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In 1944, when World War II was still going
on, Iceland became a republic by dissolving a union with
Denmark. After the end of the war, the United States had
to maintain its air base at Keflavík in exchange for
taking responsibility for Iceland's defense. The
agreement with the United States and the Icelandic entry
into the NATO Alliance in 1949 created a fierce and long
political battle.
Since Denmark had been occupied by Germany, Iceland
was occupied in May 1940 for the purpose of preventing
British troops. The following year, the United States
took over military control of Iceland, and the Americans
established an air base at Keflavík for air bridge
intermediaries to the Allies in Europe.
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ABBREVIATIONFINDER:
List of most commonly used acronyms containing Iceland. Also includes historical, economical and political aspects of the country.
Following a referendum, the Icelandic parliament, the
parliament, decided to cancel the union with Denmark
before the end of the Second World War (see Older
History). On June 17, 1944, Iceland was declared an
independent republic. The first government became a
coalition consisting of the Independence Party, the
Social Democrats and the Socialist Party.
The US called home its troops in 1946, but the US Air
Force had to retain the landing rights at the airport
itself built at Keflavík. This was a contentious
decision in Iceland and led to the then government being
divided.
 NATO membership, economic upturn
In 1949, Iceland became a member of the Western
Defense Alliance NATO but maintained that no foreign
troops could be deployed to the country in peacetime.
NATO accession also faced strong domestic opposition.
Iceland lacked its own defense forces, while the
tension between East and West increased in the context
of the Korean War 1950-1953. Therefore, within the
framework of NATO cooperation, Iceland entered into a
defense contract with the United States in 1951. This
meant that the Americans were also allowed to use
Keflavík as a military base and station troops there in
peace time, as well as assuming responsibility for
Iceland's defense.
Government crises and recent elections characterized
Iceland's domestic politics for a long time, but from
1959 to 1971 a coalition ruled between the Independence
Party and the Social Democrats. It was a period of
strong economic upturn thanks to good fishing catches.
Social reforms were implemented and living standards
were raised.
In order to protect the important fisheries, between
1952 and 1975 Iceland expanded its fishing limits
gradually from 4 to 200 nautical miles. This led to
conflicts with Britain and Norway and so-called fishing
wars (see Agriculture and Fisheries). In 1970, Iceland
joined the free trade organization Efta to improve its
trade opportunities.
Women in politics
In 1980, Vigdís Finnbogadóttir became Iceland's and
the world's first elected female president. Three years
later, the Women's List was elected to everything. It
was the first time a feminist party had taken a seat in
one of the world's parliaments. President Vigdís became
a unifying national figure during difficult years when
Iceland entered a recession in the late 1980s, mainly
due to poor fishing. The crisis continued in the early
1990s, and the government tightened its budget,
introduced price controls and devalued the currency, the
krona.
In the 1991 election, the Independence Party went
ahead and again formed a coalition with the Social
Democrats. New Prime Minister became Independent Party's
colorful party leader Davíð Oddsson, who was mayor of
Reykjavík.
The economic problems continued and were followed by
political ones. Since Iceland gained access to the EU
internal market through the EEA Agreement in 1994, the
Social Democrats demanded that Iceland join the EU as
well. But the Independence Party said no, and after the
1995 election, the coalition split. Oddsson and the
Independence Party instead formed a government with the
EU-critical Progress Party, whose leader Halldór
Ásgrímsson became Foreign Minister.
From fishing nation to financial operator
Deregulations, privatizations and tax cuts
contributed to reversing seven years of economic decline
in 1995. Increasing fish catches and large foreign
investment in the aluminum industry also led to growth
in the second half of the 1990s. Iceland also developed
into a competitive IT nation and an international
financial player.
Finnbogadóttir left the presidential office in 1996.
The successor was the former left-wing politician and
Professor Ólafur Ragnar Grímsson, who was re-elected
several times.
The bourgeois coalition retained its majority in the
1999 general election. The following year, most of the
left opposition merged into the new Social Democratic
Party Alliance. But on the far left was the newly formed
party Left-Green, which won popular support for its
fight against plans to build a giant dam for hydropower
in sensitive nature in eastern Iceland.
The Independence Party leader Oddsson dominated
domestic politics and was eventually accused of
power-ups by the opposition. The Alliance's prime
ministerial candidate, Ingibjörg Sólrún Gísladóttir,
demanded greater transparency in politics, but the
government retained a scarce majority in the 2003
general election.
The EU becomes a matter of war
The debate about a possible Icelandic EU membership
became increasingly intense. Both the government and the
opposition were divided on this issue. The Progress
Party talked about the possibility of an Icelandic EU
membership, while the Independence Party continued to
say no. The alliance wanted Iceland to apply for EU
membership, but the Left-Greens were opposed. The debate
was mainly about the consequences for fishing, where the
opponents did not want Iceland to share control of its
fishing waters with the EU countries (see Economic
overview).
According to the government parties' coalition
agreement, Halldór Ásgrímsson took over the prime
minister's post in 2004 and handed over responsibility
for foreign policy to Oddsson. A year later, Oddsson
left politics and became head of the Central Bank of
Iceland. Ásgrímsson resigned as prime minister in 2006,
and Geir Haarde from the Independence Party took over as
head of government.
The Independence Party and the Progress Party had
ruled during a period of strong economic growth and
rising living standards. However, the success was based,
among other things, on increased investments in the
energy-consuming aluminum industry and on hydropower
development, which led to protests from the
environmental movement. Therefore, the environment
became the main battle issue before the 2007 general
election.
Contested dam building
The environmental movement in particular opposed the
decision to build a huge power plant pond, Kárahnjúkar,
in an area of sensitive nature in eastern Iceland. The
dam project was accompanied by the construction of an
aluminum smelter that would increase exports and provide
jobs in a depopulation area. The protests against this
favored the Left-Green, which advanced strongly in the
2007 election. However, the ruling Independence Party
also increased slightly, while the coalition partner
Progress Party backed down. The majority of the two
government parties in everything shrank to a single
mandate, and the Progress Party chose to leave the
government.
The Social Democratic Alliance became the
Independence Party's new partner in the government.
Despite various political programs, the parties agreed
in a coalition, which emphasized both business-friendly
business climate and increased investment in social
welfare. The new government gained a stable majority in
everything, and Haarde continued as prime minister with
the leader of the Social Democrats Ingibjörg Sólrún
Gísladóttir as foreign minister.
However, Iceland's relationship with the EU soon
became a matter of dispute between the two coalition
parties. Although large parts of the business community
advocated Icelandic EU membership and a transition from
the króna to the euro, the business-friendly
Independence Party remained skeptical. The alliance was
the only party in everything that seemed open to Iceland
to join the EU. Icelandic opinion was divided on this
issue.
Banking crisis and deep depression
From the end of the 1990s, Icelandic finance
companies, banks and venture capitalists had acquired
companies in the UK, Scandinavia and the US, primarily.
Investments were several times larger than Iceland's
entire gross domestic product (GDP). The banks' lending
was soaring and critics warned that the overheated
economy would collapse.
When the global financial crisis erupted in the
autumn of 2008, the Icelandic financial bubble burst.
The krona's value dropped dramatically, inflation rose,
companies went bankrupt and unemployment rose rapidly.
The country was hit by an acute banking crisis at a time
when property prices were falling. In order to prevent
economic collapse, the government took control of the
major banks Kaupthing (Kaupþing), Landsbanki and Glitnir.
The state issued guarantees for savers in Iceland but
not for bank customers abroad. However, the Treasury was
not enough for the rescue operation, and Iceland was
forced to negotiate crisis loans from the International
Monetary Fund (IMF) and the other Nordic countries.
In order to obtain international loans, Iceland was
forced to give up demands from the UK and the
Netherlands for compensation to British and Dutch savers
who lost money when the Icelandic internet bank Icesave
went bankrupt. As a result, the pressure on the
Icelandic economy increased, unemployment increased
dramatically and many Icelanders found it difficult to
pay their private loans.
The pothole revolution, power change
The same autumn, Icelanders held large demonstrations
in Reykjavík demanding the resignation of the
government. During the so-called saucepan revolution,
protesters knocked with pots outside everything and in
the beginning of 2009 finally forced the government
away. The Alliance and the Left-The Greens formed a
transitional government pending new elections.
In the April 2009 election, the Independence Party,
which had been in power for nearly two decades, was
punished. It had to bear responsibility for the economic
crisis and made its worst choice to date. The Alliance
and the Left-Green together gained a majority in
everything. Social Democrat Jóhanna Sigurðardóttir
became prime minister and left leader Steingrimur
Sigfússon was appointed finance minister.
The new left government's top priority was to get
Iceland's economy back on its feet. The target was a
state budget in balance by 2013 and unpopular and
extensive cuts in state costs were to be expected.
Soon, internal conflicts arose around the sensitive
issue of a future EU membership for Iceland. When
everything in April 2009 finally voted to apply for EU
membership, the Alliance was in favor while parts of the
Left-The Greens voted against.
The tours around Icesave
In the spring of 2009, Icelanders protested against
the so-called Icesave law, which meant that it was the
taxpayers instead of Icesave's owners who would pay
compensation to the British and Dutch bank customers who
lost money when Icesave went bankrupt. At the same time,
the Netherlands threatened to suspend Iceland's EU
application unless Iceland fulfilled the agreement.
Britain went even further and put Iceland on a kind of
terrorist list to freeze Icelandic assets. The anger of
the Icelanders was now turned against London and The
Hague. Residents' EU resistance increased.
The conflict around Icesave threatened to topple the
pressured government for a couple of years. Despite
intensive negotiations, it was impossible to reconcile
the demands of the home opinion with the claims of the
British and the Dutch. Since everything at the end of
2009 had bowed to increased demands for compensation
from the two EU countries, President Grímsson in January
2010 vetoed the new so-called Icesave law. Also in
February 2011, the president stopped a new deal on
Icesave. The Icelandic people also opposed the law in
two referendums, in March 2010 and in April 2011.
With the conflict over Icesave unresolved, in late
2011, Iceland was dragged before the EFTA court, charged
with discrimination against foreign customers in the
bankruptcy. At the same time, bankruptcy trustees found
new assets in Icesave in the autumn of 2011, and the
owners began to pay compensation to the foreign
creditors. Thus, Iceland's taxpayers did not have to pay
the bill. In January 2016, the tense conflict around
Icesave came to an end when Iceland had fully repaid the
money to the UK and the Netherlands.
Haarde before national law
In September 2010, everything put the former Prime
Minister Geir Haarde before the national court for his
role in the banking crisis. At the same time, many
Icelanders and judges considered that a number of other
elected politicians and senior civil servants had
escaped their responsibilities, and some therefore
regarded the judicial procedure as unfair. Haarde was
released in the spring of 2012 on three of four charges
and escaped punishment. In April 2010, an investigation
into the banking crisis had identified Haarde, but also
Davíð Oddsson and the then Finance Minister Árni M.
Mathiesen, who participated in the responsibility for
the crisis.
In June 2012, Grímsson was re-elected for a fifth
term as president.
The government won an important political victory
when the EFTA Court in January 2013 ruled that Iceland
had not discriminated against British and Dutch bank
customers in connection with Icesave's bankruptcy.
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