The world’s northernmost capital city, Reykjavík means 'Smoky Bay’, a name acquired from the town’s first settler Ingólfur Arnarson, who saw steam rising from the area’s geothermal springs when he arrived around 870. Reykjavík’s oldest building dates from the late 18th century, when the town had become the administrative centre for Iceland, which was then under Danish rule.

In the first half of the 20th century, people began to migrate to Reykjavík from the countryside. This process intensified greatly during the Second World War when British and US forces were based in Iceland. There has been more immigration in recent years and Reykjavík has become a more cosmopolitan city. It is an increasingly popular target for foreign investment, thanks to a system of low taxes and a highly educated workforce. Reykjavík was also a European Capital of Culture in 2000. At the risk of oversimplification, it could be said that the corrugated iron houses that nestle together in the old parts of Reykjavík are charming while new developments often leave much to be desired.

POLITICS

Iceland is a parliamentary democracy with a 63-seat parliament and an elected president. The president, currently Ólafur Ragnar Grímsson, acts primarily as a figurehead for the country and is not generally involved in politics.

The prime minister is Halldór Ásgrímsson. Due to the nature of the proportional representation system, the government is usually formed from a coalition between several parties. The main political parties (on a national and a local level) are the right-of-centre Independence Party, the right-wing Liberal party, the centrist Progressive Party, the centre-left Social Democratic Party and the left-wing Left-Green Alliance. The current ruling coalition is between the Independence and Progressive parties.

Like other Nordic nations, the social welfare system of Iceland remains strong and is not threatened by the policies of any political party. Unlike other Nordic nations, however, the more right-wing Independence Party has traditionally had the most support among the electorate.

ECONOMY

The Icelandic economy has been strong over the past 15 years, with very low unemployment and extensive privatisation of formerly state-owned banks and other institutions. The Króna is currently valued more highly than ever, sparking some fears of a possible return to the high inflation that characterised the 1970s and 80s, although this seems unlikely. Numerous Icelandic companies are expanding abroad, most notably Baugur, which owns numerous retail outlets in the UK, including Hamley’s and Somerfield’s. The biggest question for Iceland’s economic future remains whether the country will become a member of the European Union. The most important issue in this respect concerns who would have sovereignty over Iceland’s rich fishing grounds (nearly 40% of all exports from Iceland are seafood-related products). For the time being, the benefits of EEC membership seem to be providing the country with everything it needs.

POPULATION

Relatively speaking, Iceland is a very homogeneous society. The vast majority of the population (well over 90%) are ethnically Icelandic. Thanks to excellent church records and the small size and isolation of the population, all family ancestries can be traced with fair accuracy back to the 16th or 17th centuries. All ethnic Icelanders are related to each other with a maximum seven degrees of separation. The island was originally settled by Norsemen and their Celtic wives and slaves in the 9th and 10th centuries. Over the past 10 years, the population of foreign-born Icelanders has grown. There are now almost 20,000 foreign-born people living in Iceland. The largest groups are from Denmark, Germany, Poland and the United States.