Ávarp forsætisráðherra, Davíðs Oddssonar
á aðalfundi Íslensk-ameríska verslunarráðsins í New York,
14. apríl 2004

It is a genuine pleasure for me to be here in Scandinavia House. This building is a fine illustration of the good spirit and strong desire for cooperation that links the Nordic countries with firm bonds. It is also a particular pleasure to have the opportunity to speak here at the annual meeting of the Icelandic-American Chamber of Commerce. Iceland and the United States have enjoyed a solid and close relationship for a long time and the Icelandic-American Chamber of Commerce has made a major contribution towards consolidating and strengthening contact between our two countries.

A visit to New York calls to mind the terrorist attacks on September 11, 2001 and surely always will when one comes to this city here after. Yesterday I went to ground zero, and the television images that were imprinted in my mind from those merciless attacks and their horrific consequences took on a new and clearer meaning. In a single day the world underwent a brutal and decisive transformation. The aftermath is still with us and will be for a very long time.

We can concede that the terrorists scored an early goal and have achieved their main aim of creating threats on an international scale which have unavoidably called for measures and responses that are inconvenient and even uncomfortable for the general public. But “the hand’s joy in the blow is brief,” as it says in the sagas, and steadfastness and determination will triumph in the end because “God’s mills grind slowly, but they grind well.”

When I assumed the office of Prime Minister in the spring of 1991 the world was also in the process of a great transformation, but a different and better one than was ushered in by the attacks on the Twin Towers. This was the end of the Cold War. The Soviet Union still existed then, but there were many signs that it was on the verge of falling. Its collapse came after the unsuccessful attempt at a coup by hardliners in August 1991. In November of that year I attended a NATO Summit for the first time. That meeting began to consider the Alliance’s future after the enemy had disappeared. At that time George Bush the elder was President of the United States.

When I think back to the great events that marked the end of the Cold War, the memories that are uppermost in my mind concern the Baltic countries and former Soviet republics of Estonia, Latvia and Lithuania. Their liberation from the grips of communist tyranny is one of the most astonishing examples of the changes entailed by the end of the Cold War.

Iceland never recognised the annexation of the Baltic states by the Soviet Union in 1940 and during the Cold War a number of Icelanders took part in ensuring that their cause was not forgotten. As soon as the Soviet Union began to crack, Iceland was quick to support the Baltic countries’ growing demands for freedom. The Icelandic government did so despite warnings from some of our allies in NATO, who put their faith in the Gorbachev regime in Moscow and feared the consequences of the collapse of the Soviet Union. Iceland then became the first country to establish diplomatic relations with the Baltic countries in August 1991.

Our next act in the service of the Baltic countries’ cause was to take part, along with several other NATO states, in lobbying the Alliance to agree to their requests for membership. Fierce Russian opposition to Baltic membership brought cautioning words from some quarters within the Alliance. But as before, NATO proved loyal to its ideals and historical role, and refused to accept a new division of Europe. On March 29 this year, seven Central and Eastern European states joined NATO, including the three Baltic countries. That was a beautiful sight to behold.

Participation in NATO and the bilateral Defence Agreement with the United States are the cornerstone of Iceland’s defence and security policy. In the period after the Cold War, NATO continued to have a crucial role despite the collapse of communism and had to resort to military intervention in both Bosnia and Kosovo in order to secure stability in Europe. After the terrorist attacks on the United States on September 11 2001, NATO formulated an effective policy on responses to global terrorism and countries that harbour terrorists.

Thus the disputes about the invasion of Iraq were a serious setback for NATO and put greater strain on the Alliance than any other event in its history. The transatlantic link, however, has apparently strengthened again and hopefully it will once again be shown that it is built on fundamental common interests and is indispensable, not only for Europe but for the whole world.

The decision to align Iceland with more than thirty other countries under US leadership in the Coalition of the Willing before the Iraq war last year was based on clear premises. Saddam Hussein’s regime was a threat to peace and stability and for more than a decade it had flouted UN resolutions and demands for disarmament. This was impossible to accept, and so was to risk that his dictatorship might build up strength until it became even more dangerous than before. The Iraq war prevented that and liberated the Iraqi people from Saddam Hussein and his henchmen. And notwithstanding disputes over the legitimacy of war, there is no doubt that a major threat to stability in that region has now been removed. Work is in progress to try to rebuild the country after the hardships it suffered under the dictatorship and establish a democracy. Such a policy must surely have the wholehearted support of everyone who desires peace in the Middle East.

Iceland has already contributed to reconstruction in Iraq, and will continue to do so. In the post-Cold War era NATO has been engaged in peacekeeping operations on a growing scale, which gives the smaller members of the Alliance an opportunity for involvement that they did not have during the Cold War. Iceland has already provided civilian experts of various kinds for peacekeeping and reconstruction work in Bosnia, Kosovo and Iraq, and in the middle of this year will begin participation in the NATO mission in Afghanistan. Iceland has also leased aircraft for airlifting of aid and peacekeeping forces to Afghanistan.

Naturally, the end of the Cold War led to major changes in the North Atlantic. The ocean areas around Iceland had a large presence of Soviet military aircraft and submarines. This changed completely after the Cold War, and accordingly the United States military forces at the Keflavík base were soon scaled down under an agreement with the Icelandic government that involved maintaining a minimum capability in the country.

The United States is now engaged in a global military posture review to address new threats, which of course can only be a good thing. However, the Icelandic government cannot accept that this review could leave Iceland without defence forces. Regrettably, ideas have been raised in the United States which would deprive Iceland of air defences by withdrawing the fighter aircraft that currently remain there.

This issue is still in the balance, so the future of the bilateral Defence Agreement and the defence relationship between Iceland and the United States that has lasted more than sixty years remains unclear. Of course close contact is being maintained on the matter and I would like to believe that it will be successfully resolved in the good spirit that has prevailed between our countries for such a long time. The Icelandic government is prepared to discuss all aspects of our defence relationship with the United States. However, our standpoint is clear that we would not be interested in continuing this defence relationship if it failed to fulfil the critical commitment of ensuring Iceland’s security by maintaining a minimum capability in the country itself.

Iceland and the United States enjoy a close friendship although our two countries are different in many ways, and I do not mean only in the obvious terms of geographical size and population. Freedom, democracy and human rights are fundamental values in both our countries’ views of the world and international affairs. We enjoy a wide range of business and cultural contact. Americans are currently investing heavily in Iceland, in particular in genetic research and aluminium production. The Aluminium Company of America is taking part in the largest investment programme in Icelandic history, which involves the construction of a massive hydropower station by Landsvirkjun, the national power company, to supply Alcoa’s smelter in the East Fjords of Iceland.

Ladies and Gentlemen:

Politics centre around different views on life. For the whole of the last century, the main political battleline was the conflict between government and freedom. The conflict between those who believe in the state as the be-all and the end-all, and those who believe that people can best arrange their own affairs. The conflict between those who consider that life will never be good unless it is controlled from above, and those who are convinced that freedom of the individual is the precondition for a flourishing and diverse society.

This fact is sometimes forgotten as we argue over day-to-day issues, when politics seem to involve little more than the passing moment and all kinds of outcries that no sooner come than they are gone again. For some reason it seems to be the trend for people to claim they are not bound by ideals of any kind and even go so far as to regard politicians who adhere to basic values as old-fashioned and reactionary. This is a very regrettable trend for many reasons. Politicians take their mandate from the public at large. It is unfair towards voters to expect them to elect individual politicians without being able to grasp their values and ideals. These give some indication of the kind of standpoint that the politician will take towards all the different issues which it is impossible to foresee whether and when they might arise.

It is no less important for voters to be able to measure a politician’s ideals against the position he takes on individual issues. To find out whether he works with integrity or is guided above all by opportunism. For politicians themselves, in my opinion nothing is more important than clear and firm ideals. Politicians need to take a standpoint towards a great number of issues, large and small, almost every single day. A clearly thought-out policy is both an engine and a compass – without this, politicians are like a broken-down ship, drifting aimlessly at the mercy of the winds and the waves. In this context, however, we should remember that steadfastness is not the same as obstinacy. There is generally more than one path towards a set goal, and political success is based on finding a suitable path to take without losing sight of that goal. It is pointless to head in the right direction, full steam ahead, if this means the ship will capsize or run aground. This fact needs to be borne in mind when politicians initiate major changes in society.

One of the main tasks of the Icelandic government since the beginning of the last decade has been privatisation. It is easy to forget how actively and extensively the Icelandic state was once involved in business activities. Nothing seemed beyond its scope. Running a travel agency, fish meal processing plants, a knitting workshop, a printing company and all manner of other enterprises was taken for granted. The crucial factor, however, was the mighty grip that the Icelandic state had on all business activity through its ownership of the commercial banks. It was obvious from the start that it would take some while to convince people in Iceland about the benefits of privatising state enterprises.

Naturally, privatisation was controversial at first – opponents of the policy fought hard against it and tried to derail it by every means at their disposal. People had to be won over to the idea that privatisation would mean improved, cheaper and more diverse services for the public. There would have been no point in forging ahead with privatisation if the public did not have a clear idea of what the government’s ultimate motive was. Implementing the programme too fast would have risked a backlash that could undermine broad political support for finishing this important task. Thus the order in which state enterprises have been sold was crucial. When the time for privatising the state-owned banks came around, a sufficiently broad consensus had been achieved on the need for the state to withdraw from the direct operation of financial institutions.

Of course, calls are still made for politicians to sit on the banks’ boards of directors and for the banks to be politically controlled. But these voices are rare and rather offer a little light relief than serious political opposition to this major reform. After all, we have seen the results of freedom in the financial markets. Icelandic banks are forward-looking and dynamic, and provide strong support for businesses and households. The next phase in Iceland’s privatisation programme is now on the horizon. Parliament has authorised the government to sell Iceland Telecom. Its sale will be the single largest privatisation measure so far and the next step is to advertise for consultants to assist the Executive Committee on Privatisation with this extensive and complex project.

Another major task in Icelandic politics over the past decade or so was to bring the Treasury’s finances under control. The fiscal position at the beginning of the nineteen-nineties was far from satisfactory. A persistent budget deficit with a corresponding build-up in debt was, in my opinion, one of the greatest threats to the Icelandic economy at that time. The economic depression at the beginning of the nineteen-nineties, which was partly caused by the cod quota being cut by up to half, exaggerated the existing problem. But despite tough external conditions, a full-scale effort was made to achieve fiscal balance. One of the biggest tasks was to abolish a range of state funds that had been used to inject taxpayers’ money into industry. Obviously something is wrong when taxpayers’ money needs to be used to keep businesses afloat – even Baron von Munchausen, who famously lifted himself up by pulling his own hair, would never have entertained such an idea.

Despite the temporary problems that accompanied the relaunching of the economy, there is no doubt that it produced the desired results. From 1994 onwards, Iceland’s economy began to brighten up. The impact of economic reforms was gradually felt and output growth gained momentum. The fiscal position improved steadily over the years and the point has now been reached where Treasury debt is only 15% of GNP, compared with 50% just over a decade ago. This successful Treasury outcome has been achieved in spite of large outlays which have been allocated to civil service pension funds and to strengthening the financial position of the Central Bank of Iceland.

Furthermore, it should be remembered that spending on education and the health service has been increased by several tens of percent over the past ten years. It is also interesting to note that considerable tax cuts have been made over the same period. Corporate income tax was 50% at the beginning of the nineteen-nineties but has now been brought down to 18%. Personal income tax has already been lowered and during the current government’s term of office it will be reduced even further. If the government’s plans hold good, personal income tax will be four percentage points lower at the end of the term than it was at the beginning. I am convinced that this tax reduction will boost Iceland’s business sector even further and lay the foundation for ongoing robust growth. Inheritance tax, which could sometimes amount to as much as 45%, has been cut and will henceforth never be higher than 5%.

GDP growth is estimated at around 4% last year and is forecast in the range 4 to 5% over the next few years. This impressive growth rate follows a period of sustained growth from 1995 to 2001, while in 2002 it remained flat. The crucial point is that economic growth has been successfully passed on to the general public in the form of higher real wages. Since 1995, real wages have grown by more than 30% – by comparison, they increased by little more than 4% throughout the whole of the nineteen-eighties.

Lower taxes are not only a sensible economic measure that drives growth. They are also a confirmation of a political policy, the fundamental ideal that the freedom of the individual is the cornerstone of a civilised society. It is obvious that anyone who needs to pay the greater part of his income to the state is not free except to a limited extent. Inevitably the state will provide certain services. But the less that the state takes from ordinary working people’s pockets, the more chance they themselves have to decide how to use the fruits of their labour. And the more economic power that the public has, the more diverse and dynamic the whole of society will be.

Ladies and Gentlemen:

When I took over as Prime Minister of Iceland in 1991, the agreement on the European Economic Area was in the pipeline. It came about when the European Union invited the EFTA countries to cooperate more closely with it and take part in its internal market. The reason for this offer was that, apart from Iceland and Norway, the EFTA countries were prevented from joining the EU by their policies of neutrality. After the Cold War a window opened for the neutral countries – Austria, Finland and Sweden – to become members of the EU. Along with Norway, they decided in 1992 to aim for membership, while Iceland decided to allow the EEA Agreement to suffice. Norway later rejected EU membership in a referendum. Thus there are now three EFTA countries in the European Economic Area, namely Iceland, Liechtenstein and Norway, while Switzerland, a member of EFTA, opted to remain outside the EEA.

The EEA Agreement continues to provide a firm foundation for Iceland’s relations with the European Union, ensuring its access to the EU internal market. In effect Iceland now enjoys the chief benefits that membership would bring, while still having every opportunity to conduct its affairs in the most suitable way for itself at any time.

There remain clear reasons why Iceland is not interested in joining the EU. The basic rule of the Common Fisheries Policy – that important decisions are not taken by member countries, but by EU institutions – is unacceptable for Iceland. Another major obstacle involves monetary union. Because Iceland’s exports are still quite undiversified – with fisheries by far the largest export sector – monetary union would entail risks for us. Its different economic structure from the rest of Europe could mean that economic conditions in Iceland at any given time were not synchronised with those in the EMU countries. What might be a sensible monetary policy there at that point in time could cause major economic problems in Iceland.

While Iceland enjoys full access to the internal market it still has the possibility, by remaining outside the EU, to tailor its legal framework to the needs of businesses without having to follow EU directives to the letter. Globalisation also gives us greater scope, if people are willing to seize the opportunities that it offers or create them for themselves. The Government of Iceland is determined to go on shaping a business environment that ensures that both Icelandic and foreign companies will want to go on operating in the country. We have much to offer foreign investors, including a highly educated labour force, access to markets on both sides of the Atlantic, economic stability and a high level of technology.

Ladies and Gentlemen:

This autumn I shall have served as the Prime Minister of Iceland for more than thirteen years. This has been an eventful time, and incredibly quick to pass. It is sometimes said that a week in politics is like a whole eternity. If this is true, thirteen years must be quite a time span. It is a great privilege to have had the opportunity to serve my country in this way for such a long time. The fact is that the results of politicians’ work tends not to emerge until many years later. And perhaps this is toughest on those politicians who champion limited state intervention. They put their faith in the market, and the market often needs time to find the best solution,
which in many cases is difficult to foresee.

Interventionist politicians, who want the state to solve every problem, face an easier task. They can point out the solutions available to the state and straight away claim the honour for the actions that are taken. But it is my conviction that history has proven beyond all shadow of a doubt that, as a rule, the free market is a much better way of solving the challenges that society needs to tackle. Thirteen years in the office of Prime Minister have given me a unique opportunity to verify the words of Milton Friedman when he visited Iceland in the nineteen-eighties. Asked what action Iceland needed to take to put its economic affairs in order, he gave a simple answer: “The solution is freedom”.

I would like to repeat my thanks to the leaders of the Icelandic-American Chamber of Commerce for this chance to come here and meet you. I also wish the officials and members of the Chamber of Commerce every success in its activities over the years to come.