Centre-left victory in Icelandic election

Interim Prime Minister Johanna Sigurdardottir has claimed victory overnight in Iceland’s election ending the long-term rule of a conservative alliance. Sigurdardottir’s centre-left Social Democratic Alliance won 20 seats with 30 percent of the vote and will govern with the aid of coalition partner the Left-Green Movement who won 14 seats. Together that gives them a five seat majority in the 63 member Althing (one of the world’s oldest parliaments).

Conservative Independence Party leader Bjarni Benediktsson conceded defeat in the worst election result in the party's history. His party took only 22.9 per cent of votes, well below the previous all-time low of 27 per cent in 1987. The Independence Party has ruled Iceland with its coalition partners the Progressive Party for nearly all of the last 64 years. But they were forced out of office earlier this year when then Prime Minister Geir Haarde stepped down due to health reasons.

But it wasn’t just Haarde’s health that was suffering. It was the country’s economic collapse that claimed the conservative administration and the left-wing parties formed a caretaker government in February with a view to holding elections in spring. In the process Sigurdardottir became the country’s first female prime minister. Her rise to the top was also notable for the fact that she was the world’s first openly gay premier.

However Sigurdardottir’s sexuality was the last thing on the minds of voters in this weekend’s election. Opinion surveys and interviews with voters showed a clear inclination to punish the pro-business leaders who brought the country to ruin. In the good times banks offered 100 percent lending. Now many Icelanders are now trapped with skyrocketing loan repayments while inflation hovers at 15 percent and unemployment has shot up from barely one percent to ten percent.

The country’s banking sector collapse late last year and left the country swamped with debts. Inflation is spiralling out of control and the International Monetary Fund (IMF) has predicted that the economy will shrink by about 10 percent in 2009, which represents the Atlantic island’s biggest slump since it won independence from Denmark in 1944. In October the IMF gave Iceland a stimulus package worth $2.1 billion to stabilise the freefalling currency (the krona lost almost half its value to the euro in the last 12 months) and also prop out the country’s stock market.

Icelandic financiers are now delicately trying to untangle the mess left by the global financial crisis. Its banking system significantly outstripped the authorities' ability to act as a lender of last resort when the toxic debts began to emerge. The new government was forced to implement budget austerity measures of upwards of $400 million and hopes this plan will end capital flow curbs. This would allow foreign investors to take their money out of the country without destroying the currency. Investors (including many English councils) had been locked into crown assets when the previous government imposed capital controls to stop the domestic currency going into freefall after Iceland’s top three banks collapsed.

In the past Iceland deliberately stayed out of the EU to protect its rich fishing grounds from European boats. But now Icelanders are now looking to the European body to bail them out. Their application to join is being expedited and a process that normally takes ten years or more could be over by 2011. The EU is looking favourably on Iceland’s application. Olli Rehn, the European commissioner in charge of enlargement gave it a glowing endorsement despite the financial crisis. “It is one of the oldest democracies in the world and its strategic and economic positions would be an asset to the EU,” he said. Sigurdardottir has pledged to fast track membership application and says she wants Iceland to join the euro zone within four years.