ICELAND: NEW GOVERNMENT PUNTS ON EU QUESTION, PLEDGES A

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SUBJECT: ICELAND: NEW GOVERNMENT PUNTS ON EU QUESTION, PLEDGES A
"NORDIC SOCIAL WELFARE" STATE

Ref: Reykjavik 81


1. (SBU) Summary: Iceland's new leftist government announced its
policy statement on May 12, confirming what many expected to be a
move towards "traditional" Nordic social and economic policy. Taxes
and other revenue streams will need to be increased to meet the
government's goal of reduced deficits and a balanced budget by 2013.
The Social-Democratic and Left-Green coalition referred perhaps its
most pressing issue -- whether or not to apply for EU membership --
to the parliament, in what many here see as a concession to deep LG
misgivings. The Prime Minister's Social Democratic party may win
the vote on EU talks, but will likely need opposition support to do
so. On other foreign policy fronts, the turn towards Nordic
cooperation is confirmed, and the U.S. is no longer explicitly noted
as Iceland's leading ally in security. As with other budget cuts,
the coming battle over defense spending is likely to be bitter. End
Summary.


2. (SBU) On May 12, the Social Democratic Alliance (SDA) and the
Left-Green Movement (LG) announced the composition and policy
statement for their new government formed after the April 25
elections (reftel). It confirms expectations of a sharp left turn
in government policy and states that it intends to be a "Nordic
welfare government in the truest sense of the word". The new
government presented its policy statement as well as a 100-day plan.
A resolution authorizing the government to begin EU membership
talks will be presented in the upcoming summer session of the
Althingi which begins this coming Friday, May 15. SDA figures and
political commentators tell Post that the summer session will likely
run for six weeks before adjourning for summer holidays and
reconvening in late September/early October.

ECONOMY: BALANCED BUDGET, BUT HOW?
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3. (U) On the economy, there are not a lot of specifics other than
statements about the "tough work ahead" in the 17-page coalition
policy agreement. The new government coalition says it wants to
ensure economic and social stability, and to seek national unity on
Iceland's path to reconstruction through a new "stability pact." PM
Sigurdardottir said at the government's first press conference that
the government would begin meeting with labor unions and industry
leaders to seek broad national consensus on wage cuts and other
measures to minimize further job losses. Initial efforts at budget
cutting will be announced during the summer, and the government has
said initial guidelines on tax hikes and other revenue-boosting
measures will be unveiled during the week of May 18. This is in
keeping with the government's stated plan to achieve a balanced
budget by 2013. The preference (particularly among the Left-Greens)
is to raise taxes, with the government implying that it will target
the upper end of the socioeconomic spectrum. Press reports from the
first government cabinet meeting on May 12 indicate that income
taxes may not be raised immediately, though other taxes on consumers
and industry are possible avenues. The new Minister of Fisheries
has already floated the idea of an export tax on unprocessed fish,
both as a revenue stream and as a way of encouraging domestic job
creation in fish processing.


4. (U) Other policy goals (and an effort to hold expectations at a
manageable level) are hinted at by sentiments in the policy
statement press release: "Guided by the values of equality, social
justice, solidarity, sustainable development, gender equality, moral
reform and democracy in Iceland, the government aims at creating a
Nordic welfare society in Iceland, where collective interests take
precedence over particular interests..." "Foremost among its tasks
is to revive confidence in the domestic community and rebuild
Iceland's international reputation...." The government maintains
that if its economic and fiscal plans are successfully implemented,
there is a good possibility of acceptable economic growth, low
inflation, a stable currency and lower unemployment by the end of
its term.

FOREIGN POLICY: LOOKING HOPEFULLY TO THE NORDICS
-------------- ---


5. (U) The government's policy statement says little about non-EU
foreign affairs, apart from a focus on "collective international
security." Defense and security policy -- including the existence
and responsibilities of the Icelandic Defense Agency -- will be
subject to further review. Defense Agency officials tell us that
they have already been told to examine opportunities for cost-saving
by combining functions or assets with other government institutions,
such as the Coast Guard. Based on comments by Foreign Minister
Skarphedinsson earlier this year, this may move rapidly from the
exploratory phase into implementation. Also on defense, for the

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first time in decades, the government's stated policy does not
mention cooperation with the U.S. as a cornerstone of Iceland's
security policy, but instead refers to "allied nations" more
generally. The new government states it will strengthen ties with
the Palestinian Authority government and will work to promote peace
and nuclear disarmament. The government also states its intent to
declaring Iceland a nuclear-free zone. (Note: An LG- and
SDA-sponsored bill that would have done this did not get out of
committee during the spring parliamentary session. End Note.)

EU MEMBERSHIP: DID THE SOCIAL DEMOCRATS PUNT?
--------------


6. (SBU) On the EU, the SDA appears to have been pushed back from
what initially looked like a very strong negotiating position.
Foreign Minister Ossur Skarphedinsson will submit a parliamentary
resolution on Iceland's application for EU membership to the
Althingi sometime shortly after the new parliament convenes on
Friday, May 15. Both parties say their MPs will be free to vote
their consciences and not be bound by party strictures on the
resolution. PM Sigurdardottir emphasized the need for Iceland to
submit the application for membership no later than in July (in
part, many believe, to take full advantage of what Iceland hopes
will be a charitable view by the Swedish EU Presidency). She said
that she is confident that the parliamentary resolution will be
approved. Critics of this approach have said that if the resolution
is voted down, then it could spell the end of the coalition.
Left-Green Chair Sigfusson said his party's MPs will be free to vote
their consciences on the resolution. However, five LG MPs have
already said they will vote against the resolution. Even if all
other LG MPs vote for the resolution -- and some are hinting they
may abstain -- the LG "no" votes would mean the SDA will need to
recruit some opposition votes in order to reach a majority of 32.
Opposition leaders, for their part, have expressed considerable
reservation about giving what they say would be a "blank check" to
the SDA to handle EU membership talks.


7. (SBU) Several EU Ambassadors in Reykjavik have already noted to
post their surprise and concern over the plan to refer the
membership question to the Althingi. As one put it, the SDA's need
for opposition support raises the question of "how many pounds of
flesh" Sigurdardottir will have to pay out to get the resolution
through. Should there be too many concessions to opposition party
redlines (e.g., on fisheries, fast-track accession to monetary
union, or agriculture),the result could be a membership application
that even the Swedes will not be able to support. On the other
hand, a defeat would be a devastating loss on the SDA's signature
issue from the election campaign and a bad start for the new
government.

WHO'S WHO: STABILITY, SURPRISINGLY
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8. (U) Prime Minister Johanna Sigurdardottir (SDA Chair) and
Finance Minister Steingrimur Sigfusson (Left-Green Chair) retain
their current positions, as does Foreign Minister Ossur
Skarphedinsson (SDA). Sigfusson and Skarphedinsson have, however,
each dropped a ministry, with the LG's Jon Bjarnason picking up the
Fisheries and Agriculture portfolio and SDA rising star Katrin
Juliusdottir heading over to run the Ministry of Industry. Also of
note, the two non-political ministers -- the Minister of Justice and
the Minister of Economy (formerly known as Business Affairs) -- will
stay on. The coalition policy agreement also states plans to
re-organize the ministries to have one "Ministry of Employment" to
oversee Fisheries, Agriculture, and Industry. This will be
implemented in 2010 at the earliest. There is also the potential
for a reorganization of other ministries, including the amalgamation
of the Ministries of Justice and Communications into a single
Ministry of the Interior. PM Sigurdardottir has said she hopes to
reduce the total number of ministries to nine by the end of 2010.

The government's 12 cabinet ministers are as follows:

-Prime Minister: Johanna Sigurdardottir (SDA)
-Minister for Foreign Affairs: Ossur Skarphedinsson (SDA)
-Minister of Finance: Steingrimur J. Sigfusson (LG)
-Minister of Health: Ogmundur Jonasson (LG)
-Minister of Justice and Ecclesiastical Affairs: Ragna Arnadottir
(non-party affiliated; MOJ Civil Servant, previously Director of MOJ
Office of Legal Policy)
-Minister of Economic Affairs: Gylfi Magnusson (non-party
affiliated; Associate Professor in Economics at University of
Iceland)
-Minister of Industry: Katrin Juliusdottir (SDA)
-Minister of Education, Science and Culture and Minister for Nordic

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Cooperation: Katrin Jakobsdottir (LG)
-Minister of Social Affairs and Social Security: Arni Pall Arnason
(SDA)
-Minister of Communications: Kristjan Moller (SDA)
-Minister of Fisheries and Agriculture: Jon Bjarnason (LG)
-Minister for the Environment: Svandis Svavarsdottir (LG)


9. (SBU) Comment: The biggest surprise from the new coalition
agreement is by far the decision to refer EU membership to a
parliamentary vote. This is a high-stakes gamble for
Sigurdardottir. A win with opposition support gives her a strong
hand in leading Iceland towards Brussels and considerable leverage
over her Left-Green coalition partners. However, a loss -- and
despite the PM's optimistic statements, this is not something we can
rule out -- would be a tough blow on the SDA's signature issue from
the campaign and would embolden the opposition considerably.
Further, as other diplomats here have noted, even a resolution
approving the start of talks with the EU may be a poisoned chalice
should it be overly loaded with preconditions and caveats.


10. (SBU) Comment, cont'd: On defense and security, one thing is
certain -- there will be blood on the floor when the government's
new budget comes out. Some here have taken to joking that the
Icelandic Defense Agency spends most of its time defending itself
from its own government. Depending on how any consolidation with
the Coast Guard plays out, this could be proven very true. End
Comment.

KLOPFENSTEIN