Iceland: An End to Prolonged Political Instability?

by Saeka Inaka | 6 April 2017 | Economics/poverty, Europe, Global View, Journalism/speech, North and Central America

In Iceland, following the results of the general election held in October 2016 and after nearly two months of talks among seven parties, on January 11, 2017 the Icelandic Independence Party announced the formation of a new coalition government together with the Reform Party and Bright Future. However, until this coalition was formed, Icelandic politics had been extremely unstable.

Political instability persisted for roughly seven years from 2008, and the situation deteriorated. In September 2008, the subprime mortgage crisis triggered the Lehman shock, leading to a global financial crisis; affected by this, in October Iceland’s three major banks—Kaupthing, Landsbanki, and Glitnir—were driven into bankruptcy due to default. Hit by a nationwide financial crisis, the Icelandic market plummeted and the Icelandic króna collapsed. This naturally depressed Iceland’s economy, but it was not only the economy that bewildered the public. About a week before the economic collapse, WikiLeaks, which publishes confidential information, released an internal report from Kaupthing Bank on its website. The report revealed, among other things, that the bank had been offering high-risk loans to its shareholders and others with significant economic interests in its shares. Later, four people including the chairman were arrested on fraud charges for attempting to unlawfully inflate the bank’s stock price and received guilty verdicts. Kaupthing had many customers not only in Iceland but also in countries such as the United Kingdom, and for a nation of about 330,000 people, the bank had grown far too large; eventually, the bank’s liabilities reached a level several times Iceland’s GDP. As a result, the government could not handle the collapse on its own and took a loan from the International Monetary Fund (IMF).

Exterior of Kaupthing Bank in Reykjavik. Photo: Álfheiður Magnúsdóttir （ CC BY-NC-SA 2.0 ）

Furthermore, citing the need to protect customer information, Kaupthing sought a court injunction to stop publication of the leaked report. The Icelandic public broadcaster (RUV) had planned to report on the issue on its evening news, but five minutes before the broadcast it was notified of the injunction and, in an unprecedented moment in Iceland’s media history, was forced to drop the story. In response, RUV refrained from airing the planned report and instead only directed viewers to the WikiLeaks website where the report was posted, which brought the issue rapidly to the fore.

This series of events intensified public criticism of politics and the elite, and the prime minister was forced to resign. It also heightened public awareness of freedom of the press and political transparency. The new government therefore established the International Modern Media Institution (IMMI), which advises the legislature with the aim of enacting laws to protect freedom of information, speech, and expression. The incident not only improved regulation of Iceland’s banks, but also helped strengthen democracy.

Five years after that incident, a new political scandal that broke last April—the Panama Papers—once again brought political instability to Iceland. The Panama Papers revealed that former Prime Minister Gunnlaugsson had established an offshore company, Wintris, in 2007 in the British Virgin Islands, one of the hubs of tax havens, and that through it he had invested in Iceland’s three major banks. It was the first case in which the Panama Papers exposed a national leader’s involvement in secret dealings. It also came to light that when Gunnlaugsson was elected to parliament in April 2009, he transferred the company’s ownership to his wife and had not disclosed it as part of his assets. Combined with his refusal in interviews to answer media questions about Wintris and his failure to admit wrongdoing, he faced fierce public criticism. Shortly thereafter, the country saw the largest demonstrations in Icelandic history, involving tens of thousands of people; Gunnlaugsson completely lost public trust, the opposition submitted a no-confidence motion, and the former prime minister was forced to resign.

Demonstration against former Prime Minister Gunnlaugsson over the Panama Papers. Photo: Thorgnyrthoroddsen （ CC0 1.0 ）

As a result of this affair, issues of political corruption and transparency drew even greater attention in Iceland, and support for the Pirate Party, which advocated improvements in these areas, surged. The Pirate Party is a political party organized by private citizens calling for revisions to copyright laws that they argue do not fit the realities of the internet age. First founded in Sweden in 2006 and established in Iceland in 2012, it evolved into a party that engages broadly with political power and social issues.

In recent years, as political corruption and the wrongdoing of political and economic elites have drawn global attention, the Pirate Party rapidly gained popularity, especially among young people. In the 2013 election, the year after its establishment, it won only 5% of the vote and three seats; but in 2016, as support for the ruling Progressive Party fell to 40% after former Prime Minister Gunnlaugsson resigned, the Pirates’ popularity soared, achieving extraordinary growth by winning ten seats—more than triple its initial three—just four years after its founding. And in a survey conducted in April ahead of the October 2016 general election, support for the Progressive Party fell further to 7.9% and the Independence Party to 21.6%, while 43% indicated they intended to vote for the Pirate Party, putting it provisionally in first place and surpassing the combined vote for the two ruling parties. In the actual October general election, however, the Pirates won 14.5% of the vote, placing third.

In response to these results, the first-place Independence Party began coalition talks with the Pirate Party to form a center-right government but failed; the second-place Left-Green Movement also negotiated to form a center-left government, but that likewise did not materialize. After further rounds of inter-party negotiations, the three parties that ultimately formed a coalition were the Independence Party, Reform Party, and Bright Future. The new prime minister, Benediktsson, was also revealed during last year’s Panama Papers uproar to have owned shares in an offshore company, leaving lingering unease. Even so, after roughly nine years of frequent changes of government since 2008, the establishment of the new government is undoubtedly a major step forward. Whether this will stabilize Iceland’s turbulent politics bears close watching.