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O 131319Z MAY 09
FM AMEMBASSY REYKJAVIK
TO RUEHC/SECSTATE WASHDC IMMEDIATE 4070
INFO RHEHNSC/NSC WASHINGTON DC IMMEDIATE
RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEAIIA/CIA WASHDC

UNCLAS SECTION 01 OF 03 REYKJAVIK 000090 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR DAS GARBER, EUR/NB, INR/B 
NSC FOR HOVENIER 
 
E.O. 12958: N/A 
TAGS: PGOV PREL PINR EUN IC
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? 
---------------------------------- 
 
¶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 
 
REYKJAVIK 00000090  002 OF 003 
 
 
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 
---------------------------------- 
 
¶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 
 
REYKJAVIK 00000090  003 OF 003 
 
 
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