ICELAND: FM WARNS OF POSSIBLE DEFENSE BUDGET CUTS

C O N F I D E N T I A L REYKJAVIK 000045

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E.O. 12958: DECL: 02/26/2019
TAGS: PREL PGOV MARR PHUM NATO ECON AF IC
SUBJECT: ICELAND: FM WARNS OF POSSIBLE DEFENSE BUDGET CUTS

REFS: A) 08 OSLO 594
B) STATE 14097
C) REYKJAVIK 36
D) STATE 14201

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


1. (C) Summary: Icelandic Foreign Minister Skarphedinsson told
Ambassador on 18 February that "nothing can be ruled out" on the
question of further cuts to Iceland's defense budget, and floated a
trial balloon on further reductions to Iceland's contingent in
Afghanistan. In public comments the next day, he went even further,
suggesting that the Icelandic Defense Agency might be abolished
entirely. With the Ambassador, Skarphedinsson was positive on the
possibility of greater Nordic defense cooperation as proposed in the
Stoltenberg report, but was careful to note that this would only be a
complement to NATO, not a replacement. On Iceland's economic
recovery, the FM vented that the Swedish Government continues to be
"nit-picky" about the prerequisites for its promised bilateral loan.
He welcomed news of USG reengagement in the Durban review process.
End summary.


2. (U) Ambassador paid a congratulatory call on new Icelandic
Foreign Minister Ossur Skarphedinsson on February 18. (Note:
Skarphedinsson has also retained his previous portfolio as Minister
of Industry, Energy, and Tourism.) The visibly tired but impish
Skarphedinsson opened with a readout on the Nordic Foreign Ministers'
meeting in Oslo on 13 February, at which former Norwegian Foreign and
Defense Minister Thorvald Stoltenberg presented his report on
opportunities for Nordic cooperation in defense and security.
Skarphedinsson, who had chaired the meeting, joked that his biggest
concern had been addressing the council in "Scandinavian" rather than
English or Icelandic.


3. (C) Ambassador asked the FM for his view on local press
discussion on the event, noting her concern that the coverage seemed
to present Nordic defense cooperation as a possible replacement for
NATO in the High North. Skarphedinsson said he had been very careful
to note in his comments at the meeting and with the press that Nordic
cooperaton would only be a complement to NATO, not a replacement. He
opined that the Finns "want into NATO very badly" and as such are
eager to participate in the NATO air policing mission here, while
Swedish FM Bildt was much cooler to the idea. Skarphedinsson added
that talk of the Nordics taking over defense for Iceland was in his
view a rehashing of Cold War-era arguments. The left -- including
some in Skarphedinsson's own party -- has seized on the Stoltenberg
report as a chance to put forth the same old idea, but the FM said he
did not believe anything will come of it.

BUDGET CUTS A POSSIBILITY
--------------


4. (SBU) Turning to Icelandic government funding for defense,
Ambassador pressed the FM on rumors that further defense cuts --
beyond the 20 percent slashed from the Icelandic Defense Agency (IDA)
budget for 2009 -- are in the works. Skarphedinsson said he was
taking a careful look at all options, including possibly combining
some elements of the IDA mission with the Icelandic Coast Guard.
"It's all on the table," said the FM, noting that these are very hard
budget times for the Icelandic Government. Asked for her view,
Ambassador described the security structure constricted after the
2006 U.S. withdrawal from Keflavik as a flexible, relatively cheap
instrument that has served Iceland and its allies well. She urged
the FM to support defense funding and pressed the FM hard to counter
the oft-heard notion that funding for defense is not money spent in
Iceland. Every krona the IDA gets for air policing purchases goods
or services from Icelandic vendors, and deployed forces purchase fuel
and spend money at tourism venues during their off-duty hours. The
FM asked whether it made any difference whether the IDA or another
agency performed these functions, to which Ambassador replied that
Iceland and the IDA have developed an excellent reputation with NATO
militaries that have deployed here. It is important to maintain
those relationships and the rhythm of exercises and deployments in
order to keep standards of proficiency and facilities maintenance
high, she added. Skarphedinsson thanked Ambassador for her views but
remained noncommittal, reiterating that the ministry is under
tremendous budgetary pressure. He added that Iceland is not the only
NATO Ally with such problems; the Spanish Air Force has cancelled its
air policing rotation here later this year due to funding shortages.


5. (U) Note: The following day, the FM went even further during
open debate in the Althingi, suggesting that the IDA might be
abolished entirely and its mission parceled out to various other
agencies such as the Icelandic Coast Guard, Civil Aviation Authority,
and National Police. The Althingi's Foreign Affairs Committee Chair,
who is from the minority government's other, openly pacifist party,
immediately voiced his agreement, leading to press speculation that
the IDA's days are indeed numbered. End note.

DOING EVEN LESS IN AFGHANISTAN?
--------------


6. (C) The penny-pinching theme continued in response to
Ambassador's notification of the USG's Afghanistan-Pakistan policy
review (Ref B). Skarphedinsson said that he and his political
advisor are carefully reviewing cost-saving possibilities, including
a drawdown of Iceland's personnel deployed with ISAF. (Note:
Iceland currently has eight personnel at Kabul International Airport,
ISAF HQ, and PRT Meymaneh.) This has not been broached outside the
FM's Office as Skarphedinsson knows the relevant offices will fight
for every position, but as Minister he feels a responsibility to look
at every way of saving money. Ambassador pressed vigorously, noting
that during his January visit to Iceland, SACEUR GEN Craddock
personally vouched for the importance of every one of Iceland's
billets in Afghanistan. SACEUR traveled with then-FM Gisladottir to
Kabul during her visit last spring, and in so doing became quite
familiar with the Icelandic contingent's work, Ambassador added. The
work the Icelanders are doing is known and appreciated, and she urged
the FM to maintain the current numbers.

ECONOMIC RECOVERY, WHALING
--------------


7. (C) Touching briefly on Iceland's economic recovery, FM
Skarphedinsson said that although tough times are ahead, Iceland will
"come out better than many people expect." Fishing, clean energy,
and tourism will provide a strong basis for the economy's recovery.
Less happily, the FM noted, some of the bilateral loans included in
the IMF bailout package have been difficult to finalize. Most
notably, the Swedes have been very "nit-picky" on the details of
Iceland's recovery plan. Skarphedinsson dismissed these concerns as
reflective of Sweden's traditional view of itself as the "big
brother" who knows better in the bilateral relationship. In
contrast, Norway has historically been much more supportive of
Iceland. Picking up on the tourism theme, Ambassador noted her
concerns about Iceland's intent to resume and expand its commercial
whaling quota; the FM said he agreed but was not in a position to
change the decision himself (ref C). In closing, Skarphedinsson
welcomed notification of U.S. reengagement in the Durban review
process (ref D) and applauded the tone that President Obama and
Secretary Clinton have brought to U.S. foreign policy.

COMMENT
--------------

8. (C) The new FM is clearly feeling pressure from his colleagues in
the government to demonstrate fiscal discipline, particularly as the
minority coalition tries to make good on its pledge to directly ease
the burden on Icelandic households. Skarphedinsson has no built-in
loyalty to the IDA, and though sold on the importance of NATO, he has
at times been a reluctant advocate of the idea that Iceland should
fund its own defense. The lure of being able to cut nearly 10
percent from the MFA's budget may simply be too much for the
mercurial Skarphedinsson to resist. With no other political backers
in the current government and just over two months until elections,
the IDA may indeed be fighting for its life. Post will continue to
press for a sober accounting of the operational costs of such budget
slashing before any moves are made, and is quietly soliciting the
interventions of other NATO embassies here as reinforcements.

van Voorst