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### Viewing cable 09REYKJAVIK90, ICELAND: NEW GOVERNMENT PUNTS ON EU QUESTION, PLEDGES A

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Reference ID | Created | Released | Classification | Origin
--- | --- | --- | --- | ---
09REYKJAVIK90 | 2009-05-13 13:01 | 2011-01-13 05:05 | UNCLASSIFIED//FOR OFFICIAL USE ONLY | Embassy Reykjavik

`

    VZCZCXRO3262
    OO RUEHAG RUEHAST RUEHDA RUEHDBU RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA
    RUEHLN RUEHLZ RUEHNP RUEHPOD RUEHROV RUEHSK RUEHSR RUEHVK RUEHYG
    DE RUEHRK #0090/01 1331319
    ZNR UUUUU ZZH
    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

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