Polls indicate that the current government coalition, composed of the Social Democratic Alliance Party and Left-Green Movement, will be voted out of power. Even though Iceland's gross domestic product grew by 3 percent in 2011 and by 1.6 percent in 2012, the government fell out of favor with its constituents through a combination of spending cuts, tax hikes and slow progress in removing capital controls. Moreover, the government alienated a large portion of the population that opposed EU accession. The current government will most likely be replaced by a coalition of center-right parties, which were in power before the financial crisis of 2008.
Like those of other European countries, Iceland's political landscape is being populated with new parties. In fact, 15 parties reportedly are competing for the country's 63 parliamentary seats. But despite these new parties, the traditional political elite will probably regain their power. The conservative Progressive Party and the Independence Party, which have jointly ruled in the past, are running on platforms promoting radical change; according to poll results, each have the support of between 20 and 30 percent of the population.
Whoever is elected will have to contend with Iceland's pressing economic challenges. Iceland has struggled to remove the capital controls in place since late 2008. The government and the central bank have tried to loosen those controls gradually, but the process is taking much longer than expected. One of the main challenges for the next government will be to expedite that process. The improved economy helps the new government's prospects, but the conservative coalition, if elected, probably will not be able to loosen capital controls as quickly or as easily it claims it will.
Isolation and Integration
Iceland has long tried to balance between isolation and integration. It is an EU candidate country and a member of the European Free Trade Association and the Schengen Zone. It has strong economic and cultural ties to continental Europe. Iceland has been fully independent only since 1944, and as a NATO member without a military, Reykjavik relies on support from other NATO members and from other Nordic countries.
However, the new government will adjust its strategy toward the European Union. Only after winning elections in 2009 did the government formally apply for EU membership. The country was going through a deep recession and its currency was depreciating markedly. Reykjavik saw EU and eurozone membership as a way to get Iceland out of the crisis.
But EU membership has steadily lost popularity among the Icelandic people, due in part to the economic recovery and to changes it would have to make in its vital fishing sector. EU accession talks have been postponed and are unlikely to see any progress — most parties in their election campaigns have promised not to further pursue membership.
Given Iceland's geographic isolation and its dependency on outside support, the country's unwillingness to join the European Union may seem surprising. Iceland believes that with the growing importance of the Arctic, the island will receive more attention from larger powers. Iceland's efforts to establish ties outside Europe — it was the first European country to sign a free trade agreement with China — is part of Reykjavik's strategy to highlight the strategic importance of the island, lest it lose mainland Europe's interest.
Editor's Note: An earlier version of this analysis misstated the number of seats in Iceland's parliament.
