Iceland

Until this time, the Icelandic economy had remained essentially medieval, but with financial authority established inside the country, it began to modernize at a relatively fast pace. At the same time the struggle for independence continued; in 1904 Iceland attained home rule, and in 1918 it was finally recognized as a separate state under the Danish Crown; Denmark retained control of foreign affairs. Under this Treaty of Union, either party had the right to terminate the arrangement after 25 years. The inter-war years saw the emergence of modern party politics and significant strides were made, despite the lean years of the Great Depression.

When Denmark was occupied by Nazi Germany in April 1940, Iceland was cut off from its head of state. A month later, it, too, was occupied, but by British troops. In May 1941 the Icelandic government appointed Sveinn Björnsson, a former minister to Denmark, as Regent.

The Treaty of Union expired in 1943, and, unable to renegotiate it, Icelanders decided to act unilaterally to terminate it. In a national referendum in early 1944, with 98.6 per cent of eligible voters participating, 97.3 per cent voted to sever all ties with Denmark. The Icelandic republic was accordingly proclaimed at Thingvöllur on June 17, 1944, with Sveinn Björnsson as the first president.

Paradoxically, Iceland celebrated its final deliverance from alien rule while still occupied by another foreign power. In 1941 the Icelandic government had been pressed by the United Kingdom and the United States to ask for US protection, primarily to free the British occupation troops for service elsewhere. Contrary to contractual obligations, however, the United States did not withdraw its forces at the end of the war. Instead the US government requested permanent military bases in the country. These were refused. A compromise was reached in 1946, permitting the United States control of the Keflavík airport for 6y years. However, in 1949 Iceland became a founding member of NATO, and in 1951, during the Korean War, the United States obtained Icelandic permission to station troops in the country, this time under a NATO umbrella. This US presence, uninterrupted since 1941, has been profoundly divisive for more than a generation; Icelanders, while overwhelmingly sympathetic to the Western democracies, are still evenly split on the issue. In 1985 the Althing unanimously passed a resolution that banned the entry of nuclear weapons into Iceland.

A second, perhaps more fundamental, question of national existence since World War II has involved another Western democracy, the United Kingdom. A desire to protect fish stocks and jobs led Iceland to extend its territorial waters from 4 to 12 nautical miles (7 to 22 km) in 1964 and 50 nautical miles (93 km) in 1972. The British government responded to the extensions by sending warships to protect their trawlers in contested waters; the result was two “Cod Wars” that lasted until 1973 when the two sides reached a temporary agreement on fishing limits. A month before the agreement expired, in October 1975, Iceland extended the limit to 200 nautical miles (370 km). Failure to reach a new agreement sparked the third and most serious “Cod War” in November 1975.

In 1976 Iceland temporarily severed diplomatic relations with the United Kingdom, the first diplomatic break between two NATO countries. Further negotiations finally led to British acceptance of the new limit and the withdrawal of British trawlers in December 1976. The most intractable economic problem has been inflation spurred by high wage rises and fluctuating fish prices on the world market. During the early 1980s it averaged 38 per cent annually, forcing devaluation of the króna and the introduction of a variety of austerity measures. Inflation slowed to an average of 20 per cent from 1985 to 1989. By 1993 inflation was down to under 4 per cent. Icelanders enjoy a standard of living that is among the highest in the modern world. Icelandic politics have been dominated since 1918 by coalition governments; the Independence and Social Democratic parties formed a coalition after the 1991 elections.

Iceland’s president, Vigdís Finnbogadóttir, the world’s first popularly elected female head of state, was first elected in 1980, and served four terms of office until she stepped down in 1996.

In January 1994 the Social Democratic Party called for Iceland to apply for EU membership, a course favoured by the majority in opinion polls. The parties of the ruling coalition, the Independence Party, and the Social Democratic Party, both lost support in the general election in April 1995. A new coalition was formed with the Independence Party and the Progressive Party, which had improved its share of the vote in the election. Elections for president in June 1996 brought victory for Ólafur Ragnar Grímsson, who polled over 40 per cent of the vote. In the May 1999 Althing elections, the coalition of the conservative Independence Party of Prime Minister David Oddsson and the centrist Progressive Party maintained its majority. Four years later in 2003 the Independence Party again won most seats (22) but needed the help of the Progressive Party to form a working government. Oddsson was again appointed as prime minister but stood aside in September 2004 to be replaced by the Progressive Party’s leader, Halldór Ásgrímsson, as part of the agreement to rotate the prime ministership. Oddsson moved to a foreign office post. Ásgrímsson resigned in June 2006 after the party’s poor results in local elections and was replaced by the foreign minister Geir Haarde of the Independence Party. The general election of May 2007 saw the Independence Party gain most seats, with 25. The party’s coalition with the Progressive Party meant a majority of a single seat in the Althing.