Iceland faces a heavy – but, it is hoped, manageable – burden of foreign debt following the crash of 2008, as well as other demanding challenges. Interest payments on the public debt amounted to 9% of GDP in 2010, and are now the single largest expenditure item in the government budget. The outlook for the years ahead depends to a large extent on the government’s ability to continue implementing the rescue package in place since 2008, with the support of the International Monetary Fund (IMF) and the Nordic countries. Important too will be on the government’s ability to reach an advantageous accession agreement with the European Union, and subsequently convince the electorate to accept the agreement in a national referendum. None of this can be taken for granted.
The government’s inability thus far to settle the Icesave dispute with Great Britain and the Netherlands, a prerequisite for continued financial support from the Nordic countries and by extension the IMF, provides one source of uncertainty as to future prospects. So too do the accession negotiations with the EU, particularly in view of the junior coalition partner’s opposition to EU membership and the unwillingness of the opposition parties to support membership. The post-crash government has significant coordination problems due to the fact that some members of the Left Green parliamentary group have not been cooperative with the government on some key issues, including the Icesave dispute and the prospect of EU membership. That means that even if the government parties technically have a majority in parliament, the government is in practice a minority government, and needs to negotiate with a rather unaccommodating opposition on some important issues. This state of affairs saps the government’s energy and delays progress. These delays have consequences. For example, the strict capital controls put in place as part of the IMF-supported rescue program in late 2008 were intended to be temporary, originally expected to last for two to three years. However, due to delays in the implementation of the program, no firm plans for their dismantling were on the table as of the time of writing, almost two years later. Lacking a timetable for the abolition of capital controls, it will be difficult or impossible to attract foreign capital. For this reason and others, it is doubtful whether the government will last until the end of its current mandate in 2013. Painful spending cuts need to be made and taxes need to be increased to make ends meet, both prospects that will strain the government. At the same time, the outcome of the municipal elections in 2010, in which a comedian whose campaign manifesto included a promise to expose his own corruption was elected mayor of Reykjavik with 35% of the vote, ought to make the government think twice before giving up and calling a parliamentary election. This is at best a volatile situation.