IHS Global Insight Perspective | |
Significance | Iceland's coalition government collapsed on Monday, following the resignation of Prime Minister Geir Haarde last week. |
Implications | The demands of increasingly violent protestors have finally been met, raising hopes that stability will once again return through either the creation of a new coalition or the calling of elections |
Outlook | Iceland's new government will need to deal with two controversial issues—how to deal with the ongoing economic woes, and the island's future engagement with the EU. |
Snowballing Instability
Iceland's political instability yesterday appeared to have come full circle with the collapse of the coalition government alliance between the right-wing Independence Party (SSF) and the Social Democratic Alliance (SF). The coalition government has been teetering on the edge of collapse since the Icelandic Althingi parliament reconvened after the Christmas recess on 20 January. Since then, the reconvening protestors have gathered daily outside the building calling for the resignation of the government, Prime Minister Geir Haarde, Central Bank Governor David Oddsson, and the chief of the Financial Services Authority, as well as demanding the calling of snap elections. However, events spiralled following Prime Minister Haarde's announcement on Friday (23 January) that he was stepping down as chairman of the right-wing ruling SSF, and calling for early elections to be held on 9 May—two years ahead of schedule. His resignation was followed by similar announcements from Business Secretary Bjorgvin Gudni Sigurdsson, and director of the Financial Markets Authority, Jonas Jonsson, over the weekend (24-25 January). The spate of resignations and calls for early elections in May failed to appease protestors, who continued protesting and demanding that snap elections be called immediately. Following a meeting between the party leaders of the SSF and SF yesterday, a statement was issued announcing the dissolution of their coalition alliance. President Olafur Ragnar Grimsson has accepted Haarde's resignation, as well as the dissolution of the coalition government. The President has requested that current ministers continue in their posts until a new government is formed. Meanwhile, Grimsson has yet to confirm a date for snap elections, although this is broadly expected to be during the second quarter of 2009.
Alternative Scenarios
Haarde and Grimsson are currently in the process of attempting to create an interim broad national-coalition government representing all the parties in parliament. However, this could prove difficult to achieve, as the former junior-coalition partner, the SF, has already indicated that it would prefer forming an alliance with the opposition Left Green Party (VG), whose leader Steingrimur Sigfusson has already indicated an interest in taking over as prime minister. This is in part driven by political wariness from the SF—led by current Foreign Minister Ingibjorg Gisladottir—and the VG over engaging with the SSF, which is largely blamed by the electorate for the country's economic woes. However, the possible SF-VG would be a minority government, and the two parties would also have to negotiate their stances on issues such as Iceland's relationship with the European Union (EU) and the IMF. The relationship with the IMF could prove pivotal, as the US$10 billion loan deal from the IMF and Iceland's Nordic neighbours was an important element in bringing a degree of stability to the island economy. However, Sigfusson has indicated a desire to renegotiate the economic conditions imposed by the international organisation, which could prove more harmful that useful, as it could once again reduce already shaky confidence in the economy. Meanwhile, he could face competition for the role of prime minister from current SF Social Affairs Minister Johanna Sigurardottir, named as a possible candidate by party leader Gisladottir, who is taking a two month leave of absence. The latest polls indicate that, should elections be held today, the VG would win 32.6% of the vote, though the SSF and SF would not fair nearly as badly as expected, winning a possible 22.1% and 19.2%, respectively. Meanwhile, support for the other main opposition party, the Progressive Party, stands at 16.8%. The only possible upset at present is that the leadership of any interim national-unity coalition will become tarred by the same brush as the SFF ahead of possible elections.
Outlook and Implications
The collapse of the current administration was broadly expected, as a result of mounting popular discontent directed towards the government since the financial sector meltdown in October 2008. The country's economic situation has worsened since the collapse, with the krona plunging in value, and unemployment and inflation both soaring. The caretaker-government coalition, as well as the next fully elected administration, will be faced with a series of major challenges. Foremost of these challenges will be getting Iceland's economy back on track, which will undoubtedly prove a difficult course to navigate. The outlook for the real economy is also very grim; the financial collapse will now be followed with a deep and probably prolonged recession, with unemployment soaring and credit growth, consumption, and imports being forced to endure sharp and potentially very painful adjustments. The new administration will need to deal with sharply deteriorating public finances as the economy sharply contracts, at the same time as the government needs to find a way to manage the vast external obligations of the collapsed oversized banking sector.
Another serious challenge likely to face the new administration is the issue of Iceland's relationship with the EU. The next government will need to seriously address Iceland's membership perspectives, an issue which has largely been avoided by previous administrations, but which has risen in importance since the economic meltdown. Iceland has until now chosen to remain outside of the EU because of a reluctance to engage with the bloc's fisheries policy. Public support for EU membership has surged since the economic collapse, although this is once again waning. More importantly, the composition of the next coalition government is likely to have a significant effect on any action taken towards the bloc over the next four years. The SF and Progressives are pro-accession and are firm advocates for the holding of a referendum on these issues. In the meantime, the SFF is avidly opposed to possible membership; however, this staunch opposition has been tempered in recent months as the crisis has intensified. Finally, the possible leader of the next coalition, the VG, is opposed to membership but has indicated it would hold a referendum on the issue. Regardless of who wins the possible snap elections, it is likely that the island will at least hold a referendum on the issue of membership, which could pave the way for Iceland's eventual EU accession.