The purpose of this thesis is to look for changes in the foreign policy of Iceland after the financial crisis. The point of departure is the ongoing debate about foreign affairs with regards to possible European Union membership and the so called Icesave dispute connected to the collapse of the Icelandic financial system. Expenditures for running diplomatic missions abroad have also been under scrutiny in political and public debate.

Within international relations there is a variety of theories on the purpose of running foreign policy or what states are trying to obtain in international relations. Small states are faced with some restrictions but enjoy several benefits as well due to their size. For example, they can not rely on hard power as a method to solve their conflicts as they lack capacity. This makes theoretical approaches focusing on soft power more plausible to explain small state behavior in the international system, for example neo-liberalism and cosmopolitan power. Small states are usually more dependent on alliances and networking than the big states, they need to play strategically and make compromises.

Playing strategically is for example important when determining which locations are key locations to place diplomatic missions. During the ongoing recession three Icelandic diplomatic missions have been closed as a result of tighter budget. Cutbacks have also been made on defense by shutting down Icelandic Defence Agency and on development by closing a few offices belonging to the Icelandic Development Agency in Africa and Latin America. Nevertheless, the need for a strong foreign affairs service seems maybe greater than ever, fighting for Icelandic interests and repairing the renown of the country that was harmed by the bank collapse.

Foreign affairs have become a more important issue area for many other actors than the Ministry for Foreign Affairs (MFA). In the most extensive domestic political debate after the crisis, the Icesave dispute with UK and Netherlands, other ministries and ministers have been communicating with the outside world a lot more than usual. The prime minister, minister of finance and minister of trade among others have been active at explaining Icelandic views at the international forum. The president has furthermore become a challenger to the foreign policy decided by the parliament and turned the policy towards the Icesave dispute “upside down” by refusing to ratify parliament decisions on the issue. He has also undertaken communications with foreign media on the issue, explaining his decisions and upholding Icelandic interests. On the Icesave issue, the debate has largely been on definition of interests, there has not been agreement as to which stand best serves Icelandic interests. The policy change on the issue leading from the president’s decisions has however become what he and the aforementioned actors have had to gather around and defend towards the outside community.

Negotiations with the European Union are currently top of the agenda for the MFA. The leading party in the government is supportive of membership while the coalition partner, Left Green Movement, is opposed to membership. Negotiations will be continued until a contract has been finalized and then membership will be subject to a referendum. Opposition to membership has mainly been founded on beliefs that agriculture and the fisheries will suffer as industry sectors; that they will not flourish under EU legislation. Supporters point out on the other hand that with the current situation Iceland has to adopt most EU legislation chapters through its EEA membership without having the chance to influence them, as they would have through EU membership. The president is a long time opponent to EU membership and given his recent involvement in foreign policy formation, he might have some tricks up his sleeve to frustrate membership supporters.

The Icelandic authorities have been working on strengthening their position in far-away markets as well. Geo-thermal energy cooperation is ongoing or planned in Russia, China and India. The first new Icelandic consular office after crisis was opened in Mumbai, India recently which comes in addition to the embassy in New Delhi established in 2006. India and Japan were among the first states to officially support the IMF loan program for Iceland after crisis. However, the fellow Nordic countries constitute the strongest support base for Iceland before and after crisis, as indicated by their financial assistance and mutual relationship through the various institutions on Nordic cooperation.