The financial crash of 2008 haunts the remote tundra east of Reykjavik.
In a bar in Búðir, eastern Iceland, the regular afternoon crowd looks on as the supersize TV relays a litany of bad news about the country's economy. An update on the struggling krona. Financial results from a Reykjavik bank that almost collapsed in the turmoil of 2008. More reflections on the Icesave debacle, and the rights and wrongs of the British government's tough demands for compensation from Iceland. The drinkers react like the chorus of a Greek tragedy. In this part of Iceland, it seems, there is no good news.
Fáskrúðsfjörður, the fjord where Búðir is the sole remaining village, is tantalisingly beautiful. But great views do not fill hungry stomachs, and on either side of the firth stand houses and entire villages that have been abandoned - a sorry tale repeated in many of Iceland's eastern fjords. This is not the Iceland depicted in the media. Unlike pre-recession Reykjavik, there was never anything showy about Fáskrúðsfjörður. No one ever drove a Porsche. And nobody here weeps for the Reykjavik financiers who lost their jobs and smart cars when Iceland's economy collapsed a year and a half ago.
Today Iceland has a centre-left government led by Jóhanna Sigurðardóttir, who became the country's first woman prime minister a year ago. To her fans, she is Saint Jóhanna; even critics concede that she is canny, sharp on economic issues and with a strong social conscience. Only time will tell whether Saint Jóhanna really can work a miracle with the Icelandic economy.
Handling the Icesave aftermath is central to Iceland's recovery. When the online bank collapsed in 2008, it took £3.3bn of British and Dutch savings with it; those countries' governments repaid savers, but are now seeking compensation. Icelandic taxpayers will decide what happens next in a referendum on 6 March. Polls show they are not keen to pay for the bankers' mistakes, but if compensation is vetoed, much-needed funding from the International Monetary Fund could be at risk. The prize for finding a solution may be a fast-track route into the EU and, eventually, the eurozone.
But in the bars and cafés of the eastern townships, the talk is not of long-term economic strategies, but of finding a way to survive the months ahead. Negative equity and fears for the future of jobs haunt the tundra as local communities wonder if Reykjavik's elite remember Iceland's distant east.
The early Norse settlers made landfall in this corner of Iceland in the 9th century, securing the country's starring role in the Old Norse sagas. Even now, history is everywhere, especially in the east. At Café Nielsen in Egilsstaðir, I meet Anna Baldursdóttir, a would-be poet. "Round here, we tried too hard to keep faith with the past," she says. "Every hillside, every valley evokes memories of that heroic past which was documented in the sagas."
Visitors have long been beguiled by this romantic view. Two centuries ago, the Scottish preacher Ebenezer Henderson was amazed by Iceland's "great multiplicity of boiling springs and steaming apertures". He wrote the script for millions of subsequent visitors, among them William Morris, Louis MacNeice and W H Auden, who felt that there is "not much that can be said for Reykjavik", preferring the far-flung farmsteads of the east. "I think even we believed all those notions," Baldursdóttir says. "Iceland was somehow pristine, virginal, untouched by the affairs of the modern world. We swallowed the whole tale. Much of Europe believed it. And then we discovered in 2008 that the bankers in Reykjavik were mixed up in a business so murky that a very different Iceland was revealed to all the world."
One way forward
Halfway between Búðir and Egilsstaðir stands Reyðarfjörður, the aluminium capital of eastern Iceland. This once-sleepy town now serves the interests of Alcoa - the Aluminum Company of America. Alcoa's new smelter is up and running, bringing jobs to an isolated community and a boost to the Pittsburgh-based multinational's profits.
Alcoa's engagement in Iceland comes at a hefty environmental price: the Kyoto Protocol's "Iceland Provision" is a concession allowing greenhouse-gas emissions from the plant to be discounted from Iceland's total. There are other issues, too. Government funding for the hydro scheme that powers the smelter comes to £2,500 for every Icelander. But now that the plant is complete and the migrant workers who built it have left, there are jobs for local people.
Reyðarfjörður has the air of a town enjoying a minor boom, and locals are understandably tight-lipped when outsiders suggest it has sold out. Glaciers and geysers cannot fuel a national economy, and Reyðarfjörður offers an example of one way forward. But it is a model viewed with great suspicion by many Icelanders.
The rural roads north of Egilsstaðir traverse a landscape of stark beauty. Here, the clear, cold waters that drain down from the Vatnajökull ice cap run into the sea. The rough road climbs slowly over the fells, then drops down to the very end of Iceland, a wild and rocky headland called Landsendi. In 1306, early settlers erected a crucifix here overlooking the ocean. The cross has a simple inscription, urging the traveller to pause and reflect. It is a petition that Saint Jóhanna would do well to observe as she plans a future for Iceland's troubled economy.
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