(Bloomberg) -- Iceland’s Prime Minister Bjarni Benediktsson broke up his coalition government and called a snap election on the north Atlantic island for late November.
The move follows discontent that’s been building up for some time, Benediktsson told reporters on Sunday afternoon in Reykjavik. He plans to visit President Halla Tomasdottir on Monday and ask her to disband the parliament.
“Toward the fall, a rising disagreement between coalition parties started emerging,” he said, naming asylum seekers and energy policy as some areas of divergence. “My conclusion is that there is no likelihood that a conclusion will be reached on these major issues.”
The early general election could lead to a shift in power in the Nordic nation, with opposition Social Democrats and Center Party currently leading in the polls. The last time the Social Democrats were part of a ruling coalition was more than a decade ago in the aftermath of Iceland’s banking collapse that coincided with the global financial crisis.
The government’s tussles come against a backdrop of repeated volcanic eruptions on the country’s southwestern peninsula. In addition to occupying ministers’ attention, seismic activity has led to a need to rebuild infrastructure and re-house about 1% of the country’s population.
The tourism-dependent island has also been grappling with persistent inflation and interest rates at the highest level in western Europe. The central bank this month cut borrowing costs by a quarter point to 9.0%.
Jon Bjarki Bentsson, chief economist at Islandsbanki hf, projected cuts will continue in November even though the general election is likely shortly after the decision. Still, the central bank “might be more cautious in terms of taking big steps,” he said.
Benediktsson’s center-right Independence Party has ruled with the Left Greens and centrist Progressive Party since 2017. The prime minister only took over in April when his predecessor Katrin Jakobsdottir decided to run for president in the June election, in which she placed second.
Benediktsson’s party has lost support in recent months, polling third, while the Left Greens’ backing of about 4% makes them the least popular among the eight groups represented in parliament.
Still, voters tend to “return home” and the ruling parties are likely to do better than the polls suggest, said Eirikur Bergmann, professor of politics at Bifrost University. The Progressive Party is the most likely among them to join any next coalition, he said, given their position in the middle of the political spectrum makes it “easy for them to make deals in all directions.”
The election needs to take place no later than 45 days after the parliament has been dissolved, Benediktsson said. Iceland was due to hold its next general election by September 2025, although the Left Greens had been calling for a vote to be held in the spring.
The elections also cast doubt over Iceland’s 2025 budget, said Gylfi Magnusson, professor of economics at the University of Iceland, and a former economy minister with no party affiliation.
“The most pressing thing on the political arena right now is next year’s budget bill,” Magnusson said by phone. “Although it has been submitted” to parliament, “it can’t be said how relevant it is when it’s clear that a new government has likely taken over before year-end.”
A key item in the budget is a possible sale of Islandsbanki shares, planned to take place in two steps late this year and next year.
Two Terms
The coalition’s first term culminated in the Covid-19 pandemic and voters rewarded their crisis management with by renewing their mandate in 2021. Since then, tensions have been building up over immigration policy, power generation and fisheries.
One matter that caused significant strain for the cabinet was a sudden whaling ban in 2023, imposed by Svandis Svavarsdottir, who was then minister of food and fisheries. The ban, which took other parties by surprise, was later found disproportionate and lacking legal footing. Whaling continues in accordance with existing laws.
Svavarsdottir, currently minister of infrastructure, was last week elected as leader of the Left Green movement, Jakobsdottir’s political home.
Asylum policy has also proved difficult for the coalition partners to agree upon. The premier’s Independence Party wants to take a tighter stance, while the Left Greens have even intervened in a deportation of a family whose application was denied. And over energy, the environmental movement bristles over the Independence Party’s plans to build more power generation.
--With assistance from Philip Tabuas.
(Updates with comments from economist, political scientist, from seventh paragraph)
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