The little island that took on the world

Once among the poorest and most isolated countries in the world, booming Iceland now exports everything from volcanic ash to peacekeepers and pop divas. Tim Judah reports from Reykjavik

Much of the world, if it knows anything about Iceland, thinks of the treeless northerly island as small, rich, smug and dull. A great place to buy cod and see the northern lights but you wouldn't want to live there.

Much of the world, if it knows anything about Iceland, thinks of the treeless northerly island as small, rich, smug and dull. A great place to buy cod and see the northern lights but you wouldn't want to live there.

Then Grimsvotn exploded all over Europe. The volcano, which lies underneath Iceland's vast Vatnajokull glacier, erupted this week sending a column of ash 12,000 metres into the air, dousing first Scandinavia, then threatening to coat countries as far south as central Europe. Hundreds of passenger jets were grounded, a host of transatlantic flights - up to 500 of them cross Iceland every day - had to be diverted. Thousands of people were made to stop and think about Iceland.

When the dust settles it could be remembered as Mother Nature's little reminder that this nation of less than 300,000 is more influential than many of us had realised.

From the ethereal pop star Bjork, who headlined the biggest global television event of the year at the opening ceremony of the Athens Olympics, to Iceland's glamour-girl first lady, Dorrit Moussaieff, who switched a career in jewellery design and socialising in London to marry President Olafur Ragnar Grimsson, Iceland is as cool as the adverts tell us.

If the volcano continues to erupt it will begin to melt the glacier, causing floods and damage to roads and bridges. But for the marketeers looking to get the country some northern exposure, Grimsvotn is a welcome blowout.

It is not just ash that is coming our way, it's Icelandic business, which, more than likely, has already settled on a high street near you.

Iceland is one of the planet's most successful societies. Before the Second World War it was one of the poorest countries in Europe. Now its people are among the richest on earth. Not that there are many of them mind you, only 290,570 at the last count, but Icelanders certainly know an opportunity when they see one. For example, Iceland was a Danish colony, but with Denmark occupied by the Nazis, who themselves were more than a little pre-occupied by the British and then the Americans, Iceland seized the opportunity to declare independence in 1944. It has been on the up ever since.

It always knew how to punch above its weight. Documents that have recently come to light have shown how successive American policymakers were irritated by Iceland constantly upping the price of its strategic Cold War location. Iceland, for example, gave the US a major base at Keflavik, in exchange for a US commitment to defend Iceland, which, uniquely, joined Nato without an army.

When in the 1970s Iceland fought the famous cod wars with Britain and Germany, elbowing British trawlers and the Royal Navy out of the ever-expanding slice of the Atlantic that they claimed, its diplomats, albeit more subtly, were reminding their allies just how important it was for the US to be able to keep an eye on Soviet submarines from the island, and just how important a base it would be in case of a war.

It even provided a venue for the first act in ending the Cold War. The dramatic Reagan-Gorbachev summit took place in Reykjavik in 1986. It is now consigned to history, but Iceland emerged from it as one of the most dynamic countries in Europe.

Because of the importance of its fishing lobby the country never joined the European Union, but today it skilfully manages to gain all the benefits associated with EU membership without many of the downsides. It is, if you will, a kind of semi-detached member, but not one whose example would actually enthuse Britain's Eurosceptics. Iceland adopts some 80 per cent of European legislation but has no influence in the making of these laws.

Today the question of EU membership is, like Iceland's other volcanoes, dormant, but it does constantly grumble beneath the surface of politics here, not least because tariffs put up to protect Icelandic agriculture and fisheries make life in Iceland extremely expensive compared with the rest of Europe.

That too is part of an ongoing angst in Iceland about the future of the country, which until only recently was so poor. The government wants to create jobs, especially now that the once all-powerful fishing industry is in serious decline. The irony of this, however, has been that Iceland, having virtually no unemployment, is now suffering an acute labour shortage, so construction and other dirty jobs are being snapped up by Poles, Balts and others.

Indeed, with much of the population now clustered in the greater Reykjavik area, tiny fishing villages are dying. Today the fishing industry employs barely 10,000 people, and next year it is expected that it will no longer be the largest foreign exchange earner in the country. Services, which includes everything from banking to tourism, are set to outstrip fishing, which was once the bedrock of Icelandic prosperity. Today, the well-educated Icelanders would rather work in software development than a dangerous trawler or smelly fish factory, and that is increasingly what they are doing.

But, more than this, privatisation, both at home and abroad, has for the first time created a small group of super-wealthy Icelanders. Some of these have recently begun moving to London, and some of their companies too are increasingly being registered in Gibraltar or the Cayman Islands.

While a significant proportion of Icelandic foreign investment is being made in Scandinavia, in banking and insurance, a huge amount of money is also flowing to Britain. In the past two weeks Icelandair has bought a more than 10 per cent share in easyJet. The Icelandic group Baugur already owns the toy shop Hamleys and the fashion group Oasis, whose outlets include the high-street chains Karen Millen and Whistles.

Another group, Bakkavor, has made major inroads selling chilled produce to Tesco and Marks & Spencer. It has also bought 20 per cent of the food company Geest and is poised to buy more. Last month SIF, an Icelandic fish produce firm, bought the French food company Labeyrie. Icelandic firms have also bought into a British investment bank, the Singer & Friedlander Group.

Growth in Iceland is running at some 6.4 per cent, compared with 2 per cent in the eurozone. Such phenomenal success has made Iceland's stock market Europe's best performer, although that winning streak may have come to an end. The past two weeks have seen the index plummet by 16 per cent. "There is a bit of panic-selling in the market," Agla Hendriksdottir of Islandsbanki, the country's third largest bank, was quoted as saying.

While Icelanders are proud that some of their compatriots are making it big, especially abroad, there is also a sense of nostalgia among many for a past, in which no one was rich and everyone more or less equal.

"I was brought up in the most egalitarian society I can imagine," says Arni Bergmann, a writer and self-professed "old leftist". He laments the concentration of financial power in the hands of a few families, and also notes that one firm in particular owns a dangerously large slice of the country's media. "There is a feeling of powerlessness," he says.

Mr Bergmann may be right, but, being among the richest people on the planet and with an excellent, intact and generous social security network, few Icelanders are going to do much more than moan about it. Indeed, with cheap flights now operating to Stansted, Copenhagen and other places, Icelanders can now travel abroad, shop abroad and party abroad like never before. And, give or take a little ash, that is exactly what they are doing - or in some cases overdoing with fatal consequences.

With peacekeeping the thing for modern armies Iceland has not wanted to be left behind, even though it has no army. The government has also supported the US politically in all three recent major conflicts, in Kosovo, Afghanistan and Iraq. So in their wake Iceland has developed what might be called a boutique peacekeeping skill, which is running airports. After running Kosovo's Pristina airport until earlier this year, 17 Icelanders moved on to take control of Kabul airport.

The Icelandic media has been dominated by a row set off by a suicide bomber in Kabul's Chicken Street on 23 October in which three Icelandic peacekeepers were lightly injured, but an American female translator and an 11-year-old Afghan girl was killed. The row was sparked off when it was discovered that, far from being on heroic active duty, the head of the Icelandic peacekeeping unit in Afghanistan, Colonel Halli Sigurdsson, was engaged in an hour-long haggling session over a rug. Chicken Street is famous for its jewellery, carpet and antique shops, so foreigners and uniformed soldiers especially have been warned to keep away, lest they make tempting Taliban targets.

To make matters worse, when the lightly injured peacekeepers swaggered home through Reykjavik airport two of the three wore T-shirts which said, on the front: "Chicken Street: Shit Happens" and on the back, alongside a large skull, "Survivor: Afghanistan". One Icelandic journalist bemoaned in private: "When people get killed, when it is serious, we have so little experience, we have no idea how to react." On Wednesday, however, Iceland's Foreign Minister, David Oddsson, did react, recalling Colonel Sigurdsson from Kabul, but not before a row had developed, which included questions such as how come Colonel Sigurdsson had become a colonel, since the country had no army, and in the same vein, what were Icelanders doing in Kabul, in full uniform, armed with machine-guns and grenades?

The opposition to Iceland's centre-right coalition is accusing the government of creating an army by stealth and with no debate in parliament. According to Gudmundur Arni Stefansson, a deputy for the opposition Social Democratic Alliance: "Iceland has no army, so why are we trying to contribute to a military effort? We have earlier contributed to peacekeeping efforts in the Balkans with doctors, nurses, journalists and lawyers. I have to say that we should stick to what we know how to do, and soldiers we are not." The Foreign Minister, Mr Oddsson, insists that the men in Kabul "are not soldiers". But Ogmundur Jonasson, parliamentary leader of the Left-Green Party, was quoted as saying: "It is not surprising that the Icelandic government tries to demonstrate that the Kabul force does not constitute a military force. Unfortunately the Foreign Minister's arguments are extremely unconvincing."