ICELAND: CAN THIS COALITION BE SAVED?

C O N F I D E N T I A L SECTION 01 OF 02 REYKJAVIK 000263

SIPDIS

NOFORN

DEPT FOR EUR/NB
DEFENSE FOR OSD/P (FENTON)

E.O. 12958: DECL: 05/22/2017
TAGS: PGOV PREL ECON EU IC
SUBJECT: ICELAND: CAN THIS COALITION BE SAVED?

Classified By: Amb. Carol van Voorst for reasons 1.4 (b) and (d).


1. (C/NF) Summary: Public support for Iceland's government has
fallen below 50 percent in the wake of the financial crisis here, and
cracks are beginning to widen between the two coalition parties as
weekly demonstrations grow in size and fervor. PM Haarde's
Independence Party (IP) has taken the brunt of criticism for the
failed economy, while Foreign Minister Gisladottir's Social
Democratic Alliance is polling higher than its election results last
year. In the short term, a lack of viable (i.e., pro-EU) partners
and Gisladottir's good relationship with Haarde will likely keep the
FM from breaking up the coalition in the hope of new elections.
However, Gisladottir has said publicly she is pushing within the
cabinet for Iceland to explore EU membership, and polls show a
majority of the public agree with her. Securing a $6 billion package
of IMF and bilateral financing will buy the government some time, but
if Haarde cannot convince his party to go along with exploring EU
membership we could see early elections called for the first time
since the 1960s. Some form of reshuffle is almost inevitable,
however -- Haarde will not be able to answer the growing pro-EU group
in his party without lots of blood on the floor and the rousting of
several old IP chieftans (including the Minister of Justice and
Central Bank Chairman David Oddsson). End Summary.


2. (SBU) Following the economic disaster of October and the collapse
of the country's banking sector, the government continues to take a
beating in the polls. Public support for the government fell to 46
percent by the end of October, down 30 points from the beginning of
the year. While support for the Social Democratic Alliance (the
junior coalition partner) has held steady or increased slightly,
Prime Minister Haarde's Independence Party (IP) has been hammered.
The IP, after nearly two continuous decades as Iceland's largest
political party, is now third behind the SDA and the opposition
Left-Greens, pulling only 22 percent in the polls. The opposition
parties and a growing portion of the electorate are now calling for
elections before the current term ends in 2011. A poll at the end of
October showed 60 percent support for early elections, and the
Chairman of the Left-Greens showed up at the Embassy's Election Night
event gleefully working the room with that encouraging datum.
Demonstrations calling for -- among other things -- a new government
continue to grow, with the latest protest on November 8 drawing over
3000 participants.


3. (C) That the public blames the IP specifically for the economic
crisis is no coincidence -- the Prime Minister and Minister of
Finance are both from the party, and the IP's 2007 campaign was based
on the notion that only the Independence Party could be counted on to
maintain Iceland's then-world-beating prosperity and quality of life.
More significantly, many domestic and international observers blame
former PM and Grand Old Man of the Independence Party David Oddsson
for Iceland's stunning loss of credibility in the financial world.
Oddsson has served as the highly controversial Chairman of the
Central Bank since 2005. He made a number of ill-considered
statements to the media early in the crisis, and many suspect it was
at least partially due to his wounded pride that Iceland did not
immediately seek IMF assistance. Haarde's apparent inability to
"control" or remove his predecessor as IP Chair has led many to blame
the Independence Party for the continuing economic bad news.


4. (C/NF) Indeed, Haarde missed a key opportunity to gain political
support by not replacing Oddsson early in the crisis. Even among IP
stalwarts, Oddsson's standing has never been lower, with the party's
younger, more business-oriented members asserting to Emboffs and
journalists that it was time for Oddsson --rabidly anti-EU membership
for Iceland -- to finally exit the stage. Only Haarde has the
authority to replace the Central Bank Chair, and speculation around
town is that the PM has not pulled the trigger thus far out of a deep
sense of personal loyalty to his old mentor. The result is that
demonstrators now excoriate Haarde as well as Oddsson, the initial
target of public ire. While Oddsson remains in the picture, it will
be almost impossible for Haarde to start his party and his country
moving towards the EU.


5. (C) Other IP members, however, are proving much more open to EU
membership, and are finding support from those who previously stayed
out of the debate. IP Vice Chair and Minister of Education
Thorgerdur Katrin Gunnarsdottir, though cautioning that she was not
making any sort of leadership challenge, said in a highly publicized
late October interview that the her party had always pledged to take
the most pragmatic stand on EU membership in terms of what was best
for Iceland's interests. Given that both the global and domestic
economic situation has changed so dramatically in recent months,
Gunnarsdottir continued, it is only logical that the IP reexamine its
stand. Bjarni Benediktsson, Chair of the Althingi Foreign Affairs

REYKJAVIK 00000263 002 OF 002


Committee, quickly echoed this argument. PolOff has heard separately
from IP sources that Benediktsson sees the party's old guard as
standing in the way of not only serious consideration of EU
membership for Iceland, but also Benediktsson's personal ambitions of
a cabinet post.


6. (C/NF) Foreign Minister Gisladottir's Social Democratic Alliance
(SDA),however, has become increasingly strident in its calls for
serious exploration of EU membership as well as the dismissal of
Central Bank Chair Oddsson. Gisladottir said in a press interview
that she is pressing Haarde for a new policy on the EU, and other SDA
ministers have been equally active on this front. However, to our
knowledge, she has not made the leap to a push for early elections,
though her party would be likely to benefit. There may be a
practical explanation here, as Gisladottir's recovery from brain
surgery in September has kept her away from work for much of the
tumultuous fall. Some here also credit her personal relationship
with the Prime Minister as a brake on a move to change the coalition.
The two party heads have developed an unexpectedly close and
collaborative working relationship and clearly both like and respect
each other. Gisladottir may view Haarde as a useful ally in the
future should she be able to convince him to reexamine the EU
question.


7. (C/NF) Most probable, however, is the explanation that
Gisladottir simply does not see a viable alternative to the IP as a
coalition partner at the moment. The Progressive Party -- Iceland's
only other pro-EU party -- has seen only marginal gains over the last
month, and would in all likelihood still be too small to form a
two-party coalition with the SDA. The Liberal Party is even smaller,
leaving only the Left-Green Movement. Although the Left-Greens have
polled significantly higher of late, they still do not endorse EU
membership for Iceland. Gisladottir seems unwilling to go into
coalition with yet another party that is against joining the EU.
However, as with the IP, the Left-Greens are locked in an internal
struggle over their EU policy; the party's Vice Chair told PolOff
over the summer that she was sympathetic to the growing pro-EU wing
of the party and that she expected a reevaluation of the party's EU
policy by the end of 2008. This dynamic may be what FM Gisladottir
meant in an interview when she said early elections would be a
distraction to the government now, "but then a new year is coming,
and people will have to assess the situation then."

COMMENT
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8. (C/NF) In the short term, the Icelandic Government desperately
needs to finalize the $6 billion loan package with the IMF and other
bilateral donors. If the IMF loan fails to come through, the
government will lose what little remaining credibility it has on the
economic front and may very well find it impossible to stay on.
Despite the protests and the speculation around town, however, we
note that there is little tradition here of disgraced politicians or
governments -- even those convicted of crimes -- resigning from their
posts. Early elections have not been invoked since the 1960s, and
then only because a three-party coalition dissolved and no
replacement could be created. No-confidence votes are virtually
unheard of.


9. (C/NF) If the IMF loan comes through, a likely scenario is that
after the new year SDA Chair Gisladottir and a group led by IP Vice
Chair Gunnarsdottir present the Prime Minister with their own
ultimatums, both calling for a serious look at EU membership, and
explicitly (SDA) or implicitly (IP) calling for Oddsson's removal.
In any event, a cabinet reshuffle -- either to give the SDA more
power over economic policymaking, to sweep out the IP old guard, or
both -- seems inevitable once the fate of the IMF loan is clear.

van Voorst