Iceland

** Iceland **
1/29/09

I. Background: Settled by Norwegian and Celtic (Scottish and Irish) immigrants during the late 9th and 10th centuries A.D., Iceland boasts the world's oldest functioning legislative assembly, the Althing, established in 930. Independent for over 300 years, Iceland was subsequently ruled by Norway and Denmark. Fallout from the Askja volcano of 1875 devastated the Icelandic economy and caused widespread famine. Over the next quarter century, 20% of the island's population emigrated, mostly to Canada and the US. Limited home rule from Denmark was granted in 1874 and complete independence attained in 1944. Literacy, longevity, and social cohesion are first-rate by world standards. II. Environment - international agreements: //party to:// Air Pollution, Air Pollution-Persistent Organic Pollutants, Biodiversity, Climate Change, Climate Change-Kyoto Protocol, Desertification, Endangered Species, Hazardous Wastes, Kyoto Protocol, Law of the Sea, Marine Dumping, Ozone Layer Protection, Ship Pollution, Transboundary Air Pollution, Wetlands, Whaling //signed, but not ratified:// Environmental Modification, Marine Life Conservation III. Executive branch:- **SET TO CHANGE** // chief of state: // President Olafur Ragnar GRIMSSON (since 1 August 1996) //head of government:// Prime Minister Geir H. HAARDE (since 7 June 2006) //cabinet:// Cabinet appointed by the prime minister //elections:// president, largely a ceremonial post, is elected by popular vote for a four-year term (no term limits); election last held 26 June 2004 (next to be held in June 2008); following legislative elections, the leader of the majority party or the leader of the majority coalition is usually the prime minister //2004 election results:// Olafur Ragnar GRIMSSON 85.6%, Baldur AGUSTSSON 12.5%, Astthor MAGNUSSON 1.9% //note:// the election for president planned for 28 June 2008 was never held because Olafur Ragnar GRIMSSON had no challengers; he was sworn in on 1 August 2008 IV. Economy Iceland's Scandinavian-type social-market economy combines a capitalist structure and free-market principles with an extensive welfare system, including generous housing subsidies. With this system, Iceland has achieved high growth, low unemployment, and a remarkably even distribution of income. Government economic priorities has included stabilizing the krona, reducing the current account deficit, containing inflation, restructuring the financial sector, and diversifying the economy. The economy depends heavily on the fishing industry, which provides 70% of export earnings and employs 6% of the work force. The economy remains sensitive to declining fish stocks as well as to fluctuations in world prices for its main exports: fish and fish products, aluminum, and ferrosilicon. Iceland's economy has been diversifying into manufacturing and service industries in the last decade, with new developments in software production, biotechnology, and tourism. Abundant geothermal power has attracted substantial foreign investment in the aluminum and hydropower sectors and boosted economic growth, although the financial crisis has put several investment projects on hold. Much of Iceland's economic growth in recent years came as the result of a boom in domestic demand following the rapid expansion of the country's financial sector. Domestic banks expanded aggressively in foreign markets, and consumers and businesses borrowed heavily in foreign-currency loans, following the privatization of the sector in the early 2000s. Worsening global financial conditions throughout 2008 resulted in a sharp depreciation of the krona vis-a-vis other major currencies. The foreign exposure of Icelandic banks, whose loans and other assets totaled more than 10 times the country's GDP, became unsustainable. Iceland's three largest banks collapsed in late 2008. The country negotiated over $10 billion in loans from the IMF and other countries to stabilize its currency and financial sector, and to guarantee foreign deposits in Icelandic banks. A protracted recession is expected in 2009 and 2010 with GDP likely to contract and unemployment likely to rise substantially. The collapse of the financial system has led to a major shift in opinion in favor of joining the EU and adopting the euro, after previous opposition stemming from Icelanders' concern about losing control over their fishing resources. V. Military Iceland has no standing military force; under a 1951 bilateral agreement - still valid - its defense was provided by the US-manned Icelandic Defense Force (IDF) headquartered at Keflavik; however, all US military forces in Iceland were withdrawn as of October 2006; although wartime defense of Iceland remains a NATO commitment, in April 2007, Iceland and Norway signed a bilateral agreement providing for Norwegian aerial surveillance and defense of Icelandic airspace (2008) VI. Government Collapse ICELAND was the first economy to come close to collapse because of the global financial crisis. Barely four months later, as a result of the ensuing chaos, its government is the first to be driven out of office by popular protests. A growing rumble of popular anger, echoing loudly in a normally close-knit country of only around 310,000 people, has at last forced the conservative government of Geir Haarde, the prime minister, to give up its hold on power. On Monday January 26th as the ruling coalition disintegrated, Mr Haarde handed his own resignation and that of his cabinet to Olafur Grimsson, the president. It was accepted, Mr Haarde’s spokesman said, although the cabinet will stay on until a new government is formed. As winter deepened and more people lost their jobs, polls showed a growing opposition to Mr Haarde’s Independence Party and rising support for the Left-Green Movement, whose members helped to organise the egg-chuckers. Over the weekend the Social Democrats, junior coaltion partners to the Independence Party, sought to bolster their support by replacing Mr Haarde with a prime minister of their own. When the Independence Party rejected this, the coalition fractured. A change of government is unlikely to satisfy the protesters, nor will it automatically solve any of Iceland’s numerous problems. Demonstrators also want the scalp of David Oddsson, the governor-in-chief of the central bank and a former prime minister. He was responsible for many of the free-market reforms that put Iceland onto a path of breakneck prosperity in the 1990s. When the banks that he privatised collapsed, he got much of the blame.