Key Challenges

Iceland faces several key challenges in the economic and political sphere, which are listed below from relatively minor to major.
Inflation boosting labor market tensions
First, increased inflation during the pandemic seems likely to increase tensions in the labor market with an increased risk of debilitating strikes or inflationary wage settlements of the kind that Icelanders know well from the past. The Icelandic króna has lost 99.95% of its value vis-à-vis the Danish krone since 1939. Many observers consider inflation hard to keep under firm control with unchanged monetary and financial arrangements, concluding that Iceland needs to adopt the euro, a controversial proposition at present. They cite Ireland, which, with the euro, has recovered much better than Iceland from the financial crisis of 2007–2008. They also cite oppressive oligopoly in domestic banking, which is unencumbered by foreign competition, a unique situation in Europe.
Key institutions have
been neglected
Second, while government finances were reasonably balanced for several years before the COVID-19 pandemic struck in 2020, fiscal equilibrium is not a particularly impressive feat when important responsibilities of public authorities suffer from long-standing financial neglect. For example, Iceland’s largest hospital, Landspítalinn (LHS), has for many years faced serious difficulties, a situation that is viewed by some observers as an existential threat to the healthcare system.
Questions about future
of tourism
Third, before the pandemic broke out, tourism had developed into Iceland’s biggest foreign-exchange earner, outweighing fish and aluminum combined. With the outbreak of COVID-19, tourism earnings contracted by 60%. It is impossible to know the extent to which tourism will recover when the pandemic subsides. Some observers consider full recovery to the point where the number of foreign tourist arrivals each year equals seven times Iceland’s population unlikely, in part because concerns about climate change seem likely to lead governments to levy fees on foreign travel to limit CO2 emissions. Even so, tourism will still be important to the national economy in the future.
No clear picture of
offshore financial
Fourth, too little is known about the offshore financial holdings of Icelanders. When the Panama Papers scandal broke in 2016, Icelanders outnumbered nationals from all other countries in per capita terms in the documents. Academic research suggests that, within Europe, hidden wealth in offshore tax heavens in 2007 ranged from 3% of GDP in Denmark to nearly 50% in Russia. No such figures are available for Iceland. This matters because large amounts of money are known to have been transferred from Icelandic banks to accounts abroad immediately before and even during the financial collapse in 2008, and because vessel-owning oligarchs have for many years been granted about 90% of economic rents from Iceland’s fisheries, which leaves 10% for the lawful owner, the people of Iceland. Full disclosure and transparency in these matters would help to secure reasonable tranquility in the labor market and to restore trust.
Reform of political
class needed; revised
constitution has been ignored
Fifth and last, Iceland needs a better, more honest and more competent political class, as parliament itself acknowledged in 2010 when it resolved unanimously (with 63 votes to zero, and no abstentions) that “criticism of its political culture must be taken seriously” (authors’ translation). Without a reformed political class, democratically elected on a level playing field, the prospect that much needed reforms are implemented appear bleak. These reforms include a full account of the nation’s onshore and offshore wealth, as well as the overhaul of banking and finance. The first and most important step in this direction is the ratification of the new, revised constitution, which has been ready for parliamentary ratification since 2013. The new constitution, which was given the green light by 67% of voters in a national referendum called by parliament in 2012, aims to strengthen democracy through introducing more effective checks and balances, increasing transparency, improving judicial appointments, implementing an urgent election reform to equally weight votes (as stipulated by a 2010 national forum, the 2011 constitutional bill and the 2012 national referendum), and introducing a constitutionally guaranteed public right to the rents from Iceland’s natural resources. Following ratification, the new constitution would reduce the role of money in Icelandic politics.
Ferðamálastofa (Icelandic Tourist Board), i-erlendra-ferdamanna. Accessed 7 February 2022.

Gylfason, Thorvaldur (2919), “Ten Years After: Iceland’s Unfinished Business,“ in Robert Z. Aliber og Gylfi Zoega (eds.), The 2008 Global Financial Crisis in Retrospect, Palgrave.

Thorláksson, Indriði H. (2015), „Veiðigjöld 2015. Annar hluti“. Herðubreið, 15 April. Accessed 7 February 2022.

New Icelandic Constitution with a foreword by Vigdís Finnbogadóttir and historical introduction by Thorvaldur Gylfason, Constitution Society (Stjórnarskrárfélagið), Reykjavík, 2018.

Panama Papers (2016). “Politicians, Criminals and the Rogue Industry That Hides Their Cash.” Accessed 7 February 2022.

Zucman, Gabriel (2013). “The Missing Wealth of Nations: Are Europe and the U.S. net Debtors or net Creditors?” Quarterly Journal of Economics 128 (3), 1321–1364.

Party Polarization

Polarization levels rising; new parties entering parliament
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 led to a period of substantial turbulence in Icelandic politics, further exacerbated by the resignation of Prime Minister Gunnlaugsson in 2016 due to his implication in the Panama Papers scandal. There have been three parliamentary elections in Iceland since 2016: one in 2016 triggered by the Panama Papers scandal, one in 2017 triggered by a pedophilia scandal and one in 2021 that was not triggered by any scandal. The number of parties in parliament has increased. In 2007 and 2009, five parties won seats in parliament. After the 2013 election, six parties were represented in parliament, then seven parties in 2016, and eight parties in 2017 and 2021. 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), are splinter parties that were not established on the basis of any significant ideological polarization. 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 right-populist movement
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., presidents Putin and 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 often put forward without clear evidence.
Unlikely coalition has functioned smoothly
The pre-crash government (2007 – 2009) was a coalition of the Social Democrats and the Independence Party, spanning the left-right ideological spectrum. Two subsequent coalition governments (a left-wing coalition 2009 – 2013 and a center-right coalition 2013 – 2016) followed more traditional patterns of allegiance, with polarization more clearly evident then than it is today. Until 2017, it was considered highly unlikely (if not unthinkable) for the Independence Party and the Left-Green Movement to join forces in government. However, that happened following the 2017 election, which produced the present right-center-left coalition government of the Independence Party, the Left-Green Movement and the Progressive Party, a coalition that continued in office with a renewed mandate from the voters in 2021. The coalition has not experienced any significant internal disputes over policy, which, since 2020, has been dominated by the COVID-19 pandemic. (Score: 8)
Eva H. Önnudóttir and Ólafur Th. Hardarson: “Iceland 2017: A new government from left to right.” Accessed 4 February 2022.
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