Davíð Oddsson was a member of a group of young conservative-libertarians within the Independence Party who felt that the party should support more strongly attempts to extend economic freedom in the heavily regulated Icelandic economy. The group included Þorsteinn Pálsson, Geir H. Haarde, Jón Steinar Gunnlaugsson, Kjartan Gunnarsson, Magnús Gunnarsson, Brynjólfur Bjarnason and Hannes Hólmsteinn Gissurarson, and they published the magazine Eimreiðin from 1972 to 1975; in the following years they followed with interest what was happening in the United Kingdom under Margaret Thatcher and in the United States under Ronald Reagan; they also read books and articles by and about Milton Friedman, Friedrich Hayek and James M. Buchanan, who all visited Iceland in the early 1980s and whose messages of limited governments, privatisation, and liberalisation of the economy had a wide impact. Davíð got a chance to further his ideals when, in 1982, the Independence Party, under his leadership, regained the majority in the Reykjavík Municipal Council which it had lost four years earlier to three left-wing parties. Davíð swiftly reduced the number of Council members from 21 to 15, and merged the largest fishing firm in Reykjavik which belonged to the municipality and had been a huge burden, with a private fishing firm and then sold off the municipality’s assets in the new firm, Grandi, now one of the biggest fishing firms in Iceland. Incidentally, the director of Grandi, Brynjólfur Bjarnason, who oversaw what was Davíð’s first privatisation, later became the director of the Icelandic Telephone Company which turned out to be Davíð’s last privatisation in government (2005). As Mayor of Reykjavík, Davíð had a City Hall built by the Reykjavík pond (there had never been a City Hall in Reykjavík), and a big restaurant, Perlan, revolving over the old water tanks in Öskjuhlíð. Despite his libertarian leanings, Davíð also generously supported the Reykjavík City Theatre, in particular the building of a new theatre house which was opened in 1989. In the nine years when Davíð was Mayor of Reykjavík, a whole new district, Grafarvogur, was built and also a new shopping area around the shopping mall Kringlan. A forceful and uncompromising Mayor of Reykjavík, Davíð was much-criticized by the left-wing opposition in the Municipal Council.
In 1983, Davíð Oddsson’s old friend and ally, Þorsteinn Pálsson, had been elected leader of the Independence Party, and in 1989 Davíð had been elected deputy leader, or Vice-Chairman of the Party. After Þorsteinn Pálsson had to resign as Prime Minister in 1988, after falling out with the leaders of his two coalition parties, there was a widespread feeling in the party that its leadership should be changed, and much pressure on Davíð to stand against Þorsteinn. This he did in 1991, and became leader of the Independence Party. Under Davíð Oddsson’s leadership, in the parliamentary elections of 1991, the Independence Party regained most of the support it had lost in 1987 when it had been severely weakened because of a split in its ranks. In record time, Davíð formed a coalition government with the social democrats, Alþýðuflokkurinn, whose leader, Jón Baldvin Hannibalsson, became Minister of Foreign Affairs. Jón Baldvin and Davíð jointly decided that Iceland should become the first state to recognise the reinstatement of the sovereignty and independence of the three Baltic countries, Estonia, Latvia and Lithuania, after the fall of Soviet Union.
Davíð’s government inherited a huge budget deficit and a burden of unproductive investments; much money had been spent on fish farming for example, with little result. Inflationary pressures were also building up, while some fish stocks in the Icelandic waters were being depleted. The budget deficit was turned into a surplus in 1996, not least because of the close cooperation between Davíð and Friðrik Sophusson, the Minister of Finance, who had also been a prominent young libertarian. There was a surplus almost continuously since then, which has been used to reduce the public debt, and also to reform the pension system, which is now almost wholly self-supporting, while some small companies were privatised. Monetary constraints were imposed by making the Central Bank largely independent of any political pressures. It also helped the Davíð Oddsson government that there was a consensus between the labour unions and the employers that the rampant inflation of the 1980s, with huge, but largely meaningless, nominal wage increases, could not go on; therefore, in 1990, the unions and the employers had signed a “National Accord”, whereby wage increased would be moderate, and government would be assisted in bringing down inflation. From 1991, inflation in Iceland was on a level with the neighbouring countries.
In 1994, the Social Democratic Party split, and as a result they suffered a huge loss in the 1995 parliamentary elections. While in theory the coalition government maintained its majority, it only consisted of one seat. Davíð Oddsson therefore decided to form a coalition with the Progressive Party. The leader of the Progressive Party, Halldór Ásgrímsson, became Minister of Foreign Affairs. In the new government, privatisation was continued on a much greater scale than before: a big and important chain of fish processing plants was sold; part-public or public investment funds were merged and sold as a private investment bank; the two commercial banks under government control were sold in a few stages; in 2005, as noted previously, the state-owned Icelandic telephone company Siminn was also privatised. The two coalition parties accepted the loud demand by many people that a charge would be imposed on the holders of fishing quotas.
Davíð’s two governments were staunch allies of the United States and strongly in support of NATO, of which Iceland is a founding member. Davíð firmly supported the actions undertaken by the U.S. and its allies in Afghanistan and Iraq, taking much criticism from the Icelandic Left. Since the fall of the Soviet Union, there has been some uncertainty about whether the United States defence force could or should remain in Iceland, having been invited there in 1951, at the height of the Cold War. The Icelandic government generally believes that the U.S. should continue to commit itself to the defence of Iceland, while it has also made clear its willingness to share in the costs of maintaining the arrangements. Davíð has not been enthusiastic about joining the European Union (EU), unlike the leadership of the Social Democratic party. A vocal supporter of free market policies, Davíð has publicly expressed doubts about the dirigiste tendencies of the European Union; he has also feels that Iceland, as a prosperous high-income nation, would contribute much more to the EU than it would get back; again, most notably, the country would have to cede control to Brussels of the Icelandic waters, fought over and gained in the many “cod wars” of the past.
The latter Davíð Oddsson government (1995-2004) embarked on a course of tax cuts. It cut the corporate income tax to 18%; it abolished the net wealth tax; it lowered the personal income tax and inheritance tax. This combination of opening up of the economy, fiscal and monetary stabilisation have together created an entrepreneurial climate in Iceland that spurred record economic growth in the country, with the real average income of individual households increasing by more than 17%. Icelanders have also been busily investing in other countries, especially the United Kingdom and Denmark.
As a young man, Davíð Oddsson authored or co-authored several plays for the stage and for television. During his days as political leader, he pursued his literary interests as well, and in 1997, he published a collection of short stories, Nokkrir góðir dagar án Guðnýjar, which became a best-seller in Iceland. Davíð celebrated his 50th birthday at a huge reception in Perlan, paid for by the Independence Party, and his friends published a festschrift of more than 500 pages where many of the most distinguished writers, scholars and politicians of Iceland contributed papers. In the 1999 parliamentary elections, Davíð’s Independence Party retained strong support, despite the attempt by a former government minister of the Party, Sverrir Hermannsson, to establish a splinter party: the minister had been made director of the National Bank of Iceland and had had to resign because of financial irregularities. In 2002, Davíð published another collection of short stories, Stolið frá höfundi stafrófsins, which was also well-received.
However, in that same year, 2002, there began a controversy in Iceland about the company Baugur, owned by the successful entrepreneurs Jóhannes Jónsson and his son, Jón Ásgeir Jóhannesson. A giant on the Icelandic scene, Baugur controlled the majority of the retailing business in Iceland: in parliament, the then-leader of the social democratic party Össur Skarphéðinsson called for a closer supervision on possible monopoly pricing, specifically mentioning this company. Davíð said he agreed in general. In the summer of 2002, the Icelandic police raided the headquarters of Baugur, after a disgruntled former employee in their American operations had produced what he claimed was evidence of financial irregularities. The two main owners of Baugur did not take kindly to this and accused Davíð of being behind a campaign against them. They bought a newspaper, Fréttablaðið, which is sent free of charge into every household in Iceland. The paper opposed Davíð in the bitterly fought 2003 parliamentary election when there was talk of corruption, bribery and abuse of the police. In a speech on February 9 2003, the main spokesperson of the social democratic party, Ingibjörg Sólrún Gísladóttir, suggested that Davíð might be responsible for the tax investigation of businessman Jón Ólafsson, then owner of a private television station, and also for the police raid on Baugur. Paraphrasing Shakespeare, she asked: "Are you a friend of the Prime Minister or are you not; that is the question".
After the 2003 elections, Davíð Oddsson and the leader of his coalition party, Halldór Ásgrímsson, Minister of Foreign Affairs, agreed that Davíð should remain Prime Minister until 15 September 2004, at which time Halldór would become Prime Minister, and that the Independence Party would, in exchange for relinquishing the Prime Minister’s post, gain an additional ministry in the government from its partner. In 2004 the Davíð Oddsson government became embroiled in controversy, as Davíð introduced a bill which would have made it impossible for large private companies to own more than 15% in any one media, and under which newspapers and television stations could not be owned by the same companies. Davíð argued that this was to prevent concentration of the media in the hands a few people, and to enable the media to remain independent and critical not only towards politicians, but also towards financial moguls. His critics maintained, however, that the proposal was directly aimed at Baugur which Davíð was, they said, obviously regarding as a political enemy. By then, Baugur had bought another newspaper, the television station from Jón Ólafsson and a few radio stations, and controlled more than half of the media market. In a much-softened version, parliament passed the media bill proposed by the government. But then, for the first time in the history of the Icelandic Republic, in the summer of 2004, the president, Ólafur Ragnar Grímsson, refused to sign the bill into law. Davíð bitterly criticized this, pointing out that the director of the television station formerly owned by Jón Ólafsson and recently bought by Baugur, Sigurður G. Guðjónsson, had been Ólafur Ragnar Grímsson’s campaign manager in his first presidential campaign, in 1996, and that Ólafur’s daughter was employed by Baugur. However, Baugur enjoys considerable goodwill in Iceland because their shops offer lower prices than are to be found elsewhere, while their owners are seen as an embodiment of an Icelandic dream of rags-to-riches; many also agreed that the media bill seemed to be a part of a political duel rather than an attempt to make general law. The conclusion of a long struggle was that Davíð Oddsson withdrew the bill instead of holding a national referendum on it, as required by the Icelandic constitution if the president refuses to sign a bill into law.
During his almost 14 years as Prime Minister, Davíð became acquainted with, or friend of, many Western leaders, including Bill Clinton, George W. Bush, Václav Klaus and Silvio Berlusconi. He has occasionally attended the meetings of the Bilderberg Group, and he has read a paper to the Mont Pelerin Society. But he only served as Minister of Foreign Affairs for one year. In the autumn of 2005, Davíð announced that he would leave politics. He said that he felt that the time had come for a new generation to take over. His close ally over many years, Geir H. Haarde, replaced him, both as leader of the Independence Party and Minister of Foreign Affairs. A probable contribution to this decision was a short, but dramatic, bout with cancer, soon after the crisis over the failure of the media bill. He was however fully cured and in October 2005, he became the Governor of the Central Bank.