Currently there is a two party government with The Social Democratic Alliance and The Left-Green movement, but parliamentary elections will be held in April 2013. This center-left government formed in 2009 has mostly been working on getting Iceland up from the recession followed by the financial collapse in 2008, when the financial sector in Iceland collapsed. GDP growth in 2011 was +2.6% and the unemployment rate was 4.4% is Nov. 2012. There are however still large problems with the economy, and they are mostly related to currency issues. There are strict capital controls in place and the Icelandic krona (ISK) is relatively weak.
According to recent polls the Independence party has the biggest support, or around 35%. The Progressive Party has around 14% support and it is expected that these two parties will form the next government, as they have done so many times in the past. These two parties were together in government from 1995 - 2007.
The Progressive party and a large part of the Independence party want to withdraw the EU application and that might happen if they form a government in April 2013. Then the euro would be out of the question for Icelanders and in all likelyhood Iceland will use the Icelandic krona for many years to come. Also, if the EU negotiations are finished, then the contract goes for a referendum and according to recent polls a majority of Icelanders will decline the contract and choose not to enter the EU.
The biggest problem to be solved during the next year is lifting the capital controls and bringing balance to the exchange rate. An equivalent of billions of dollars are locked in the Icelandic economy behind the capital controls. It might take many years to tap off this large sum so that the exchange rate does not fall too much. It will be interesting to see how the next government will tackle this problem. Also it is estimated that the investment need of the pension funds in Iceland is as high as one billion dollars per year and so the problem could grow every year, since the pension funds are running out of investment options in Iceland and have to invest abroad.
Observing the politics in Iceland this year will be exciting, especially the elections in April.
