, possibly as much as 75%, before capital controls can be lifted. And both argued that Iceland should end talks to join the European Union, preserving independence.

"People seem to have a very short memory," Halldor Gudmundsson, 44, said after casting his ballot on Reykjavik's outskirts. "These are the parties that got us into the mess in the first place."

The two parties presided over Iceland for years, setting in motion its unchecked economic liberalization, which led to a phenomenal rise and crash.

Iceland's privatized banks borrowed on cheap overseas markets and lured British and Dutch savers with high returns.

But after amassing assets worth more than 10 times Iceland's GDP, Landsbanki, Kaupthing and Glitnir collapsed in quick succession, dragging the entire country into a financial abyss in October 2008.

Property prices tumbled, unemployment soared and the currency was only saved by capital controls that locked in foreign investors indefinitely.

The Social Democrats stabilized the economy with a bailout package hailed as exemplary by the IMF. But a series of policy blunders, tax hikes, leniency toward foreign creditors and their inability to deal with household debt cost them popularity.

Iceland was hit severely by the 2008 global financial crisis and economic downturn that followed.

Iceland's banking-sector assets had grown from about 96% of GDP in 2000 to about 800% by the end of 2006, and were worth around 10 times its GDP on the eve of the crisis. 

Iceland's centre-right government collapsed in January 2009 as a result of the crisis. In the summer of 2009, Iceland's parliament backed the new government's plan to begin accession talks with the European Union. Only one year later, the country started EU accession talks

With the approach of the elections, in January 2013 the government decided to put on hold negotiation over the “difficult” chapters relating to fisheries, agriculture, right of establishment and services, and on free movement of capital. [more]

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