By Mary Jordan
Washington Post Foreign Service
Tuesday, January 27, 2009
LONDON, Jan. 26 -- Iceland's coalition government collapsed Monday, the first government to fall as a direct result of the global economic turmoil.
Prime Minister Geir Haarde said he and his cabinet would resign immediately. As personal savings have been wiped out and joblessness has soared, Icelanders -- once among the world's wealthiest people -- have taken to the streets in protest, banging pots and pans and throwing eggs and toilet paper at Haarde and other parliamentary leaders.
Protests have mounted throughout Europe, where the political backlash to the crisis is growing. In Ireland, Britain, Spain and other countries where bankruptcies and home foreclosures are rising, polls show that approval ratings of leaders are sinking. In Eastern Europe and Greece, where there is less of a government safety net, protesters have spilled onto the streets by the thousands. Last month's collapse of the Belgian government, which had been wrestling with long-standing conflicts, was also hastened by the banking crisis, analysts said.
Perhaps nowhere has the economic crash been more spectacular than Iceland, an island with 300,000 residents on the edge of the Arctic Circle. Last fall, its largest banks went bust and the value of its currency plummeted. In recent days, protests intensified as no leader took responsibility for the crash, prompting police to use tear gas for the first time in half a century.
People felt that the government was "playing the violin while the Titanic was sinking," best-selling Icelandic author Andri Snær Magnason said in a telephone interview from Reykjavik, the capital. "Everybody who has a loan is paying 20 percent interest," and even those who own modest homes find their salaries cannot cover what is owed, he said.
Haarde announced Friday that he would call early elections and said he would step down. He cited health reasons and said doctors were treating him for cancer.
But ahead of those planned elections, Haarde's Independence Party could not come to terms with the Social Democrats, its main partner in the two-year-old coalition that was scheduled to stay in power until 2011.
The Social Democrats have called for the firing of the central bank governor and for closer ties with the rest of Europe. The nation had purposefully sought to stay outside the European Union but now many believe that if Iceland had the euro as its currency instead of the krona, this crisis would not be so severe.
Foreign Minister Ingibjorg Gisladottir, head of the Social Democratic Alliance party, is expected to start talks immediately with smaller parties in an attempt to form a new government that would rule until the new election. She has been receiving treatment for a brain tumor and said she does not want to be prime minister.
"Iceland is certainly leading the way of the social protests and the political fallouts," said Simon Johnson, former chief economist at the International Monetary Fund and senior fellow at the Peterson Institute for International Economics in Washington. "I think it's going to spread; we're in a phase now we're beginning to see all the political fallout."
Simon Tilford, chief economist at the Center for European Reform, said the severity of the economic downturn in Britain has "ended any chance" that Gordon Brown's Labor government will be reelected when he calls elections sometime before mid-2010.
Iceland's economy is forecast to shrink by almost 10 percent this year. Its banks, which had expanded into global powerhouses, had embraced risky investments that far exceeded the reserves of the nation's central bank. The country was forced to accept a bailout from the IMF.
Staff writer Anthony Faiola in Washington and special correspondent Karla Adam in London contributed to this report.