Iceland is experiencing an eruption in economic activity, and is making great strides recovering from its slump over the past several years. The new coalition born from October's parliamentary elections will provide policy continuity, a key factor to sustain foreign investment. Voters entered the polling stations on the heels of a great turnaround. Tourism was the decisive element that enabled the country to enjoy considerable growth since 2011. Current projections based on airlines' seat supply suggest growth in the sector will continue, but momentum is not guaranteed. To sustain progress, Iceland must mitigate pending fluctuations in domestic product, maintain foreign engagement, stay committed to fiscal discipline and restore infrastructure spending.
The attention international investors are paying to the Icelandic election is a telling example of how the economy is becoming increasingly relevant to other markets. Never in Iceland's history have so many parties been elected to Parliament — eight in total, two of which were voted in for the first time. Typically, Icelandic voters lean more to the center-right in elections, but this outcome was one few expected, and has led to fascinating political circumstances.
The new government spans from left to right involving the Left Greens, the Progressive Party and the Independence Party (conservatives). This government most likely will remain business friendly, and emphasize infrastructure and welfare issues. Although a coalition with conservatives and left-wing parties might hint at volatility and diverging views to outsiders, the reality is that the conservative party agenda is the coalition's glue. The Independence Party is pro-business, but in favor of keeping existing welfare programs and internal spending like the left wing and their grass-roots supporters. Therefore, there is a chance to create a consensus on reforming state expenditures for the first time in Iceland's history.
We already see the markets reacting positively — the stock market is up and the currency is appreciating. The market feels the new coalition will not have a massive negative impact — it will either be status quo or further boost economic activity. While foreign investors might be concerned about a new government raising taxes, the real issue is not about raising taxes (the source of revenue), but rather how taxes are allocated to welfare, education and health care.
Infrastructure — roads, airports and hospitals — dominated the election, but what exactly is needed to sustain Iceland's meteoric growth?