Key Challenges

New government faces key challenges
Iceland’s next government, which is yet to be formed following the elections in October 2017, will face several key challenges.
Labor-market agreements vital to economy
Labor market prospects are unclear. Many agreements from 2015 to 2016 will expire between 2017 and 2019, including 39 in the second half of 2017, 84 in 2018 and 142 in 2019. The majority will expire between December 2018 and March 2019. The outcome of these labor market agreements will be important for future agreements. The SALEK agreement between employers’ associations and trade unions aimed to introduce a Nordic-style framework for negotiating wages and settle recent labor market disputes, the latter of which had led to widespread strikes and threats of inflation. But state employees and teachers have never signed the agreement. Consequently, roughly 70% of the labor market has agreed to join the SALEK agreement. The likelihood that the remaining 30% will agree to join is low.
Health care system under financial strain
A further challenge will involve strengthening the health care system, which has been under severe financial strain since the 2008 financial crash. Before the 2016 election and again in 2017, every political party promised to pay more attention to restoring health care provision to its earlier standing.
Influx of tourists brings revenue, stresses
Another major challenge concerns the dramatic rise in tourism in Iceland in the post-collapse period, especially following the volcanic eruption of Eyjafjallajökull in 2010. Between 2010 and 2016, the total number of tourists visiting Iceland rose by 370% from 0.5 million to 1.8 million. This has had a dramatic impact on the national economy as tourism has become the most important earner of foreign exchange, surpassing the fisheries and aluminum industries’ combined foreign exchange earnings. Iceland needs more and better infrastructure, including roads and airports, and public services, such as police and health care, to accommodate the huge increase in tourism. Furthermore, an analysis is needed of the expected environmental effects of this increase. There are indications that the influx of tourists will continue in part because oil prices and air fares will likely remain low over the next few years.
Future of banking system remains unclear
Yet another challenge concerns the future of the banking system, which failed so spectacularly in 2008. Governments since the financial crash have not outlined a strategy for the future ownership and organization of Iceland’s banking system, including the division between domestic and foreign, and between public and private ownership. Furthermore, there are no discernible plans for introducing foreign competition into Iceland’s protected retail banking system, a unique phenomenon in Europe. The problem is not confined to the banks because oligopolistic market structures are a hallmark of Iceland’s economy. With several major industries dominated by three or four local firms (e.g., oil, insurance and construction), Iceland needs more foreign competition.
Constitutional questions remain unresolved
Last but not least, the unresolved question of the new constitution hangs over Iceland like the sword of Democles. In a democratic state, parliament cannot under any circumstances permit itself to disregard the unequivocal results of a constitutional referendum. After the constitutional referendum called by parliament in 2012, in which voters gave their strong support to a constitutional bill drafted by the nationally elected Constitutional Council, parliament has failed to move toward ratification, undermining Iceland’s democracy. The reason for this political failure is, first and foremost, the unwillingness of the Independence Party to accept the new constitution’s declaration that “Iceland’s natural resources which are not in private ownership are the common and perpetual property of the nation,” a provision supported by 83% of the voters in the 2012 referendum. The result of the parliamentary elections in October 2017 did not offer a clear path forward. What happens next depends on what kind of coalition emerges and how long it will last.
Ferðamálastofa (Icelandic Tourist Board)

Gylfason, Thorvaldur (2016), Chain of Legitimacy: Constitution Making in Iceland, CESifo Working Paper No. 6018, July.

Thorláksson, Indriði H. (2015), “Veiðigjöld 2015. Annar hluti” (“Fishing fees 2015. Part Two”).

Iceland Federalist Papers (2017).
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