Iceland: an overview

The banking crisis of 2008 has coloured almost every aspect of Iceland’s politics and economy. It led to the fall from power of the party that had been in government for six decades, and the first trial of a head of state in connection with the financial crisis. The new draft constitution, which is currently before the parliament for approval, involved unprecedented citizen involvement.

Before the crisis, Iceland had enjoyed an economic boom. But the dramatic increase in Iceland’s foreign debt ensured that the banking crisis would bring with it a currency crisis and inhibit the Icelandic central bank’s response. Iceland is nevertheless emerging relatively unscathed. A major remaining issue from the UK point of view is the Icesave compensation dispute. The British and Dutch governments compensated depositors in Icesave accounts following the collapse of Landsbanki, but agreements to claim this back from Iceland were defeated in two referendums. The court of the European Free Trade Association (EFTA), is expected to rule on the case in December 2012. If Iceland loses, the costs could be substantial, although the government has said that there is enough in the Landsbanki estate to cover all depositors.

The Icesave issue could affect Iceland’s current application to join the EU, which itself was prompted by the banking and currency crisis. The application is proceeding relatively quickly, despite domestic public and political opposition.

Fisheries could also be problematic. Iceland has been condemned for ‘plundering’ the mackerel stock and for threatening its long-term future. The stock is worth some £200 million to the UK economy. More information about the issue can be found in Library Standard Note SN6511—Icy fishing: UK and Iceland fish stock disputes. Iceland’s commercial whaling operations could also have implications for its EU accession.