Key Challenges

Fears of labor
unrest abating
Despite fears of labor unrest fueled by dissatisfaction with the recent, substantial wage hikes for business and political elites, three large labor unions nevertheless negotiated moderate wage agreements for their members in April 2019. Some public sector unions signed further agreements in late 2019 along similar lines but others have not yet reached agreement. The danger that labor market discord could result in debilitating strikes or excessive wage increases followed by a bout of increased unemployment, inflation or both seems to have abated.
Tourism vital,
but slowing
The growth in tourism has slowed down following a fivefold expansion between 2010 and 2018 from 0.5 million foreign tourist arrivals to 2.35 million. This slowdown notwithstanding, tourism will still make a significant contribution to the national economy. In recent years, tourism has generated more foreign exchange earnings than fish and aluminum combined, and may well continue to occupy first place as the country’s main foreign exchange earner in the years ahead. Even if the long-term consequences remain unclear, it appears that the bankruptcy of WOW air in the spring of 2019 may not dent the national economy as seriously as many feared. At the same time, Icelandair has encountered difficulties due to the need to ground its four Boeing 737 MAX-8 jets until 2020. The long-run impact of this on Icelandair, one of Iceland’s largest companies, remains to be seen.
Economic difficulties
in healthcare sector
Iceland’s largest hospital, Landsspítalinn (LHS), has for many years faced serious economic difficulties. These financial problems have resulted in repeated cuts to staff numbers and service provision in ways that many perceive as an existential threat to the healthcare system and some even see as a deliberate effort to pave the way toward increased privatization of healthcare, a controversial issue.
Economic difficulties in healthcare sector
The current cabinet – which is led by Katrín Jakobsdóttir, the chairman of the Left-Green Movement, and which has held office since late 2017 – has launched a plan for a limited, partial revision of the Icelandic constitution. By so doing, the government is rejecting the result of the consultative referendum in 2012 in which 67% voted for the proposed constitution drafted by the Constitutional Council in 2011 – a level of public support that remains undiminished according to recent opinion polling (MMR, 2019). Support for the proposed constitution, which includes a provision for national ownership of Iceland’s natural resources that was supported by 83% of voters in the 2012 national referendum, seems likely to increase in the wake of recent scandals involving Samherji. Recent revelations suggest that Samherji, Iceland’s largest fishing firm, paid huge bribes to African politicians to gain access to valuable fishing quotas. Meanwhile, Samherji is also under investigation in Norway and elsewhere for money laundering.
Country placed on
money-laundering list
After having failed to adequately comply with the recommendations of the Financial Action Task Force (FATF), concerning measures to tackle money laundering and the financing of terrorism, Iceland was added to the FATF’s grey list.
Uncertainty on judicial appointments
Another concern is whether the European Court of Human Rights (ECHR) will revise its ruling from March 2019. The ECHR had determined that Iceland had violated Article 6 of the European Convention on Human Rights, which is meant to ensure individuals’ right to a fair and public hearing, in the appointment of judges to the recently established Court of Appeals.
Ferðamálastofa (Icelandic Tourist Board), Accessed 27 October 2019.

Gylfason, Thorvaldur (2018), “Chain of Legitimacy: Constitution Making in Iceland,” in Jon Elster, Roberto Gargarella, Vatsal Naresh, and Bjørn Erik Rasch (eds.), Constituent Assemblies, Cambridge University Press, New York, 2018.

Iceland Federalist Papers (2017). Accessed 21 December 2018.

MMR (2019), Accessed 11 December 2019.

Party Polarization

Signs of polarization mounting; new parties represent broad spectrum
Iceland has performed above the OECD average for “ideological polarization in party systems” since 2013. Since 2016, however, Iceland has shown signs of greater polarization. The economic collapse of 2008 has led to a period of substantial turbulence in Icelandic politics, which has been further exacerbated by the resignation of Prime Minister Gunnlaugsson in 2016 due to his implication in the Panama Papers scandal. There have been two parliamentary elections in Iceland since 2016: one in October 2016 triggered by the Panama Papers scandal and one in October 2017 triggered by a pedophilia scandal. The number of parties in parliament has increased over the last decade. In the 2007 and 2009 elections, five parties won seats in parliament. After the 2013 election, six parties were represented in parliament, which increased to seven parties in 2016 and eight parties in 2017. Whether this stems from increased polarization in the political arena is not clear. The new parties now represented in the parliament (Althingi), such as Regeneration (Viðreisn) and the Center Party (Miðflokkurinn), were not established on the basis of any significant ideological polarization. Regeneration is essentially a liberal, pro-EU splinter group from the right-wing Independence Party. Meanwhile, the Center Party, a splinter group from the centrist Progressive Party, was formed by Gunnlaugsson. The Pirate Party and the People’s Party are more ideological. The Pirate Party emphasizes freedom of speech, free information, direct democracy, and transparency in politics and public administration. Meanwhile, the People’s Party focuses on the interests of the lowest-paid workers and vulnerable groups, such as the elderly and disabled.
No clear far-right
tendency evident
Crypto-fascist tendencies increasingly in evidence elsewhere in Europe are not clearly visible in Icelandic politics. Nevertheless, latent sympathy with real or imagined foreign strongmen (e.g., President Putin and President Trump) and their methods can be discerned in the political discourse of some representatives of the Independence Party, including its main organ (Morgunblaðið), and the Center Party. For example, the constant criticism of RÚV, the public broadcasting corporation, by right-wing politicians is considered unfounded and unfair by most objective observers.
Shifting coalition patterns; surprising lack of intra-coalition conflict
The pre-crash government (2007 – 2009) was a coalition of the Social Democrats and the Independence Party, and spanned the left-right ideological spectrum. However, two subsequent coalition governments (the left-wing 2009 – 2013 and the center-right 2013 – 2016 coalition governments) followed more traditional patterns of allegiance, with polarization more clearly evident then than it is today. Under the present coalition government (a coalition of the Independence Party, the Left-Green Movement and the Progressive Party, formed in 2017), the Left-Green Movement and the Progressive Party have historically been considered the main opponents of the Independence Party. Until then, it is was considered highly unlikely (if not unthinkable) that the Independence Party and the Left-Green Movement would join forces in government, but that is exactly what happened after the 2017 election. During its first two years in office, the current coalition government has not encountered any significant internal disputes concerning policy objectives, despite significant left-right ideological differences between the coalition partners. Some observers have not been surprised by the lack of internal conflict. The three current parties of government and the Social Democrats have long been referred to as the “Gang of Four” (Fjórflokkurinn) – an alliance of political parties perceived to behave like political interest organizations. (Score: 8)
Eva H. Önnudóttir and Ólafur Th. Hardarson: “Iceland 2017: A new government from left to right.” Accessed 21 December 2018.
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