In These New Times

FT

22nd January, 2009

Iceland’s embattled prime minister resigned on Friday citing medical reasons and called an early election for May, a move that could prompt a dramatic shift to the left after a 20-year experiment in free market economics.

Geir Haarde said a medical examination had revealed he had a malignant tumour of the oesophagus. He will have surgery abroad at the end of January or early February. Elections had been scheduled for 2011.

The resignation comes as Iceland continues to grapple with the most serious crisis in its recent history, with the economy expected to contract by 10 per cent this year following the collapse of its banking system last year.

The tiny north Atlantic nation of 320,000 people was forced to turn to the International Monetary Fund and its Nordic neighbours for a $6bn bail-out, and has been ordered to implement a series of punitive financial and structural reforms by the IMF.

Mr Haarde’s resignation and the decision to call an early election will generate significant uncertainties over the nation’s political future that could have consequences for the stability of its struggling currency, the krona.

The latest opinion poll conducted by MMR revealed the Left-Green Movement would emerge victorious if elections were held today with 28.5 per cent of vote, compared with 24.3 per cent for Mr Haarde’s Independence party and 17 per cent for the Social Democrats.

The Left-Greens – an anti-big business, pro-environment party – have benefited from a dramatic rise in anti-capitalist sentiment in Iceland following the crisis as people expressed disgust at prominent and flashy young businessmen known as the ‘Viking raiders’.

These entrepreneurs led Iceland’s overseas corporate expansion, lived a high life characterised by designer corporate jets, and are regarded as a symbol of the ways in which Iceland lost touch with its more modest and puritan economic past.

Mr Haarde’s right wing Independence party introduced the policies that allowed these free marketeers to prosper – alongside large parts of the rest of the population, who got rich speculating in property.

The Left-Green party espouses a radically different set of values and if its recent performance in the polls is matched in May’s election, Iceland will be set on a dramatic new political course.

The party’s manifesto states that “all natural resources shall be public property and utilised without reducing them”.

It also “rejects further building of power plants for the use of polluting large scale industry and demands conservation of the highland”. This would spell an end to Iceland’s aluminium smelting industry, an important source of revenues.

Iceland’s foreign relations would also undergo a shift, as the Left-Greens have said they will “fight for an independent, Icelandic foreign policy that maintains the sovereignty of Iceland” and “opposes participation in military organisations such as Nato”.

In the past, government officials have expressed deep concerns that a victory for the Left-Green party would result in a disastrous government at this critical juncture in Iceland’s history, given its anti-business stance and radically pro-environment manifesto.

These uncertainties will do little to reassure international markets, which remain wary over the the krona.

The country’s central bank estimates international investors own up to IKr400bn ($3.2bn, €2.5bn) of Icelandic bonds and has warned it should be prepared for a “massive currency outflow” once the krona is fully refloated.