Iceland’s Social Democrats Reach Deal for New Government

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(Bloomberg) — Iceland’s new ruling coalition agreed on a platform of budget restraint to fight inflation and a referendum on continuing European Union entry talks. 

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Following negotiations since early December, the election-winning Social Democrats on Saturday signed a government deal with the center-right Liberal Reform Party and the People’s Party that backs more social spending. Kristrun Frostadottir, the chair of Social Democrats, will become the premier.

The new cabinet is seen paving the way for more energy investment as part of efforts to diversify the tourism-dependent economy that’s been prone to boom-bust cycles. The government will also have the task of tackling growing strain on infrastructure such as the health care and school system after higher influx of foreign workers. 

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The trio, with a combined 36 seats in the 63-seat legislature, will replace the outgoing cabinet of incumbent premier Bjarni Benediktsson that was unseated by voters dismayed over high costs of living and housing shortages. While economic output is seen grinding to a halt this year, borrowing costs still remain at 8.5% and inflation is expected to average 5.9% in 2024, according to central bank’s projections.

Thorgerdur Katrin Gunnarsdottir, the head of Liberal Reform, will serve as the foreign minister. The Liberal Reform will also take over the finance ministry, with the party’s deputy chair Dadi Mar Kristofersson set to become the finance chief.

Inga Saeland, the head of the People’s Party, will become minister of welfare and housing. The trio of party leaders has been nick-named the “Valkyries,” in reference to female warrior figures in Norse mythology, as the alliance will be the country’s first to be led only by women.

A national referendum on continuing negotiations on Iceland’s membership of the EU will be held no later than 2027, the parties said. 

Iceland has been a member of European Economic Area, an extension of EU’s single market, since 1994 together with Norway and Liechtenstein. It applied to join the bloc in 2009 under the leadership of the Social Democrats, while entry talks were put on hold in 2015 after the change of government.

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According to a poll done in November by pollster Maskina, 55% of respondents deemed it “very or rather important” to hold a referendum on EU membership during the next four-year government term.

“At the beginning of the electoral term, independent foreign experts will be tasked with preparing a report on the advantages and disadvantages of using the Icelandic krona and Iceland’s options in currency matters,” the parties said.

The 36-year-old Yale-educated Frostadottir, a relative newcomer in the island’s politics, is a former chief economist of local investment bank Kvika hf. A mother of two, she has led the Social Democrats since 2022, and has also worked for Morgan Stanley in New York and London.

Gunnarsdottir, 59, has been a member of Iceland’s parliament, Althingi, for more than two decades and served as education minister in 2003-2009. She is a strong advocate of prudent fiscal policy and of EU membership. Her 53-year-old deputy Kristofersson, the incoming finance minister, is an economist by training and an expert in resource economics.

(Updates with key ministers, main goals from second paragraph)

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